Oligopoly Power in the Food Industries Revisited: A Stochastic Frontier Approach

Since the late 1980s, the analysis of market power in the food industries has shifted from analyzing market concentration (structure) towards empirically measuring how far a market diverges from perfect competition (conduct). The New Empirical Industrial Organization (NEIO; usually offspring of the work of Appelbaum, 1982, or Bresnahan, 1982) has dominated the food economics literature on market power in the past 25 years (see Kaiser and Suzuki, 2006, for a summary of NEIO applications to food industries) and continues to do so (Cakir and Balagtas, 2012; Hovhannisyan and Gould, 2012; Cleary and Lopez, 2014). NEIO studies, in general, find a significant degree of oligopoly power in the food industries (Bhuyan and Lopez, 1997; Lopez, Azzam and Liron, 2002; Sheldon and Sperling, 2003). This study estimates mark-ups and oligopoly power for U.S. food industries using a stochastic frontier (SF; Kumbhakar, Baardsen and Lien, 2012; Baraigi and Azzam, 2014) approach, where mark-ups are treated as systematic deviations from a marginal cost pricing frontier. We apply the analysis to 36 U.S. food industries using NBER-CES Manufacturing Industry Database (2014), which covers a span of 31 years from 1979 to 2009. Empirical results show that all the food industries in the sample exercise at least some degree of oligopoly power, but most in a moderate manner. The estimated mean Lerner index is approximately 0.06, generally much lower than obtained using the conventional NEIO approaches. The SF model used provides a novel and promising framework to test and measure the degree of market power in agricultural and food markets.


Issue Date:
2015
Publication Type:
Journal Article
PURL Identifier:
http://purl.umn.edu/205113
Page range:
Oligopoly Power in the Food Industries Revisited: A Stochastic Frontier Approach Rigoberto A. LopezA, Hualu ZhengB, and Azzeddine AzzamC AProfessor and Department Head Department of Agricultural & Resource Economics University of Connecticut Email: rigoberto.lopez@uconn.edu BPhD Student Department of Agricultural & Resource Economics University of Connecticut Email: hualu.zheng@gmail.com CProfessor Department of Agricultural Economics University of Nebraska-Lincoln Email: aazzam1@unl.edu Selected Paper prepared for presentation at the Agricultural & Applied Economics Association’s 2015 AAEA & WAEA Joint Annual Meetings San Francisco, California, July 26-28, 2015 Copyright 2015 by the authors. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.-Kumbhakar, S.C., S. Baardsen, and G. Lien. 2012. A new method for estimating market power with an application to Norwegian sawmilling. Review of Industrial Organization, 40: 109-129. Lopez, R.A., A.M. Azzam, and C. Liron-Espana. 2002. Market power and/or efficiency: A structural approach. Review of Industrial Organization, 20: 115–126. Morrison, C.J. 1990. Market power, economic profitability and productivity growth measurement: an integrated structural approach. NBER Working Paper #3355, National Bureau of Economic Research, Cambridge MA. National Bureau of Economic Research. 2014. NBER-CES Manufacturing Industry Database. Accessed December 1, 2014 from http://www.nber.org/nberces/ Roberts, N.J. 1984. Testing oligopolistic behavior. International Journal of Industrial Organization, 2, 367-83. Schroeter, J. R. 1988. Estimating the degree of market power in the beef packing industry, Review of Economics and Statistics, 70: 158–162. Sheldon, I., and R. Sperling. 2003. Estimating the extent of imperfect competition in the food industry: What have we learned? Journal of Agricultural Economics, 54(1): 89-109.
Total Pages:
11
JEL Codes:
D43; L13; L66; Q13




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