In Bae Ji Graduate Research Assistant Oklahoma State University Stillwater, OK Phone: Fax:

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1 Dynamc Aement of Olgopoly, Olgopony Power, and Cot Effcency ung the New Emprcal Indutral Organzaton n the U.S. Beef Packng Indutry In Bae J Graduate Reearch Atant Oklahoma State Unerty Stllwater, OK Phone: Fax: nbae.@oktate.edu Chann Chung Profeor Oklahoma State Unerty Stllwater, OK Phone: Fax: chann.chung@oktate.edu Selected Paper prepared for preentaton at the Agrcultural & Appled Economc Aocaton 00 AAEA, CAES, & WAEA Jont Annual Meetng, Dener, Colorado, July 5-7, 00 Copyrght 00 by In Bae J and Chann Chung. All rght reered. Reader may make erbatm cope of th document for non-commercal purpoe by any mean, proded that th copyrght notce appear on all uch cope.

2 Abtract In th paper, the new emprcal ndutral organzaton approach wth a dynamc model multaneouly employed to meaure the degree of olgopoly, olgopony power, and cot effcency n the U.S. beef packng ndutry. The olgopony power etmated wth two effect: cah cattle procurement market power and capte upply market power. The model etmated by the Generalzed Method of Moment ung monthly data from 990 to 006. The emprcal reult reeal the preence of market power n both the beef retal market and the cattle procurement market n the ample perod. The capte upply a ource of olgopony market power, but the effect conderably mall. The olgopony market power greater and le table than olgopoly market power for the whole ample perod. The cot effcency effect outwegh the market power effect for the ample perod. Keyword: beef packng ndutry, capte upply, cot effcency, ndutral concentraton, market power, NEIO

3 Dynamc Aement of Olgopoly, Olgopony Power, and Cot Effcency ung the New Emprcal Indutral Organzaton n the U.S. Beef Packng Indutry Introducton Seeral ue are concerned wth market power n the U.S. beef packng ndutry. Among thee market power ue, concentraton and capte upply are the mot controeral ue. A wae of merger and conoldaton n the beef packng ndutry began n the late 970 and contnued untl the early 990 (Azzam 997. Epecally durng the recent decade, the concentraton of the beef packng ndutry ha gradually ncreaed. The fourfrm concentraton rato n term of boxed beef upply ncreaed from 5.9 percent n 980 to 84.7 percent n 000, whle the rato n term of cattle laughter ncreaed from 8.4 percent n 980 to 7. percent n 003. A a form of backward ntegraton by packer, the capte upply ha alo contnuouly ncreaed oer the lat two decade. The capte upply rato a a total cattle laughter alo contnuouly ncreaed from 0.5 percent n 988 to 44.4 percent n 00 (USDA. Wth horzontal merger and concentraton, t unclear whether cot effcency gan from ncreaed concentraton outwegh potental market power effect. It alo dputable whether capte upply ncreae effcency of reducng tranacton cot and market rk or t reduce competton and ncreae the market power of packer. After Schroeter (988 ntroduced the new emprcal ndutral organzaton (NEIO n agrcultural economc, many tude hae meaured market power. Thee NEIO The defnton of capte upply by USDA Gran Inpecton, Packer and Stockyard Admntraton (GIPSA nclude anmal procured through forward contract, marketng agreement, and packer feedng arrangement or otherwe commtted to a packer more than 4 day pror to laughter.

4 approache n agrcultural economc are well reewed by eeral reearcher uch a Sexton (000, Sheldon and Sperlng (00, and Whtley (003. Among the artcle that ue NEIO approache, eeral tude try to compare market power and cot effcency. Mot ndutral organzaton lterature ugget that a merger effcency gan offet conumer potental welfare loe (Azzam and Schroeter 995; Azzam 997; Sexton 000; Totao and Chung 005. Howeer, Lopez, Azzam, and Epana (00 fnd that market power effect domnate cot effcency effect n mot food ndutre, and that further ncreae n concentraton would ncreae output prce. Numerou tude are concerned wth capte upply. Thee tude focu on the relatonhp between the capte upply and cah market prce to netgate the effect of capte upply on the beef procurement market. Many tude report a negate relatonhp between capte upply and cah market prce (Ward, Koontz, and Schroeder 998; Schroeter and Azzam 004. Alo mot reearcher belee that th negate relatonhp reflect market power of the packer a a buyer that ue the capte upply to pre cah market prce n the cattle procurement market (Schroeder et. al. 993; Ward, Koontz, and Schroeder 998; Zhang and Sexton 000. Thee tude focu on dealng wth the relatonhp between capte upply and cah market prce rather than lookng nto the effect of capte upply n the ndutral leel. The preou tude hae ome lmtaton. Frt, mot tude aume that the proceng frm hae olgopony power n the cattle procurement market (Azzam and Schroeter 995; Azzam 997, whle other aume the wholealer hae olgopoly power n the beef market (Lopez, Azzam, and Epana 00. Allowng for market power n

5 procurng frm nput whle gnorng the potental market power n ellng fnal output lkely to undertate market power effect or ce era (Totao and Chung 005. Addtonally, Only one tudy deal wth the capte upply n the NEIO model (Zheng and Vukna 009. Howeer, th tudy focue only on the capte upply market power for the aerage frm rather than dealng wth both the capte upply and the concentraton for the ndutral leel n the pork packng ndutry. Therefore, n th tudy, the olgopoly and olgopony market power are multaneouly condered, and the olgopony market power eparated by two effect: cah cattle procurement market effect and capte upply effect. Fnally, the concentraton change condered n the NEIO model. That, we extend Zheng and Vukna (009 model to a more general model that nclude concentraton effect n the NEIO model. Second, conectural araton uch a market conduct parameter are promnent component n the NEIO approach. Conectural araton meaure the oerall market reacton to an nddual frm change n output upply and nput demand. Howeer, thee preou tude aume that the conectural araton contant throughout the ample perod. Therefore, they are lmted n explanng how market power and effcency change wth eolng ndutry tructure oer tme. The obecte of th paper threefold. Frt, the effect of cot effcency and market power by ncreang concentraton n the U.S. beef packng ndutry meaured conderng market power exerted through both olgopoly and olgopony multaneouly. Ignorng th mportant arable can nduce omtted arable problem. If the omtted arable uncorrelated wth rght-hand de arable then the etmate wll only loe all effcency properte, but f the omtted arable correlated wth rght-hand de arable then the etmate wll loe all properte o that the etmate baed and ncontent. (Greene

6 Second, the olgopony market power for capte upply eparately etmated from the cah cattle procurement market n the NEIO model. Thrd, the change of market power and effcence n the beef retal and cattle procurement market are meaured for the U.S. beef packng ndutry durng the tme perod ung monthly data. Th paper extend the extng lterature of market power related to the U.S. beef packng ndutry by ncludng capte upply market power and by examnng the dynamc olgopoly and olgopony power ontly oer the pat eeral decade. The reult of th paper wll be helpful to undertand the tructure and change of market power behaor n the U.S. beef packng ndutry. The Model Generally, two approache ext n the theoretcal framework of conectural elatcty (Wann and Sexton 99; Me and Sun 008. One the prmal producton functon-baed approach (Azzam and Pagoulato 990; Me and Sun 008 and the other the dual approach baed on a cot functon (Schroeter 988; Azzam 997; Lopez, Azzam, and Epana 00; Totao and Chung 005. In th paper, we ue the dual approach becaue of an abence of uantty data for the output and nput at the frm leel. In ew of the ntended applcaton, we aume beef proceor and retaler are ntegrated n a ngle proceng-retalng ector that allowed to hae olgopoly and olgopony market power multaneouly (Totao and Chung 005. We aume a beef proceng-retalng ndutry contng of N frm conertng a ngle farm nput, cattle, nto a fnal output, beef. We aume two procurement channel: the cah market and the 4

7 capte upply and that the capte upply for each perod gen becaue the capte upply determned before the packer decde the amount of cattle procured from the cah market. Therefore, the frm determne the cattle procured from the cah market to maxmze the frm proft. We aume each farmer faced wth a compette market to ell cattle to packer. Each frm proceng technology characterzed by fxed proporton between the farm nput and the output (Schroeter 988; Azzam 997. Coneron of the farm nput nto output reure non-farm nput that are purchaed n compette market and ued n arable proporton. Each frm ell the homogenou output to conumer who buy the output compettely n a market. Therefore, each frm not necearly a prce-taker both n the cattle procurement market and n the beef retal market. Proft,, for the th frm (for,,, N ( P Q( W ( Q W ( Q C (,, ( where P the beef retal prce, W the cah market cattle nput prce, W the capte upply cattle nput prce, market, the th frm beef product or cattle nput from the cah the th frm beef product or cattle nput from the capte upply, the th frm total beef product or total cattle nput, Q N the ndutry total beef product or the ndutry total cattle nput, C (, the proceng cot functon for the th frm, and a ector of prce of nonfarm nput. The frt order condton for proft maxmzng ( P W c (, 0 P Q Q W Q Q W W W Q Q. 5

8 6 Rearrangng the frt order condton and re-wrtng t n elatcty form yeld (3, ( d c W P, where Q Q, n h h the th frm conecture about ral repone to a change n fnal product ale and n cattle purchae, ( ( Q P Q d and ( ( Q W Q are the em-elatcte of retal demand and em-elatcte of farm upply for cah market repectely, W W the change of the capte upply prce wth repect to the change of cah market prce, Q the th frm market hare n retal market and cattle procurement market, and C c, (, ( the margnal cot for the th frm. Followng Azzam, the th frm cot functon aumed to take the generalzed Leontef form: (4 k k k C ( (, (. The optmzng condton (3 become (5 k k k d W P (. Multplyng (5 by each frm market hare, ( Q, and ummng acro all N frm n the ndutry yeld

9 (6 n P n W n n n d n k ( kl k. Rearrangng euaton (6 yeld the ndutry prcng euaton a: (7 P W Q H ( H ( H k ( k HQ em, d Q k where H ( the Herfndahl ndex n the retal beef market and n the cattle procurement market, ( ( weghted conectural araton n the retal output market and n the farm nput market, and e m the error term for the margn euaton (Cowlng and Wateron 976; Dckon 98; Azzam 997. In euaton (7, the frt three term n the rght-hand de capture market power n the beef retal market, n the ah cattle procurement market, and n the capte upply repectely n the ndutral leel. The fourth term capture margnal cot for the ntegrated proceng/retalng ector n the ndutral leel. The alue of mean there no mark-up or mark-down, that, all frm are prce-taker n the beef retal market and n the cattle procurement market, o that the output prce or the farm-nput prce unchanged. The alue of 0 mple Cournot monopoly and monopony. For noncompette conduct, concentraton affect all mark-up, mark-down, and margnal cot. Appelbaum * (98 defne conectural araton elatcty a ( H, whch range between 0 and. The prce elatcty of demand for the beef market and the prce elatcty of upply for the cah cattle market are gen by E d d P and E W repectely. Then the 7

10 ndutry olgopoly power defned by L retal * E d, and olgopony power for the cah market and the capte upply are defned by L cah * E and capte * L E repectely, where Q Q. The alue * 0 denote perfect competton; * denote pure monopoly or monopony; and other alue denote arou degree of olgopoly or olgopony power wth hgher alue of perfect competton (Me and Sun 008. * denotng greater departure from Market power effect from an ncreae of concentraton n the proceng/retalng ndutry can be eparated from cot effcency effect by dfferentatng euaton (7 wth repect to the Herfndahl ndex n the proceng/retalng ndutry (H a: P ( ( ( Q (8 Q H Q d. The frt three term n the rght-hand de of euaton (8 capture market power effect n the ntegrated proceng/retalng ector, and the fourth term capture cot ang for the ntegrated proceng/retalng ector (Azzam 997; Lopez, Azzam, and Epana 00. To tet capte upply effect on market power, the olgopony market power n euaton (7 dfferentated wth repect to capte upply, Q, and then we obtan (9 capte L ( H, Q Q where the capte upply effect on market power. The alue of 0 mple that the change of capte upply ha no mpact on the olgopony market power. 8

11 The frt null hypothe that olgopoly market power and two olgopony market power n the U.S. beef packng ndutry eual zero. Reectng t hould ugget that the U.S. beef packng ndutry exert market power n ether the beef retal market or the cah cattle procurement market, or the capte upply, or all. The econd null hypothe that ncreang capte upply ha no effect on the olgopony market power. Reectng t ugget that capte upply a ource of olgopony market power for packer. The thrd null hypothe that by ncreang concentraton, the cot effcency effect outwegh market power effect. Reectng t ugget that an ncreae of concentraton n the U.S. beef packng ndutry wll decreae ocal welfare. Data Th paper ue monthly data ere for the U.S. beef packng ndutry rangng from 990 to 006. The cattle laughter total le weght, whch ued a the total beef producton or the total cattle nput upply from Letock Slaughter Annual Summary of Unted State Department of Agrculture (USDA. The cah market cattle prce data combned from eeral long-term fed cattle prce htory (monthly data et of the USDA Economc Reearch Serce (ERS whch hae reported the Nebraka drect fed teer prce. The weghted capte upply prce combned from the USDA Agrcultural Marketng Serce (AMS Mandatory Prce Report (MPR data. The retal prce of beef, the retal prce of pork, the wholeale prce of chcken, the corn prce, and the calf prce are from USDA Natonal Agrcultural Stattc Serce (NASS and ERS. The fuel ol number prce obtaned from the Conumer Prce Index Databae of the Bureau of Labor Stattc 9

12 (BLS. Per capta ncome data from the econtat te ( The conumer prce ndex for meat and the producer prce ndex for farm product are from BLS. The prce ndex and the productty ndex of labor for the U.S. anmal laughterng and proceng ndutre are obtaned from the Indutry Productty and Cot Databae of BLS. The prce ndex and the productty ndex of captal and materal for U.S. food and other ndutry are obtaned from the Maor Sector Multfactor Productty Index Databae of BLS. The Herfndahl ndex for the U.S. beef proceng ndutry the cattle laughter concentraton ndex (and boxed beef concentraton ndex compled from eeral annual report from the Packer and Stockyard Stattcal Report ( The four frm capte upply rato alo from the Packer and Stockyard Stattcal Report. The defnton and decrpte tattc of thee arable are preented n table. Emprcal procedure To etmate the margn euaton (7, multaneou euaton are needed uch a three nonfarm nput demand euaton: the farm nput (cattle upply euaton, the retal output (beef demand euaton, and the capte upply prce euaton. Non-farm nput demand are obtaned by applyng Shephard lemma on the ndutry leel proceng cot functon repreented by euaton (4 a: (0 C( Q, Q k k k HQ, whch can be re-arranged a: 0

13 X k ( k HQ e, Q k where X the ndutry leel dered non-farm nput demand, and k are the nput prce of labor and captal and materal, and e the error term for the non-farm nput demand functon. pecfed a: Cattle upply and beef demand euaton take the em-logarthmc form whch are corn orghum cale fuel ( ln Q 0 W P P 3P 4P e, pork chcken (3 ln Q 0 d P P P 3INCOME ed, where Q Q the em-elatcty of upply, d the em-elatcty of W Q P Q demand, and e and ed are the error term for upply and demand euaton repectely. Fnally, the capte prce can be a functon of the cah market prce becaue the prce of cattle through marketng agreement and forward contract a capte upply calculated by ung arou formula that nclude bae prce, ualty charactertc, and a ytem of prema and dcount. Thee formula are ted to cah market prce (Schroeter and Azzam 004. The prce of capte upply modeled a: (4 W 0 W Q ew, where W the cah market prce, W the capte upply prce, Q the cattle uantty procured through the capte upply, and e w the error term for the capte upply euaton. Howeer, the data for capte upply prce not aalable before the adent of

14 the mandatory prce report, o th euaton (4 eparately etmated to fnd the alue,, wth the monthly data from 003 to 007. The reult of etmaton 3 how that Th alue not much dfferent from Zheng and Vukna (008 alue, ; they etmated the mlar euaton for the pork ndutry. Statc Etmaton by GMM Euaton (7, (, (, (3, and (4, whch conttute a ytem of een euaton n total are etmated. Howeer, we etmate x euaton except the euaton (4 becaue the data not aalable. When etmatng the ytem, endogenety problem wll occur. To deal wth endogenety problem n the multaneou euaton, we employ an ntrumental arable etmator, generalzed method of moment (GMM. Alo, GMM ued becaue the Breuhch-Godfrey tet for autocorrelaton (Breuch 978; Godfrey 978 reect the null hypothe of no frt-order autocorrelaton on each euaton redual. Note that the etmated tandard error for GMM etmate are conderably maller than thoe for 3SLS or LIML (Green 008. The nneteen ntrumental arable ncluded n the euaton are the Herfndahl ndce for the boxed beef producton market and for the cattle procurement market, four-frm concentraton rato for cattle procurement market, beef prce, cattle cah prce, cattle prce, four-frm capte upply rato, labor prce, captal prce, materal prce, corn prce, orghum prce, cale prce, fuel prce, pork prce, chcken prce, ncome, tme, and uared tme. 3 In the etmaton, we teted the RESET tet wth lnear model pecfcaton wth three arable uch a W, Q, and tme. The RESET tet how that the aboe model not napproprate for the power, 3, and 4 at the 5% gnfcance leel. Addtonally, th model ha an autocorrelaton problem, o we ued GLS to etmate the parameter,, 0, and.

15 Dynamc Etmaton by GMM The aboe econometrc pecfcaton can only etmate the tatc market conduct parameter,. It cannot meaure and demontrate ther poble change oer tme. We treat the eulbrum market conduct parameter a a functon of the exogenou arable, four-frm concentraton rato, CR, and capte upply rato, CAPR, a: (5 c CR c CAPR. Then euaton (7 can be changed a: c0 (6 ( c0 P W c CR c CAPR H ( c 0 d ( c c CR c CAPR H Q Q 0 c CR c CAPR H ( HQ k l k k. We can alo fnd euaton (7 by dfferentatng euaton (6 wth repect to the Herfndahl ndex (H a: (7 P H ( c 0 ccr ccapr ( c0 d ( c 0 c CR c CAPR Q c CR c CAPR Q Q. Th allow the conectural araton parameter,, to ary oer tme, reflectng change n the economc enronment 4 (Azzam 997; Me and Sun 008. Euaton (7 meaure concentraton effect on output prce of the dynamc market conduct, whle euaton (8 meaure thoe of the tatc market conduct. 4 Azzam (997 and Lopez, Azzam, and Epana (00 tred to ue tme aryng model a a functon of Herfndahl ndex. Howeer they faled to reect the null hypothe that the conecture araton parameter,, a contant. Me and Sun (008 modeled tme aryng model a a functon of four-frm concentraton rato and aerage mll capacty. Schroeter (988 alo modeled a a functon of labor nput prce, captal nput prce, and tme trend for tme aryng model. 3

16 Euaton (6, (, (, and (3, whch conttute a ytem, are etmated for dynamc model. The dynamc market conduct parameter, *, and market power retal L, cah L, and L capte can be etmated ung the etmated alue of c, four-frm concentraton rato, capte upply rato, and etmated upply and demand elatcte. The concentraton effect on the output prce of the dynamc market conduct and ther tandard error are alo etmated through GMM ung the MODEL Procedure n SAS 9.. Emprcal Reult The etmaton reult of the tatc model by GMM are reported n table. By t-tattc, 0 of the parameter etmate are tattcally gnfcant at the 5% gnfcance leel. For the key parameter, conectural araton,, and tattcally gnfcant at the 5% gnfcance leel. The conectural araton teted for pure monopoly or pure monopony, 0, and for perfect competton,. Both null hypothee are reected at the 5% gnfcance leel. So we can conclude that olgopoly and olgopony conduct ext n the U.S. beef packng ndutry. The em-elatcte of upply and demand are and , repectely. They are alo tattcally gnfcant at the 5% gnfcance leel. Baed on thee reult, the conectural elatcte, power, retal L for capte upply,, olgopony market power for cah market, L capte L olgopoly market power, cah *, olgopoly market, and olgopoly market power, are calculated n table 3. The conectural elatcty , the retal L, 0.04, the olgopony market power for cah market, cah L, 0.946, and the olgopony market power for capte upply, capte L, They are all gnfcant at the 5% gnfcance leel. Thee reult mply that market power 4

17 ext n both the beef retal and cattle procurement market. The olgopony market power for capte upply conderably maller compare to the olgopony market power for cah market, but the olgopony power lghtly larger than the olgopoly power. Th reult concde wth the fndng of Totao and Chung (005. In contrat to the tatc etmaton, the dynamc model allow conectural elatcty and market power to change oer tme. In the dynamc model, we aume conectural elatcty a functon of four-frm concentraton and capte upply rato, o we can calculate the conectural elatcty and market power for each year. The parameter etmate and the tattc for the model are reported n table 5. The magntude of parameter etmate and oerall ft are comparable to thoe from the tatc GMM etmaton. The dynamc conectural elatcty and market power from 990 to 006 are preented n table 6. They are all tattcally gnfcant at the 5% gnfcance leel. The olgopoly power tll lghtly maller than the olgopony power. The olgopoly and olgopony market power are gradually decreang wth tme after 990, whch not content wth the change of the concentrate rate (Herfndahl ndce n both the beef retal and cattle cah procurement market, but the olgopony market power for capte upply gradually ncreae wth the ncreae of capte upply. Oer , the maxmum alue of olgopoly market power 0.3 n 990, the mnmum n 004, and the aerage , but the maxmum alue of olgopony power 0.66 n 990, the mnmum n 003, and the aerage 0.9. The reult how that olgopony power lghtly larger and le table than olgopoly power. 5

18 The effect of capte upply on market power, 0, teted. The alue of n the tatc model, and n the dynamc model, and both of them are tattcally gnfcant at the 5% gnfcance leel. Th reult mean that by ncreang capte upply, the olgopony market power expand. In the tatc and dynamc model, the margnal effect of market concentraton on market power and cot effcency are calculated by euaton (8 and (7 n table 4 and table 7. The olgopoly effect, the olgopony effect for cah market and capte upply, the cot effcency effect, and the total net effect are 55.68, 45.9, 4.7, , and -3. repectely n the tatc model. They are all tattcally gnfcant at the 5% gnfcance leel. For the dynamc model, the olgopoly effect, the olgopony effect for cah market and capte upply, the cot effcency effect, and the total net effect are calculated for each year. The aerage alue are 35.57, 4.6,.8, , and repectely. They are alo tattcally gnfcant at the 5% gnfcance leel. Thee reult mply a mark-up effect on the beef prce by ncreang concentraton n both olgopoly and olgopony market whle cot effcency alo ext by ncreang concentraton. The cot effcency effect domnate the market power effect n both the tatc and dynamc model but gnfcantly maller n the dynamc model. Th reult content wth the fndng of Azzam and Schroeter (995, Azzam (997, Sexton (000, and Totao and Chung (005 but contradct thoe of Lopez, Azzam, and Epana (00. In ummary, the null hypothee that the olgopoly market power and olgopony market power n the U.S. beef packng ndutry eual zero are reected n the tatc and dynamc model. Therefore, we can conclude that the U.S. beef packng ndutry exert 6

19 market power n both the beef retal market and the cattle procurement market but the olgopony market power lghtly larger than the olgopoly market power. The econd null hypothe that capte upply ha no effect on olgopony market power reected. Th concluon mple that packer ue capte upply a a ource of market power, but the market power from capte upply mall. The thrd null hypothe that by ncreang concentraton the cot effcency effect outwegh market power effect fal to reect n both the tatc and dynamc model. So, we can conclude that an ncreae of concentraton n the U.S. beef packng ndutry ncreae ocal welfare. Concluon Durng the lat two decade, concentraton and capte upply hae been controeral ue a ource of market power n the U.S. beef packng ndutry. Th paper contrbute two fold to the meaurement of market power n the U.S. beef packng ndutry. Frt, the olgopoly and olgopony market power are multaneouly condered, and the olgopony market power dded by two effect: capte upply market power and cah cattle procurement market power. Therefore, the NEIO approach can meaure the market power of retal market, cah cattle market, and capte upply a a functon of concentraton. Second, the tme aryng model appled to look nto the dynamc change of market conduct uch a conectural araton and market power. Coneuently, we can dynamcally calculate the change of concentraton effect on market power and cot effcency n the U.S. beef packng ndutry. To etmate the multaneou euaton, monthly data from 990 to 006 are ued n the etmaton. 7

20 The emprcal reult reeal the preence of market power n both the beef retal market and the cattle procurement market n the pat two decade. The olgopony market power lghtly greater and le table than olgopoly market power, but the dfference n magntude between olgopoly and olgopony market power mall for the whole ample perod. Addtonally, further ncreae n concentraton would expand market power n both olgopoly and olgopony market. Howeer, the olgopoly and olgopony market power are lghtly decreaed durng the ample perod een though the concentraton lghtly ncreaed from 990 to 006. Th reult may be from other market crcumtance. The ncreae of capte upply lead to the ncreae of olgopony market power, but the market power by capte upply a relately mall porton of the total market power. Therefore, we can conecture that the maorty of market power would be caued by concentraton rather than capte upply. The reult alo how that the cot effcency effect from the ncreaed concentraton n the U.S. beef packng ndutry are conderably larger than the market power effect n the tatc model, but lghtly lager n the dynamc model. Th reult mean that the cot effcency effect outwegh the market power effect. 8

21 Reference Appelbaum, E. 98. The Etmaton of the Degree of Olgopoly Power. Journal of Econometrc 9: Azzam, A.M. and E. Pagoulato Tetng Olgopoltc and Olgopontc Behaor: An Applcaton to the U.S. Meat-Packng Indutry. Journal of Agrcultural. Economc. 4: and J.R. Schroeter. 99. Implcaton of Increaed Regonal Concentraton and Olgopontc Coordnaton n the Beef Packng Indutry. Wetern Journal of Agrcultural Economc 6(: Meaurng Market Power and Cot-Effcency Effect of Indutral Concentraton. The Journal of Indutral Economc 45(4: Breuch, T.S Tetng for Autocorrelaton n Dynamc Lnear Model. Autralan Economc Paper 7: Cowlng, K.G. and Wateron, M Prce-Cot Margn and Market Structure. Economca 43: Dckon, V.A. 98. Conectural Varaton Elatcte and Concentraton. Economc Letter 7:8-85. Econtat Databae. Aalable at Godfrey, L.G Tetng Agant General Autoregree and Mong Aerage Error Model When the Regreor Include Lagged Dependent Varable. Econometrca 46: Greene, W.H Econometc Analy. New York Unerty: Prentce-Hall Inc. Lopez, R.A., A.M. Azzam, and C.L. Epana. 00. Market Power and/or Effcency: A Structural Approach. Reew of Indutral Organzaton 0:5-6. Me, B. and C. Sun Aeng Tme-Varyng Olgopoly and Olgopony Power n the U.S. Paper Indutry. Journal of Agrcultural and Appled Economc 40(3: Schroeder, T.C, R. Jone, J. Mntert, and A.P. Barkley The Impact of Forward Contractng on Fed Cattle Tranacton Prce. Reew of Agrcultural Economc 5(:

22 Schroeter, J.R Etmatng the Degree of Market Power n the Beef Packng Indutry. The Reew of Economc and Stattc 70(:58-6. Schroeter, J. R. and A. Azzam Capte upple and cah market prce for fed cattle: The role of delery tmng ncente. Agrbune 0: Sexton, R.J Indutralzaton and Conoldaton n the US Food Sector: Implcaton for Competton and Welfare. Amercan Journal of Agrcultural Economc 8: Sheldon, I. and R. Sperlng. 00. Etmatng the Extent of Imperfect Competton n the Food Indutry: What Hae We Learned? Journal of Agrcultural Economc 54-: Totao, E. and C. Chung Horzontal Conoldaton n the U.S. Food Proceng Indutry: Boon or Bane? Paper preented at the Southern Agrcultural Economc Aocaton Annual Meetng n Lttle Rock, Arkana, February 5-9. U.S. Department of Agrculture. Economc Reearch Serce. Meat Prce Spread. Aalable at U.S. Department of Agrculture. Gran Inpecton, Packer and Stockyard Admntraton. Packer and Stockyard Stattcal Report. Aalable at pc=pub-tat U.S. Department of Labor. Bureau of Labor Stattc. Aalable at go/ Wann, J.J., and R.J. Sexton. 99. Imperfect Competton n Multproduct Food Indutre wth Applcaton to Pear Proceng. Amercan Journal of Agrcultural Economc 74: Ward, C.E., S.R. Koontz, and T.C. Schroeder Impact from Capte Cupple on Fed Cattle Tranacton Prce. Journal of Agrcultural and Reource Economc 3(: Whtley, J The Gan and Loe from Agrcultural Concentraton: A Crtcal Surey of the Lterature. Journal of Agrcultural & Food Indutral Organzaton -. Zhang, M. and R.J. Sexton Capte Supple and the Cah Market Prce: A Spatal Market Approach. Journal of Agrcultural and Reource Economc 5(:

23 Zheng, X. and T. Vukna Do Alternate Marketng Arrangement Increae Pork Packer Market Power? Amercan ournal of Agrcultural Economc 9(:50-63.

24 Table. Decrpte Stattc of Varable Ued n the Emprcal Etmaton ( , N=04 Varable Symbol Mean S. D. Mnmum Maxmum Herfndahl ndex for cattle laughter H Cattle laughter weght (bl./lb Q Retal prce of beef (cent/lb P Cah market prce (cent/lb W Capte upply prce (cent/lb W frm concentraton rato CR frm capte upply rato CATR Retal prce of pork (cent/lb Whole. prce of chcken (cent/lb pork P chcken P Per capta ncome (thouand $ INCOME Prce of cale (cent/lb Prce of corn ($/buhel Prce of orghum ($/buhel Prce of fuel ol # ($/gallon Labor productty (000=00 Prce of labor (000=00 Captal productty (000=00 Prce of captal (000=00 Materal productty (000=00 Prce of materal (000=00 cale P corn P orghum P fuel P Q X l l Q X c c Q X m m PPI for farm product (98=00 PPI CPI for meat (98=00 CPI for fuel (98=00 CPI m CPI f

25 Table. Etmate of the Parameter and Conectural Varaton wth the Statc Model for the U.S. Beef Packng Indutry by GMM Parameter Varable Etmate S. E. t-stattc p-value Conectural Varaton H <.000 Supply Functon 0 Contant <.000 S W < Demand Euaton corn P orghum P cale P <.000 fuel P < Contant <.000 r d P <.000 pork P <.000 chcken P < INCOME <.000 Cot Functon ll cc mm lc cm ml l c / ( l l <.000 / ( c c <.000 ( m / m <.000 / ( l c <.000 ( m / c <.000 / ( m l <.000 l <.000 c <.000 m m <.000 3

26 Table 3. Conectural Elatcty and Market Power for the U.S. Beef Packng Indutry Margnal Effect Etmate S.E. * Conectural Elatcty ( retal Market Power n Retal Market ( L cah Market Power n Cah Market ( L capte Market Power n Capte Supply Market ( L Note: All etmate are tattcal gnfcant at the 5% gnfcance leel. 4

27 Table 4. Margnal Effect of Market Concentraton on Market Power and Cot Effcency wth Statc Model for the U.S. Beef Packng Indutry from 990 to 006 Olgopoly Cah Market Olgopony Capte Market Cot Effcency Total Effect Etmate S.E. Etmate S.E. Etmate S.E. Etmate S.E. Etmate S.E Note: All etmate are tattcal gnfcant at the 5% gnfcance leel. 5

28 Table 5. Etmate of the Parameter and Conectural Varaton wth the Dynamc Model for the U.S. Beef Packng Indutry by GMM Parameter Varable Etmate S. E. t-stattc p-value Conectural Varaton c 0 Contant <.000 c H <.000 c CR Supply Functon 0 Contant <.000 S W < Demand Euaton corn P orghum P cale P <.000 fuel P < Contant <.000 r d P <.000 pork P <.000 chcken P < INCOME <.000 Cot Functon ll cc mm lc cm ml l c / ( l l <.000 / ( c c <.000 ( m / m <.000 / ( l c <.000 ( m / c <.000 / ( m l <.000 l <.000 c <.000 m m <.000 6

29 Table 6. Conectural Elatcty and Market Power for the U.S. Beef Packng Indutry from 990 to 006 Year Conectural Market Power Market Power Market Power Elatcty n Retal Market n Cah Market n Capte Market Etmate S.E. Etmate S.E. Etmate S.E. Etmate S.E Ae Note: All etmate are tattcal gnfcant at the 5% gnfcance leel. 7

30 Table 7. Margnal Effect of Market Concentraton on Market Power and Cot Effcency wth Dynamc Model for the U.S. Beef Packng Indutry from 990 to 006 Olgopony Olgopoly Year Cah Market Capte Market Cot Effcency Total Effect Etmate S.E. Etmate S.E. Etmate S.E. Etmate S.E. Etmate S.E Ae Note: All etmate are tattcal gnfcant at the 5% gnfcance leel. 8