Monday, May 25, 2009

Oligopsony Power: Evidence from the U.S. Beef Packing Industry

Posted by D. Daniel Sokol

Xiaowei Cai (Cal Poly - Agribusiness), Kyle W. Stiegert (Wisconsin - Agricultural and Applied Economics), and Stephen R. Koontz (Illinois - Agricultural and Resource Economics) provide Oligopsony Power: Evidence from the U.S. Beef Packing Industry.

ABSTRACT: Based on Green and Porter's (GP) noncooperative game theoretic model, oligopsonists are hypothesized to follow a discontinuous pricing strategy in equilibrium. The model allows for low procurement prices during cooperative phases and high procurement prices (i.e. aggressive purchasing) during noncooperative phases. In this paper, the GP model is applied to the U.S. beef packing industry. Anecdotal evidence of beef packer margins and relevant processing costs suggest part of the margin variability could be attributed breakdowns and returns to cooperative phases. To operationalize the GP framework, we applied Hamilton's regime switching model assuming first order Markov process to test for the cooperative/noncooperative behavior of beef packers in three main fed cattle markets in the central United States and the whole U.S. market. We found that the evidence of cooperative/noncooperative conduct among the beef packers is present in all the markets examined, but the conduct varies across markets.

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