Agrarwirtschaft 58 (2009), Heft 8

Transcription

1 Market power on the edge? An analyss of the German and Hungaran hog markets Marktmacht auf der Kppe? Ene Analyse der deutschen und ungarschen Schwenemärkte Lajos Zoltán Bakucs and Imre Fertő Hungaran Academy of Scence, Budapest, Hungary Henrch Hockmann and Oleksandr Perekhozhuk Lebnz Insttute of Agrcultural Development n Central and Eastern Europe (IAMO), Halle (Saale), Germany Abstract A structural market model s estmated to analyse the mpact of market power on resource allocaton n the German and Hungaran pork markets The regresson analyses suggest that market power ests, although on a relatvely low level Moreover, the estmates show that processors mght pursue Cournot strateges In addton, we observe that the market power of processors n the German hog sector s decreasng, whle n the Hungaran sector t s ncreasng These results are consstent wth the structural developments n pork producton and pork processng Key words market power; Germany; Hungary; pork chan Zusammenfassung En strukturelles Marktmodell wrd geschätzt, um zu beurtelen, ob de Ausübung von Marktmacht de Ressourcenallokaton auf den deutschen und ungarschen Schwenefleschmärkten verzerrt De Regressonsanalysen zegen, dass zwar ncht von perfekten Märkten ausgegangen werden kann, de durch de Ausübung von Marktmacht bedngten Verzerrungen allerdngs als gerng anzusehen snd De Schätzungen mplzeren, dass de Fleschverarbeter sch konsstent mt der Verfolgung von Cournot-Strategen verhalten Zusätzlch deuten de Schätzungen darauf hn, dass de Marktmacht der Verarbeter m deutschen Schwenesektor abnehmend st, während se sch m ungarschen Sektor erhöht Dese Resultate stmmen mt den strukturellen Entwcklungen n der Schwenefleschprodukton und n der Schwenefleschverarbetung überen Schlüsselwörter Marktmacht; Deutschland; Ungarn; Schwenefleschkette 1 Introducton The last decades have been charactersed by changng requrements on all food chans Structural change n retalng, processng and farmng, together wth growng market saturaton and ncreasng consumer concerns regardng product and process qualty have strongly nfluenced not only organsatonal type and structure, but also the generaton of profts along the food chan Despte the growng emergence of vertcally ntegrated structures, market allocaton stll plays a major role n the governance of product flows wthn food chans Moreover, startng wth agrculture, the number of frms n downstream sectors (processors, retalers) decreases Because of the olgopsonstc market structure on both the retal and processng levels, these sectors mght be able to eplot ther favourable poston Market power can be eerted by varous means The most obvous way for processors to eplot market power s to depress purchasng prces n upstream sectors below the level of a perfectly functonng market Other uses of market power are to deter market entry or foster market et Generally, market power nduces a based allocaton of resources wthn the value chan Besdes welfare losses assocated wth suboptmal resource allocaton, market power wll lead to a redstrbuton of factor ncomes at the cost of both upstream and downstream sectors Emprcal analyss ntated by the work of HARBERGER (1954) suggested that the mpact of market power on overall economc performance s epected to be rather small However, conclusons may be altered when lookng at ndvdual sectors Snce many agrcultural products are suppled nelastcally, the eerton of market power may have more severe consequences on allocaton and factor remuneraton n ths sector than n others Although the need to nvestgate the mpact of market power s broadly acknowledged (MCCORRISTON, ), the relevance of ths topc does not correspond to the number of studes In fact, studes of market power n European food chans (especally for transton countres) are rather rare Ths paper contrbutes to the closure of ths gap n lterature As such, ts am s to dentfy the magntude of market power and to dscuss possble consequences for development n the Hungaran and German pork chans, and on the hog market n partcular The chans ehbt some smlar structural features Frst, there s at least some ndcaton of a dual structure n agrculture In Hungary ths development s a result of the transton process In Germany, however, t s due to unfcaton n 199, when two rather dfferent agrcultural systems (famly farmng n the Western part and large-scale enterprses n the East) merged Second, the pork chans n both countres are not subject to hgh foregn drect nvestment (FDI) Ths mples that development wthn the chans s not based by the actvtes of large multnatonal enterprses, whch could eplot sgnfcant market power, especally n a relatvely small country as Hungary Furthermore, takng Germany as a reference, we nvestgate whether there are some specfc transton effects on the emergence of market power, e, whether the transton process n Hungary contaned frctons that hndered the development of well functonng markets 337

2 Ths paper s organsed nto fve sectons The ntroducton s followed by a dscusson of the relevance of nvestgatng market power n food chans In addton, a lterature revew s provded Chapter 3 provdes some basc facts about market and frm structures, as well as ther development n the German and Hungaran pork chans Secton 3 presents our theoretcal model and ts emprcal mplementaton The results of the estmaton are dscussed n Secton 4 A dscusson of the mplcatons, as well as lmtatons of the model s provded n Secton 5 The sgnfcance of market power Generally, two approaches regardng the nvestgaton of market power can be dstngushed The frst s (vertcal) prce transmsson analyss Wthn ths framework, the symmetry of jont movements of prces at dfferent levels s tested There are a great number of emprcal studes dealng wth marketng margn and asymmetry problems n lvestock markets VON CRAMON-TAUBADEL (1998) fnds asymmetrcal prce transmsson n the German pork market DAWSON and TIFFIN () dentfy a long-run prce relatonshp between UK lamb farm-retal prces, and study the seasonal and structural break propertes of the seres, concludng that the drecton of Granger causalty s from retal to producer prces Thus, lamb prces are set n the retal market Threshold Autoregressve Models were developed by GOODWIN and HOLT (1999), GOODWIN and HARPER () and BEN-KAABIA et al () n studes of the US beef sector, US pork sector and Spansh lamb sector, respectvely GOODWIN and HOLT (1999) found that farm markets do adjust to wholesale market shocks, whlst the effect of retal market shocks s largely confned to retal markets In ther pork market study, GOODWIN and HARPER () found a undrectonal prce nformaton flow from farm to the wholesale and retal levels Farm markets adjust to wholesale market shocks, but retal level shocks are not passed on to wholesale or farm levels BEN- KAABIA et al () establsh a symmetrc prce transmsson, concludng a long-run perfect prce transmsson, where any supply or demand shocks are fully transmtted through the system They also observe that an ncreased horzontal concentraton allows retalers to eercse market power BOJNEC () found that both the Slovenan farmgate beef and pork markets are weakly eogenous n the long run, wth a mark-up long-run prce strategy for beef and a compettve prce strategy for the pork market BA- KUCS and FERTŐ (5 and 6) use VECM and contegraton wth structural breaks models to study prce transmsson on the Hungaran pork and beef markets, and found compettve prcng and no evdence of prce transmsson asymmetres Most emprcal results emphasse the presence of feedback among the dfferent market levels, and support the mperfect prce transmsson between farm and retal markets n all meat categores studed In short, most studes fnd asymmetrcal prce transmsson n lvestock markets, also establshng a mostly undrectonal prce nformaton flow from farm to wholesale and fnally to retal levels However, whle symmetrc movements suggest well-functonng markets, asymmetrc movements can only be attrbuted to market mperfectons when several restrctve assumptons are met These comprse no delays n prce adjustment, no demand or technologcal change, no outsourcng of functons, and no ncrease of other producton costs at the retal and processor level etc (MEYER and VON CRAMON- TAUBADEL, 4) The second approach was developed n the contet of New Industral Economcs (BRESNAHAN, 198 and 1989) Startng wth APPELBAUM (198), the nvestgaton of market power focuses on the conduct of frms n an ndustry and attempts to dentfy market power by the estmaton of structural market models In ths framework, conduct s usually descrbed by a frm s conjectural varaton, e, the epected reacton of compettors to an ncrease n output or demand A few studes have been conducted regardng food processng MUTH and WOHLGENANT (1999) analysed whether the US meat packagng ndustry possesses market power n the nput or output markets In both cases the hypothess of market power had to be rejected Smlar results were derved by MORRISON PAUL (1999), who found sgnfcant market power n ths ndustry, though at a relatvely low level Market power n US food retalng was analysed by PARK and WELIWITA (1999) Accordng to ther estmates, there s some evdence that together wth the concentraton process n retalng, there was an emergence of market power, though also at a low level In hs analyss of the German meat market, ANDERS (5) reached the same concluson The fndngs n DOBSON et al (3) contradct sharply these conclusons Ther results suggest that the ongong concentraton processes allow retalers to dctate terms and condtons to processors Recent papers have attempted to establsh the lnk between prce transmsson and market power WELDEGEBRIEL (4) evaluates the mpact of olgopsony power on the degree of prce transmsson usng a formal theoretcal model He shows that when takng the degree of prce transmsson n a perfectly compettve market as a benchmark, olgopoly and olgopsony power do not necessarly lead to mperfect prce transmsson, although they can Indeed, they may counteract each other's mpact on the degree of prce transmsson The outcomes depend on the functonal forms for retal demand and farm supply LLOYD et al (6) show that f market power has an effect on the farm retal margn, ths determnes the specfcaton of the contegratng relatonshp and thus provdes a test of market power Ther results for the UK beef chan suggest that the mportance of market power cannot be rejected 3 Developments n the German and Hungaran pork chans 31 German pork chan In order to facltate a better understandng of the estmaton results, t s essental to provde some background nformaton regardng the structural development n pork producton and processng Fgure 1 provdes nformaton about the number of slaughterhouses and meat processors, and the amount of meat produced Meat producton shows a slght but steady ncrease n the perod under nvestgaton The same holds, though wth fluctuatons, for the number of meat processors Snce the data covers all frms wth more than employees, the ncrease s not an ndcaton of market entry but of frm growth Moreover, ths also ndcates that concentraton processes have not yet started n the 338

3 German meat processng ndustry The same holds for slaughterhouses The number of these enterprses was relatvely stable n the perod under nvestgaton In addton, slaughterng s much more concentrated than processng One slaughterhouse delvers to four processors, on average The fact that no market et can be observed s rather astonshng The restructurng of food chans n Eastern Germany resulted n the creaton of hgh slaughterng and processng capactes Together wth the collapse of meat producton, ths resulted n hgh overcapactes and strong competton on the market for pgs and pork as well (WELLERT, ) Both the estence of overcapactes and strong competton would suggest accelerated concentraton processes Moreover, market et may have taken place but could not be revealed by our data set The reason s that the growth of small slaughterhouses and processng facltes has balanced out the et of larger enterprses Fgure shows some ndcators regardng pg producton n Germany Correspondng to the ncrease n meat producton, the number of pgs s also slghtly ncreasng Contrary to the stuaton n the slaughterng and processng ndustres, structural change n agrculture s much more pronounced Wthn one decade, the number of pg farms declned by more than 5% and, consequently, sgnfcant ncreases of herd szes could be observed Ths development n the farm sector may have changed the barganng poston of the farmers consderably and thus may have led to a redstrbuton of power among the partners We wll consder ths possblty n the deducton of the emprcal model Fgure 1 Number of frms Source: ZMP (varous ssues) Fgure Number ndustry, accountng for over 18% of the total Hungaran food processng output Meat ndustry sales show a slghtly growng trend (fgure 3) The number of frms shows a J curve Ths number dropped by about one-half between 1996 and, and then started to grow agan The prvat- Evoluton of the number of meat processors, slaughterhouses and meat producton n Germany meat processors slaughter houses meat producton Source: ZMP (varous ssues) Evoluton of the number of pg farms, average herd sze, and total number of pgs n Germany pork producers (n thousand) average herd sze number of pgs Meat producton (1 tons) Number (n mllon) 3 Hungaran pork chan The Hungaran meat ndustry s charactersed by a dstorted market structure, whch s emphassed by the large number of small, not very cost effcent frms The dramatc decrease of raw materal producton left many of the formerly effcent larger companes strugglng wth unused processng capacty JANSIK (), studyng the FDI n Hungary, fnds that ndustres charactersed by a monopolstc market structure (sugar, vegetable ol, tobacco, soft drnks, starch) were prvatsed n the early 199s and have over 7% foregn ownershp of ther captal Meat processng s the largest food Fgure 3 Sales (bln Hungaran Fornt) Evoluton of total sales and number of frms n the meat ndustry sector n Hungary total sales Source: HCSO (7), AKI (varous accesses) number of frms Number of frms 339

4 saton of the meat ndustry started late, n the md-199s, and was charactersed by low FDI In 5, appromately 4% of total captal was under foregn ownershp Thus, the concentraton process was delayed; the share of the fve largest frms was stll rather low, wth 36% n 199 and 441% n 3 The Hungaran pork sector has eperenced numerous structural changes n the past 15 years From the 95 mllon head n September 199, the pg stock decreased to 43 mllon by December 1994, and has fluctuated around 5 mllon head ever snce One mportant feature of the Hungaran pg sector s the large number of small-scale farms Even before prvatsaton, small-scale farms accounted for 5% of the total pg stock, a fgure that had not changed sgnfcantly by 5 Many of these small-scale farms do not have commercal actvty, e, they are subsstence farms However, a large proporton does sell ther products, whch forms a two-ter commercal and famly pork producton system The average herd sze by farm type llustrates unambguously the dual producton structure n the Hungaran pork sector The average herd sze n Hungary vared between 9-16 pgs, however, these numbers hde the sgnfcant dfferences between varous farm types Prvate farms on average hold 5 to 7 pgs, whlst the average herd sze for economc organsatons s 33 to 44 thousand pgs (see table 1) Table 1 Year 4 Theoretcal background 41 Structural model of olgopsony market power We follow the methodology developed by BRESNAHAN (198) and MUTH and WOHLGENANT (1999) to test for olgopsony market power The profts of a representatve processor are: (1) p f (, z ) r rz' z, where s the number of pgs slaughtered and z s a vector of demand shfters (usually other nputs) P and r z represents prces of outputs and other nputs, respectvely, whle r s the prce of pgs, whch s gven by the nverse pork supply functon: () g(, s ) r Average herd sze n Hungary Prvate farms Economc organsatons Total Source: HCSO (7) Here, s s a vector of supply shfters and represents total hog supply Ths settng mplctly assumes that slaughterhouses and pork processors produce homogeneous goods and act as prce-takers on the output market whle they are able to nfluence prces on the procurement market The frst order condton of proft mamsaton s: f ( (3), z ) g(, s ) p r, where, represents the ncrease of farm supply (or total demand) nduced by an ncrease of frm s demand In the case of a perfect market, ths dervatve s zero and we have a usual frst-order condton for prce-takng behavour In a monopsony or under Cournot competton, the parameter s equal to one The frst order condton can be aggregated over all n frms n the ndustry Defnng ths, n 1 f (, z ) f (, z) n 1 (3) can be wrtten as: f (, z ) (4) r 1 p, r where denotes the prce elastcty of pork supply r n 1 and s the average nput conjectural elastcty and captures the degree of market power (BRESNAHAN, n ) The parameter range s < <1, where corresponds to a perfectly compettve market, whle 1 characterses a monopsonstc market or perfect colluson Cournot competton suggests 1 n 5 Emprcal analyss and nterpretaton 51 Econometrc mplementaton PERLOFF and SHEN (1) demonstrated that lnear structural market models produce completely unrelable estmates due to severe multcollnearty The problem s mtgated partally by usng fleble functon forms (SEXTON and LAVOIE, 1) Takng ths nto account, we used a translog functon to specfy pork supply g: (5) 1 ln ln w ln w 1 s 'ln s ln s' A ss ln s ln s' a Substtutng the supply elastcty, (6) ln ln w lns'asw ln w nto the optmalty condton (4) provdes: sw ln w 34

5 (7) f (, ) r 1 z p ln w ln ' s a sw w The margnal product f (, z ) was derved from a translog specfcaton of the producton functon: (8) ln y 1 ß ß ln b ln 1 ß z 'ln z ln z' B zz ln z ln z' b The margnal product s obtaned as: ln ln y y y y (9) ß b ln ln z' b z z ln Substtutng (9) nto (7) and rearrangng terms provdes the derved demand equaton: (1) r y p ß b 1 ln ln z' b ln w z * ln s' a In addton, we accounted for possble changes n the eerton of market power by assumng: (11) t t, where t represents tme The parameters can be obtaned by smultaneously estmatng the supply equaton (5) and derved demand (1) However, wth the translog specfcaton, meat producton enters nto derved demand Moreover, ths varable s not eogenous but depends on the supply functon (5) In order to account for ths endogenety, we etend the conventonal estmaton procedure by consderng the supply functon (5), the producton functon (8) and the derved demand functon (1) smultaneously Unfortunately, ths procedure only proved to be relable for Germany Severe data problems hndered a consstent nterpretaton of the estmated parameter n the Hungaran case Thus, for Hungary we estmated the reduced system consstng of (5) and (1) only In order to account for the endogenety problem, we nstrumented producton and used the estmated values n (1) Because of the nonlnear relatonshps n the parameters, we estmated the model wthn a nonlnear Three-Stage-Least- Squares (NL3SLS) framework Ths allowed us to consder a fleble varance covarance structure of the stochastc nfluences of the ndvdual equatons (GREENE, 3) 5 Specfcaton of the supply and producton functon In order to guarantee a suffcent number of degrees of freedom, we used monthly data Perods under consderaton are January 1995 to December 4 for Germany, and January 1993 to December 3 for Hungary In our emprcal analyss we assumed that no eternal trade of pgs ests Although there s some mport and eport of lve anmals, ths represents only a margnal share of the total hog supply Moreover, the avalablty of data causes a dfference n the varables chosen for estmaton between Germany and Hungary sw 1 Snce slaughterhouses and meat processors produce pork and beef, we appromated output by an nde of real returns (y) Product prces are gven by an nde on wholesale meat prces The ndustry producton functon was assumed to depend on labour nput (a), pork and cattle slaughterng ( and w, respectvely), and power consumpton (v) as an ndcator for varable nputs Due to the lack of data, for Hungary no ndcator of varable nputs n slaughterng and processng was avalable In addton, captal nput was not consdered for both countres However, snce Hungary and Germany possess relatvely hgh overcapactes n slaughterng, the epected producton elastcty of captal would be zero From ths pont of vew, the omsson of captal does not represent a severe problem for estmaton The specfcaton of the hog supply functon causes a specfc problem Because of fed producton processes, the pg supply on a specfc date s bascally determned by the number of pglets taken nto stock appromately s month before The nvestment decson s a functon of epected costs and benefts We assumed that these consderatons fnd ther epresson n pork nventores (q) From ths dscusson t follows that actual prces wll only have lttle mpact on actual supply Dependng on the output and nput prces, farmers may accelerate or decelerate hog fnshng to some etent We consdered actual prces of hogs (r), pglets (s) and feed stuff (f) as varables n the supply functon All prces have been deflated by the Consumer Prce Inde Because of the requrement of theoretcal consstency, we mpose the restrcton that the supply functon s lnearly homogeneous of a degree of zero n prces However, the avalablty of data causes the defnton of varables for the hog supply and ndustry producton to dffer between the two countres Moreover, snce some varables are reported n annual frequency only, these had to be nterpolated to monthly frequency The varables, as well as some descrptve statstcs, are presented n tables and 3 for Germany and Hungary, respectvely In addton, n order to account for the effects of technologcal change we ncluded a tme trend (t) n the set of shfter varables for both the hog supply and meat producton 53 Estmaton results The derved demand functon s hghly nonlnear n the parameters Ths suggests that the estmaton results may depend to a large etent on the startng values of the parameters In order to provde such approprate values, we estmated the producton and supply functon frst by OLS and used the parameter values for nonlnear estmaton Even wth ths procedure, the estmates of market power depend to a large etent on ther startng values of the varables capturng market power We selected among the dfferent optons wth regard to the values we receved for the supply and demand elastctes: the producton elastctes should be postve Moreover, the pork and beef numbers were epected to represent the sgnfcance of these nputs n the producton process Besdes havng the correct sgn (postve n hog prces and negatve n nput prces) the supply elastctes should be consstent wth the rather nelastc reacton eplaned above Best results were obtaned usng =1 (perfect colluson) and t = (constant market power) as startng values 341

6 Table Market results Supply shfters (s) Demand shfters (z) Varables and some descrptve statstcs, Germany Symbol Mean Standard Devaton Mnmum Mamum Hog slaughterng (nde) r Hog prces ( /1 kg) s Pglet prces ( /head) f Prce of compound feed ( /ton) q Pg nventores (thousand head) a Labour nput (mllon hours) w Cattle slaughterng (thousand head) v Power consumpton (mllon klowatt hours) y Revenues (nde) p Inde of pork wholesale prce Source: ZMP (varous ssues), EUROSTAT (varous accesses), own calculatons Table 3 Hungaran varables and some descrptve statstcs Market results Supply shfters (s) Demand shfters (z) Symbol Mean Standard Devaton Mnmum Mamum Hog slaughterng (thousand head)* r Hog prces (HUF/kg) s Pglet prces (HUF/kg) f Prce of compound feed (HUF/kg) q Pg nventores (thousand head)* a Labour nput (persons)* v Cattle slaughterng (thousand head)* y Revenues of the meat ndustry (mllon HUF) p Wholesale prces (nde) Note: * Transformed from annual to monthly data by nterpolaton Source: HCSO (7), AKI (varous accesses), own calculatons Snce the NL3SLS procedure s an nstrumental varable estmator, R has no sound statstcal nterpretaton Thus, ths ndcator s nether used for model selecton, nor s t reported n the tables The Durban Watson coeffcent can only be consstently nterpreted when the equaton contans a constant Ths holds for the producton functon and the supply functon The values of ths ndcator n the dfferent estmates suggest that autocorrelaton mght be a severe problem n some equatons However, estmatons wth autocorrelaton faled because of non-postve defnte varance covarance matrces Moreover, snce autocorrelaton effects the effcency but produces no bas of the estmates, we argue that autocorrelaton s a mnor problem as long as the sgnfcance of the parameters s satsfactory All varables were normalsed by ther geometrc mean Because of ths, the parameter estmates for the supply and producton functon can drectly be dscussed n terms of elastctes The NL3SLS results for the German hog market are presented n table 4 The producton elastctes for hog and beef slaughterng are appromately 3 and 5, respectvely In the perod under nvestgaton, the relaton between hog and cattle slaughterng s about 3:1 (3 m tons of pork and 1 m tons of beef) Thus, the estmated producton elastcty of beef appears relatvely hgh However, gven that we used real returns as an output nde and that beef prces are relatvely hgh compared to pork prces, the estmates appear reasonable An estmate of b = 138 suggests that the producton functon s conve n hog demand ( + - >) Although the value appears to be unreasonably hgh, the general concluson s consstent wth the overcapactes n the German meat ndustry An ncrease n slaughterng would allow a more effcent use of resources and thus would ncrease output more than proportonally Ths concluson s also confrmed when lookng at a (local) proportonal varaton of all nputs Summarsng the producton elastctes provdes a value of about 11, e, ncreasng economes of scale The results also show the estence of technologcal change Convertng the estmate from monthly to annual data suggests that the productvty of factor use ncreases by appromately % per year The productvty growth n the hog supply s twce as large as that n the meat ndustry At frst glance, an mpact of appromately 4% n pg producton may appear too hgh However, the data dscussed n table reveal the rapd structural change n German pork producton, whch s epected to have sgnfcantly contrbuted to productvty growth The supply elastctes have the correct sgn and correspond to the epectaton of nelastc reactons No parameter estmates for feed stuff are reported The reason s that ths nput was selected for mposng the homogenety restrcton of the supply functon Gven the other supply elastctes, the prce elastcty of feed stuff would be at about -18 The Durbn Watson coeffcent s rather low 34

7 for the hog supply functon However, snce most coeffcents are hghly sgnfcant, autocorrelaton does not appear to be a problem The parameters enterng the derved demand functon are marked by dark cells n table 4 The estmates show that market power cannot be neglected on the German hog market In addton, the results suggest that the meat ndustry has lost barganng power n the perod under nvestgaton ( t < ) Ths result s consstent wth the large structural change n German pg producton nsofar as the decrease of the number of processors and the ncrease of average herd have mproved the market poston of ndvdual farmers Table 4 NL3SLS parameter estmates for Germany Producton Functon Derved demand Supply Functon -184* 6 t 15*** 3*** t tt 1*** -*** tt 337*** 697*** r a 936** -511* s w 483*** 57*** q v 196*** 37** rt t -397*** -6*** st at -5 93** qt wt *** rr vt *** ss 138*** qq aa ** rs ww 8363** 4116** rq vv -4438*** 57578*** sq a 3935 w -83 v 158 aw -15 av 4564 ww -8 74** t -48*** t DW DW Source: own calculatons The estmaton results of the model for Hungary are presented n table 5 As mentoned above, we were not able to consder the endogenety of the producton functon separately, but had to nstrument ths varable n the NL3SLS approach Because of ths, only those parameters of the producton functon that enter derved demand were estmated and reported In general, the meat ndustry producton functon for Hungary has smlar characterstcs to the producton functon for the German case: Convety n hog supply suggests the estence of ncreasng economes of scale and a relatvely hgh producton elastcty of hog slaughterng Compared to Germany, the producton elastcty n Hungary s consderably hgher Ths s consstent wth the rather low mportance of cattle producton n Hungaran agrculture In the perod under nvestgaton, the rato of pork and beef producton was about 6:1 Ths llustrates that beef contrbuted only margnally to the output of Table 5 3 SLS parameter estmates for Hungary Derved demand Supply functon 714*** 163* t -198*** -8*** t tt a ** r v -141** -73** s 516*** q -19** rt 3*** st -7 qt -35 rr -1396** ss -1437* qq 179 rs 7** rq -1375*** sq 84* t 8* t DW DW Source: own estmatons the meat ndustry, and n turn justfes the relatvely hgh producton elastcty for pork Unlke Germany, the estmates provde no ndcaton of technologcal change n pg producton n Hungary One reason may be the domnance of small-scale producers who could not beneft from new anmal breeds, and mprovement of producton technologes etc The estmates do not provde comprehensve nformaton about the mpact of techncal change n meat producton, snce the correspondng parameters ( t and tt ) were not estmated However, the estmate for t suggests that technologcal change s present and has, lke n Germany, pg-savng characterstcs Ths knd of technologcal change s due to new processng technques that allow the mproved etracton of valuable parts from the carcasses The DW for hog supply s rather low, however, lke n Germany, ths does not appear to be a serous problem gven the sgnfcance of the ndvdual parameters n the hog supply functon The Hungaran pg market s also charactersed by market power, however, to a lower etent than the market n Germany One reason for ths result may be the dual structure of pg producton n Hungary The small pg producers market ther anmals not necessarly to meat processors, but drectly to local markets The choce between the two channels s affected by the relatve prces farmers receve on the dfferent markets Ths reduces the meat ndustry s possbltes to eert market power and to redrect rents from farmers to processors However, there s evdence that the poston of meat processors, although margnally, has mproved n recent years ( t > ) Ths result s consstent wth the structural change, e, the ncrease of concentraton n the Hungaran meat ndustry 54 The nterpretaton of The estmates suggest that market power ests on the both the Hungaran and German hog markets We derved 343

8 ths result wthn a conjectural varaton framework Correspondngly, the parameter can only be nterpreted consstently wthn ths settng As an alternatve to the conduct performance approach used n ths paper, the estence of market power may be analysed n a colluson framework Usng a dynamc olgopoly model wth colluson, CORTS (1999) shows that wthn such a settng, the conjectural varaton approach systematcally underestmates the mpact of market power on market allocaton when supply shocks are not permanent Wth regard to pork producton, ths may be a relevant problem snce hog supply generally shows a cyclcal pattern, known as the hog cycle Thus, because supply changes are temporary, underestmaton of market power may be a severe problem Although farmers are confronted by relatvely few slaughterhouses and meat processors, accordng to our results the latter are only able to beneft slghtly from ther favourable ndustry structure One reason mght be the overcapactes n the ndustry, whch lead to ntense competton among processors on the hog market and restrct the ncentves to collude Gven these facts, the poor evdence for market power from the structural model s coherent wth the stuaton n the ndustry Ths nterpretaton s supported by a varaton of the econometrc model In table 3 we present the mnmal value of the objectve functon of the NL3SLS procedure usng dfferent values of market power ( for perfect competton, 1 for perfect colluson, and 1/n for Cournot competton) Determnng the coeffcents of market power wthn the estmaton provdes a lower value of the objectve functon and thus provdes a better appromaton to the estent data Ths concluson also holds for perfect competton However, gven the number of frms n the meat ndustry (about n Germany and about 1 n Hungary, on average), table 6 also ndcates that Cournot competton does not appear to be a reasonable appromaton of the stuaton on the pg market Ths result mposes a further problem snce the conjectural varaton equlbrum may suffer from theoretcal ambguty In order to overcome ths problem, BRESNAHAN (1981) proposes restrctng attenton to consstent conjectures However, analyses by DAUGHETY (1985) and LINDH (199) suggest that the Cournot conjectures are the only consstent equlbrum strateges The etent of estmated market power s larger for both countres than the values that result from Cournot conjectures From our pont of vew, ths cannot be regarded as an ndcaton for the theoretcal nconsstency of our estmates The reason s that t mght be msleadng to consder all domestc processors as potental market partners for a farmer Transport costs and EU regulatons regardng the Table 6 Functon value/ number of observatons Values of the objectve functon under dfferent assumpton of market power Perfect competton Cournot ˆ ˆ t t transport of lve anmals provde natural and nsttutonal restrctons to market entry Consequently, the number of meat processors a farmer may deal wth s sgnfcantly smaller than the number of processors wthn the country Assumng that the Cournot conjectures are present, our results suggest that on average German farmers may negotate wth 15 processors, whle Hungaran farmers may choose among 35 frms Gven the number of slaughterhouses and processors n Germany and Hungary, as well as the sze of the countres, these fgures appear to be reasonable Thus, the estmates of market power provde some ndcaton that the frms n the meat ndustry behave consstently wth Cournot conjectures regardng the procurement market 6 Conclusons *) Perfect colluson Germany Hungary Note: * Estmated wth the endogenously determned values for market power plugged n Source: own calculatons Ths study nvestgated the estence of market power n the Hungaran and German pork chans, respectvely A structural market model was derved and estmated The analyss was restrcted to the demand and supply of pgs, and thus to the frst stage of the pork chan In both countres the hypothess of market power could not be rejected However, the degree of market power was relatvely low n both countres Consstent wth the structural adjustment n the processng stages and farmng, we found that market power was slghtly ncreasng n Hungary but decreasng n Germany However, because of data avalablty, ths emprcal nvestgaton was only able to detect average market power Ths does not mply that market power s an rrelevant phenomenon on the markets under nvestgaton Due to ther market shares n specfc regons, some slaughterhouses mght be able to ehbt sgnfcant market power Consderng the overall ndustry however, ths mght be balanced by the behavour of other frms Gven the nsttutonal restrcton regardng hog transport, the natonal market mght not be fully ntegrated Indeed, we found that the degree of market power s hgher than t would be suggested by Cournot competton n a fully ntegrated domestc market In addton, our results appear to be consstent wth Cournot behavour n the regonal markets However, the detecton of ndvdual monopsony power requres frm-specfc data, or at least regonal data so that correspondng dfferences can be accounted for Unfortunately, ths nformaton s not avalable The mpled result that processors compete on quanttes s surprsng gven the low use of overall capactes n meat processng In addton, t can be debated whether eamnng monopsony power was the correct approach At least for Germany, there s an ndcaton for sgnfcant competton among slaughterhouses and meat processors Moreover, a rapd concentraton process n German pork producton could be observed Ths mproved the barganng poston of pork producers and thus may have put them nto a poston n whch farmers are able to eplot market power The same could also be true for the Hungaran pork chan, snce there are some large (and partally unused) producton facltes Ths suggests a modfcaton to the model nsofar as market power n the producer model has to be estmated 344

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In: Journal of Agrcultural Economcs 55 (1): WELLERT, K (): Zur Wettbewerbsfähgket von Molkere- und Schlachtunternehmen m verenten Deutschland Cuvller-Verlag, Göttngen ZMP (Zentrale Markt- und Presberchtstelle) (varous ssues): Marktblanz: Veh und Flesch Bonn Bad Godesberg Acknowledgement The authors gratefully acknowledge fnancal support from the Deutsche Forschungsgemenschaft and the Hungaran Academy of Scence Lajos Zoltán Bakucs gratefully acknowledges the fnancal support from OTKA project no: F-6866, Agrcultural Prces Contact author: PROF DR HEINRICH HOCKMANN Lebnz Insttute of Agrcultural Development n Central and Eastern Europe (IAMO) Theodor-Leser-Str, 61 Halle (Saale), Germany phone: +(49) , fa: +(49) e-mal: hockmann@amode 345