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Identifying implicit collusion under declining output demand: The case of the United States beef packing industry
Abstract
The objective of the present study is to develop a model capable of making inferences about industry conduct in input and output markets from observing how firms respond to unexpected declines in demand. The technique, an extension of a "trigger price" oligopoly model, empirically tests the hypothesis that firms behave more competitively in both input and output markets following large unexpected declines in demand. The model is based on the proposition that when firms do not have perfect information about their competitors, oligopoly/oligopsony behavior is influenced by inferences firms make about rival behavior following random fluctuations in demand. Applied to the beef packing industry, the effect of unexpected declines in beef demand on packers' conduct in input/output markets is empirically tested by estimating a marketing margin relation of the packing industry. The hypothesis that packers behave more competitively in input and output markets following demand shocks is tested through the effects of large negative demand residuals on the oligopoly and oligopsony distortions. A decrease in the oligopoly or oligopsony distortion following unexpected price declines is interpreted as an indication that firms in the industry may be tacitly collusive. Results do not provide evidence that packers' degree of market power in input and output markets decreased following large unexpected declines in demand for beef. Thus, the hypothesis that packers maintain cooperative pricing strategies in cattle procurement and boxed-beef sale is rejected. This result is consistent with previous findings that beef packers were not successful in maintaining cooperative pricing strategies. Two auxiliary tests were conducted to test the price-taking hypothesis in input and output markets. Packer oligopoly in the wholesale beef market is not rejected. However, the magnitude of the oligopoly power parameter is somewhat smaller than those reported in previous studies. Packer monopsony in the cattle procurement market is rejected.
Subject Area
Agricultural economics
Recommended Citation
Weliwita, Sakalasooriya Mudiyanselage Ananda, "Identifying implicit collusion under declining output demand: The case of the United States beef packing industry" (1995). ETD collection for University of Nebraska-Lincoln. AAI9538658.
https://digitalcommons.unl.edu/dissertations/AAI9538658