The final published version is available online:

Transcription

1 Fofana, A. and Jaffry, S. (0) Assessng retal market competton for mult-aquaculture products. Journal of Economc Studes, :, pp. -. ISSN 0-. Ths artcle s Emerald Group Publshng and permsson has been granted for ths verson to appear here ( Emerald does not grant permsson for ths artcle to be further coped/dstrbuted or hosted elsewhere wthout the express permsson from Emerald Group Publshng Lmted. The fnal publshed verson s avalable onlne: Deposted on: August 0 SRUC Repostory Research publcatons by members of SRUC

2 Page of Journal of Economc Studes Abstract Assessng Retal Market Competton for Mult-Aquaculture Products Purpose Ths paper s an nvestgaton of market competton for three product types of salmon (smoke, fresh and whole salmon) to understand whether supermarkets are exercsng market power over salmon consumers n the UK retal market. Desgn/methodology/approach Competton and the correspondng prcng conduct among supermarkets are tested by applyng dynamc structural smultaneous system equatons and usng smlar data set used by Jaffry, Fofana and Murray (00). For Peer Revew Fndngs The results ndcate that the market s compettve for fresh fllets and whole salmon but retalers appeared to exert some level of market power for smoke salmon. The hypothess that market power s the same for all three products n the study was rejected; further ndcatng that the market for fresh products are compettve whle retalers may be exercsng market power over consumers for smoke salmon. Research lmtatons/mplcatons Current data lmtatons dd not allow the nvestgaton to cover the past few years n the modellng process. However the results are stll relevant as there have been no major structural changes n aquaculture products retalng landscape n the recent past. Practcal mplcatons Concerns over the supermarkets exercse of market power over consumers have prompted the competton authortes to contnue nvestgatng the stuaton n the UK supermarket sector snce. The most recent nvestgaton by competton authortes was n 00. In all cases, no evdence of market power was found despte ncreased market concentraton. Results from ths study generally uphold the clam of the competton authortes n the UK. Orgnalty/value Ths s the frst study to use a model wthn a structural econometrc framework of frms to test for compettveness of salmon products n the UK market place. Keywords: Competton, Market power, Error correcton model, Dynamc demand systems, salmon

3 Journal of Economc Studes Page of Introducton Rapd growth of the UK retal sector n the last few decades has fueled an enormous change n the organzaton of relatonshps along the seafood marketng structure. Changes n consumer buyng habts wth the ncreased demand for convenence food such as salmon and the consumpton of more meals away from home are frequently cted as the natural causes of these transformatons (e.g. Connor, Knsey and Senauer ). These changes have shfted the For Peer Revew market from beng unsophstcated nto beng hghly technologcal and concentrated. The rsng level of concentraton n the sales of farmed fsh has been brought about partly by the substantal growth n the producton of ntensvely farmed salmon, and partly by the ncreased domnance of supermarkets n retal sales (Fofana and Jaffry 00). Mergers among supermarket chans and take-overs by multnatonal retal frms have led to supermarket domnance n the retal market. Supermarket sales of seafood n the UK stood at $. bllon ( =$.) n 00 representng % ncrease snce 00 when sale were valued at $. bllon ( =$.). Over tme, the share of large supermarkets retal sales has ncreased at the expense of the smaller retalers, manly fshmongers. For example, the market share of fresh fsh sold through supermarket chans n the UK ncreased from % of the market n (Murray and Fofana, 00) to % n 00 (Seafsh 00). Consequently, the supermarket, rather than the ndependent small retaler (e.g. fshmonger) s now the outlet of choce for most consumers. The motvatons of ths paper are closely lnked to the developments that have occurred n the fsh retalng ndustry n the last two decades and the domnance of supermarkets n retalng of seafood products especally salmon, n the UK. These developments have aroused concerns n the publc sphere that supermarkets may be exercsng market power by extractng lower prces

4 Page of Journal of Economc Studes from ther supplers whch they fal to pass onto consumers. The concerns expressed by consumer groups and newspapers such as Fsh Farmng Today, No. 0 November, (00) and Sunday Tmes, August () are cases n pont. A number of publshed books about retaler growth and domnance also document the growng publc concern of the sprallng power of the supermarket retal chans. For Peer Revew Concerns over the supermarkets domnance and ther potental exercse of market power prompt the competton authortes to contnue montorng the stuaton of market power n the UK supermarket sector snce. In Aprl the Offce of Far Tradng (OFT) referred the conduct of supermarkets n ther grocery busness to the Competton Commsson (CC), the frst report of whch was released n 000. The CC s nvestgaton covered both the supermarkets relatonshps wth supplers and wth consumers. The nvestgaton ncluded an analyss of prce trends over tme, of nternatonal prce comparsons, of proftablty, and of consumer satsfacton. The CC concluded that there was no evdence of excess prces or profts, and that the market was broadly compettve. In early 00, the OFT agan referred the retal ndustry to the CC for more detaled nvestgaton due to further consoldaton n the retal market snce 000. The OFT was partcularly concerned that ncreased consoldaton and the move by supermarkets nto the convenence sector mght have dstorted competton and n the process harmed consumers. The ssues of competton and of market power come together n dscussons of domnant frms and of the chan they operate. Hgh market concentraton and shares are commonly assocated wth the exercse of market power (Burt and Sparks (00)). Therefore one concern n the ndustral organzaton lterature s that more concentraton mght lead to ncreased market

5 Journal of Economc Studes Page of power, whle less concentraton mght drve the ndustry prcng strategy n the drecton of perfect competton. The strategy of puttng compettors at a dsadvantage by offerng lower prces to supplers s benefcal to domnant frms as t ncreases ther market share or prces. In the lterature a number of possble ways of rasng costs have been dentfed, ncludng supply agreements, exclusve dealngs, wage deals, complance costs, advertsng, development servce enhancements and vertcal ntegraton most of whch tactcs have been ascrbed to the operaton For Peer Revew of multple retalers and supermarkets n the market (Smth (00), Clarke et al. (00)). Jaffry et al (00) carred out a study of the retal market for fresh salmon n the UK usng data for the ndustry from Ther work was motvated by clams that supermarket chans used ther buyng power to obtan substantal dscounts from supplers but faled to pass these benefts on to consumers. Usng sngle demand and supply equatons they analysed the relaton between the retalers and consumers for the fresh salmon usng the New Emprcal Industral Organzaton (NEIO) methodology. The study revealed that the retal market for fresh salmon was compettve despte the market beng hghly concentrated. However, the study does not mply that market power s not beng appled to other product forms such as smoke salmon or whole salmon at the retal level or upstream the value chan. In a relatvely recent artcle, Fofana and Jaffry (00) nvestgated the behavor of retalers n the nput market for smoke, fllet, and whole salmon usng a translog proft functon. The results of ths study ndcate that retalers do not possess olgopsony power over ther supplers. However, based on the sgnfcance decson parameters n ther model results they concluded that retaler mght have some degree of olgopsony power n the market for fllet and smoke salmon. Ths study expands on the Jaffry, Fofana and Murray (00) and used smlar data to smultaneously analyze market power for

6 Page of Journal of Economc Studes salmon products and complements Fofana and Jaffry (00) by analyzng whether supermarket retalers of salmon possess market power over consumers to help buld a complete pcture of market power n the marketng chan of salmon n the UK. Snce the late 0s, applcaton of the New Emprcal Industral Organsaton (NEIO) to estmatng the extent of market power has become very popular. Recent developments n tme For Peer Revew seres econometrcs have further enhanced emprcal nvestgaton of market power usng the NEIO methodology. In ths methodology s framework, correct specfcaton of the demand process s crucal. Whle most applcatons of ths method have been restrcted to sngle markets, Cotterll, Dhar and Putss (000), Hausman, Leonard and Zona () and Hyde and Perloff (), among others, have used system demand equatons to overcome the theoretcal shortcomngs of sngle demand equaton n determnng market power. Hyde and Perloff () developed cross-markets nvestgaton of market power for meat usng a lnearsed form of AIDS model. In ths paper an economc model of frm conduct smlar to that of Hyde and Perloff () s used to measure explctly the degree of market power exercsed by supermarket over consumers of salmon products n the UK. Ths approach yelds precse, nterpretable statstcal tests to evaluate the degree of market power n salmon retalng. Whle the approach used n ths paper s smlar to that of Hyde and Perloff, t s more robust n that the tme seres propertes of the data are accounted for n the constructon of the AIDS model. The margnal cost equaton n ths paper also dffers from that of Hyde and Perloff n that not only does t nclude a varable that captures captal cost of retalng but t also conducts a test for the legtmacy of the nstruments

7 Journal of Economc Studes Page of used n the estmaton. Though smlar data set are used, the modellng approach dffers from Jaffry et al s study of salmon retal market power over consumers n the UK that uses sngle demand models to nvestgate a product. Model formulaton The key to measurng market power usng the NEIO methodology s the consstent estmaton of For Peer Revew demand and cost models. Therefore, we frst specfy a system demand model and then derve the optmalty equatons followng Hyde and Perloff (). Demand Systems The frst stage n the estmaton of market power s to estmate consumer demand. The key to any demand estmaton s to specfy a model that s both flexble and consstent wth economc theory. The lnear form of the AIDS has enjoyed great popularty n appled demand analyss due to ts consstency and ease of estmaton. Startng from a specfc cost functon wth the basc assumpton that commodtes are weakly separable from non-related goods, the AIDS model gves the share equatons n a good system as where X t z = α + γ +β t j ln Pjt ln () j= Pt p q t t z t = s the budget share of the th good, P jt s prce of the j th good n the bundle, X t X t s total expendture on all goods n the system and P t s the ndex of prces n tme perod t. The ndex of prces P t s assumed to be a functon of commodty prces and s defned as a translog prce ndex of the form:

8 Page of Journal of Economc Studes ln Pt =α0 + αk ln Pk + γ jk ln Pj () j j k The AIDS model uses the 'corrected' Stone s () prce ndex: where ln P 0 t = z t p ln p t 0 For Peer Revew p s the mean of the seres used as the base perod. To keep the model consstent wth economc theory, the parameters are constraned such that the homogenety, addng-up and symmetry condtons hold. These restrctons are mposed as follows: α = j= γ j = = 0 (Homogenety) γ = j γ j j (Addng up) (Symmetry) Therefore, we estmate own prce and expendture elastctes of the three product forms ncluded n the study. The uncompensated own prce( ) and Alston, 0) are calculated as follows ε = γ = 0 β = 0 j γ = + β z ε and ncome ( ) β η = + z η elastctes of demand (Green In estmatng elastctes, the budget shares are deally the predcted shares at the estmaton pont. However, Chalfant () ndcated that the use of the correspondng sample share closely approxmates the predcted shares, and that these can be used n emprcal work. =

9 Journal of Economc Studes Page of Optmalty condton As hghlghted by Hyde and Perloff (), Bresnahan () showed that a sutable way of generatng an entre famly of possble equlbra s to equate margnal cost wth a measure of effectve margnal revenue. Ths s mathematcally gven as follows ( q ) q p + λ p ' () For Peer Revew where q s quantty, p s prce and the λ term s a parameter to be determned and captures the degree of market power n the ndustry for all goods =,..., n. Theoretcally, λ takes a value between 0 and ( 0 λ ) and f λ equals zero perfect competton exsts; f λ s equal to the ndustry behaves as a cartel. Intermedate λ values dentfy dfferent olgopoly regmes. In general the optmalty condton n () can be rewrtten for good as p +λ MC () p q = q ( q ) where MC ( q ) s a formulaton for the margnal cost functon. The procedure summarsed n equaton () has been appled n many sngle market studes (see for example Jaffry et al (00) and Steen and Salvanes () for specfc examples on the applcaton to the fsh market. Hyde and Perloff () generalsed equaton () to study several markets smultaneously. In the same ven, we generalsed equaton () to study several product markets smultaneously. Some authors have nterpreted λ as conjectural varaton, n ths paper we have followed Perloff () as the wedge between prce and margnal cost created by an unknown game.

10 Page of Journal of Economc Studes To extend Hyde and Perloff () analyss, we ncluded a varable, K, whch s an ndex that captures the prce assocated wth captal and other utltes faced by all retal outlets as part of the determnant of margnal costs. The K varable n the margnal cost equaton emphasses the asymmetry n costs that can exst between the ncumbent large retal frms and potental entrants n the market. Supermarkets have used ths advantage to cut prces to lure customers and by so dong to move away from short run to long run proft maxmzaton objectves. These strateges For Peer Revew are arguably desgned to ncrease market share, protect market poston n the long run and act as strategc barrer to deter potental entrants n the ndustry. The evaluaton of compettve markets and market behavour often focuses on the extent to whch one or more frms can sustan a prce ncrease. Frms wll fnd t very dffcult to sustan sgnfcant long-term prce ncreases f t s easy for new frms to enter a market and provde a substtute product or servce. The exstence of barrers to market entry wll lmt such market responses. There are many types of barrer to entry n dfferent markets. Ban () dentfed absolute cost advantage and economes of large scale producton that requre large captal expendture as among the general sources of barrer to entry n an ndustry. Ban argued that a barrer to entry s a structural attrbute of a market mplyng that ncumbent sellers can earn more than a normal rate of return wthout attractng new entrants nto the ndustry. For example, the cost of land s a sgnfcant part of fxed costs n the UK. The Competton Commsson (000) reported that the fve man supermarkets n the UK pad more to acqure land for development than ther counterparts n other European countres. Along these lnes the Competton Commsson (000) examned development costs of land n France, Germany, and the Netherlands. The analyss suggests that development costs n the UK were typcally. tmes hgher than n France;. tmes hgher than n Germany and. tmes hgher than Netherlands. K, whch s an ndex of costs of captal

11 Journal of Economc Studes Page 0 of goods, s therefore a key varable n the cost structure of large retal organzatons n the UK, and t s vtal to uncover any antcompettve behavour. Ths s due to the fact that land cost (fxed cost) and development costs (sunk costs) n the UK are sgnfcantly hgher than smlar costs n other European countres. Several authors have examned the lnk between frm s captal cost and market power (e.g. Subrahmanya and Thomadaks, 0; Cheng, Chen and Hte, ; Cressy, ). Although the conclusons as to the effects of market power dffer to some extent For Peer Revew between studes, the general nference from these studes s that ncreased market power appears to lower the cost of captal to the frm whose power has ncreased. Sometmes captal costs consttute a sunk cost, whch means the cost s unrecoverable f the operator decdes to ext the market. Sunk costs are a barrer to entry, whch mples that they make t less lkely for frms to enter the market. Some porton of the utlty operatons may also have hgh fxed costs, whch are costs that do not vary wth the output of the frm. Hgh fxed costs results to economes of scale, whch may lead to natural monopoly (Porter ). Therefore captal cost s consdered to be crucal n the measurement of market power of retal chan and ther exerton of power over both producers and consumers. Kumbhakar et al (0) argued that estmatng market power nvolves estmates of margnal cost because t cannot be observed unless there s constant return to scale. In such a case average cost whch can be computed from observed data s used as a proxy for margnal cost. Followng Hyde and Perloff (), constant returns to scale s assumed so as to allow the possblty of detectng other forms of market structures. In ths ven, margnal cost for each good reflects constant 0

12 Page of Journal of Economc Studes returns to scale and s lnear n wholesale prces, wages and captal as shown n the followng equaton. MC ( q ) a + b v + d w+ e k = () where v s the wholesale prce of each fsh product; w s an ndex of retal wage costs common for all salmon products and k s a measure of captal cost common to all retal outlets n the ndustry. a, b, d and e are parameters to be estmated. Smlar margnal cost representatons For Peer Revew have also been used by Deodhar and Sheldon () and Hatrl et al (00). Dfferentatng the AIDS model holdng total expendture (X) and other prces constant, the slope of each of the demand curve can be gven as follows p q j p = q j γ j s j δ j + β () z s p j, j where δ j refers to the Kronecker delta. In the salmon retal market retalers stock most of the product forms for salmon. In the case where each frm sells all three goods, as we assume that retal frms sell all three products, () can be generalsed to p j p + q j = MC q j= ( q ) Substtutng () and () nto the optmalty condton (), wth some mathematcal manpulatons yelds the followng equaton used n the estmaton. ()

13 Journal of Economc Studes Page of P λ z p jq j λ a () j z γ γ β j +β z = + b v + dw+ ek q j where p s the retal prce of salmon product, v s the wholesale prce, w s an ndex of the retal wage rates, q s the quantty sold, z s the budget share, γ and β are coeffcents from the LAIDS For Peer Revew model and a, b, c, d, e and λ are parameters to be estmated. As evdent from equaton (), an ntegral part of the optmalty condton whch depcts the ndustry s prcng behavour s the elastcty concept whch s the conduct coeffcent (λ ). The λ parameter measures a gap created by some unknown game as could be the case n a folk-theorem equlbrum that les between the collusve and Cournot equlbra (Hyde and Perloff ()). Thus the model nvolves a knd of pseudo-dynamcs depcted n a framework that s essentally statc. More recently, some studes n the lterature have tested the valdty of statc olgopoly models (e.g., Nevo (00); Hausman and Leonard (000); Genesove and Mulln (); Wolfram ()). Most of these studes suggest that the seemngly statc olgopoly models yeld reasonably accurate predctons of prcng behavour. The conduct coeffcent reveals the knd of olgopolstc behavour that characterzes the market, and there s no need to mpose any a pror restrcton on t. That s, t s not necessary to assume a certan conduct beforehand, and test for ts property. Instead, any behavoural model s a pror plausble. Data and Emprcal Modellng Salmon retal data for smoked, fllets and whole salmon were collected from Seafsh Industry Authorty and the producton and wholesale data were obtaned from Scottsh Qualty Salmon

14 Page of Journal of Economc Studes (SQS). Unt values were used to derve unt prces per klogram. Asche et al. (00) argue that the sgnfcant prce reductons of new aquaculture speces ndcate that the markets are not strongly lnked to the markets for other products. As perfect substtutes have a constant relatve prce and close substtutes have hghly correlated prces, ths suggests that farmed fsh does not compete too closely wth other goods. Therefore data for substtute products were excluded from the analyss. Wage (w) n the margnal cost equaton s an ndex of wage costs of retalers, based on contnuous surveys conducted by the UK Offce for Natonal Statstcs (ONS) n whch over, 00 samples are selected annually. Captal cost varable n the margnal cost equaton s an ndex of rent, whch ncludes mantenance, nsurance, ground rent, councl tax, water rates, mortgage, buldng mantenance and an nterest payment ndex; collected from the Offce for Natonal Statstcs (ONS), UK. The data avalable for emprcal modellng are monthly observatons from January to December 00. Table summarses and presents descrptve statstcs of the varables used n For Peer Revew the estmaton procedure. [Insert Table Here] Followng Genesove and Mulln () we use quarterly level data to ensure that the estmated elastcty represents the long run elastcty as opposed to the short run. In addton, the long run s consdered because under mperfect competton, retalers are more lkely to focus on establshng and mantanng a prce n the long-run rather than focusng on short-run profts

15 Journal of Economc Studes Page of (Juma, 00). Before specfyng the most approprate emprcal model the tme seres propertes of the data were revewed n order to nvestgate formally whether the long run demand relatonshps are economcally meanngful or merely spurous. Frst, each of the ndvdual tme seres was tested for a unt root n the demand equatons. Unt root testng was mplemented usng the Augmented Dckey-Fuller (ADF) test. The tests were For Peer Revew conducted wth and wthout a trend term and the results ndcated that the constructed seres for fresh fllets, whole and smoked fllets were all non-statonary n levels but statonary n frst dfferences, a necessary condton for contegraton. The second step was to nvestgate whether both z and the vector of explanatory varables n each demand equaton are contegrated. Ths test was mplemented usng Johanson s () approach, a vector auto-regressve model. Ths test s mportant because the demand model specfed would be napproprate f the varables do not have a long run relatonshp or are not contegrated. The results show that there s at least one contegraton vector n the share equaton, z for each of the salmon product forms. The results are presented n table below. [Insert Table Here] The fact that all varables n the LAIDS model are I() and that there s at least one contegratng vector n each of the share equatons mples that the LAIDS model must be estmated n a way that accounts for these propertes. The estmaton of the LAIDS model usng ntegrated data has been addressed usng a number of methods. For example, Ng () specfcally consders the

16 Page of Journal of Economc Studes ssue of testng the homogenety restrcton and uses a method n whch the emprcal dstrbuton of the relevant test statstcs s smulated by parametersng the data generatng process and usng ths as the bass for a Monte Carlo exercse. The most commonly used method n fsh demand analyss s the Anderson and Blundell (, ) technque as appled by Asche et al. (). Ths method makes use of recognzed connecton between contegrated tme seres and ther error-correcton representaton. Duffy (00) argued that the ECM formulaton of Anderson and For Peer Revew Blundell s expressed n terms of devatons from a long-run poston that s descrbed by an AIDS. Followng Asche et al., the dynamc AIDS model) s specfed n fourth dfferences. Ths s to help combat possble stochastc seasonal effects whch could affect the short run dynamcs of the model are accounted for by usng fourth perod dfferencng (Asche et al., ), nstead of frst dfferences. One lag was suffcent to account for the dynamcs and for the effects of habt formaton n the model.therefore followng Asche et al. we specfy our dynamc LAIDS model as follows: Zt = αt+ δ Zt + αsksk+ αtt+ ϕ jln Ρjt+ βln Ε+ ηt (0) k= n j= where denotes fourth dfferenced flter (e.g. p= pt pt ), Z t depcts the fourth dfference of the budget share of the th good, Z t s the lagged fourth dfference of the budget share, S k are seasonal dummes, t a lnear trend, ln p j s the fourth dfference prce of the j th good n the bundle, ln E s the fourth dfference of total expendture on all goods n the system and η t s the error term. The use of a trend s qute common n demand analyss, for example see Burton and Young, (), Asche et al. (). The trend term n the equaton s assumed to capture several factors. Frst, the trend term help captures the effect salmon marketng by SQS as a healthy det to counteract negatve publcty about salmon farmng. These promotonal

17 Journal of Economc Studes Page of actvtes of the ndustry body and smlar organzatons that promote oly fsh have drawn attenton to salmon products. Second, the trend also captures structural shfts n demand and changes n taste. Lke Asche et al., we are not able to separate the trend and the constant terms n equaton (0) thus estmated values are not nterpreted as mnmum expendture on each salmon product. The For Peer Revew flter n equaton (0) has been argued to control for both determnstc and stochastc seasonal trends n the model (Asche et al., ). Asche et al also argued that the fourth dfference flter wth quarterly data s preferable to the normal frst dfference flter because t controls both for seasonal cycles and for unt roots such that the short-run dynamcs n the data seres are statonary. Followng Anderson and Blundell () and Burton and Young (), the propertes of homogenety and symmetry are appled n the long-run segment of the model. Whle symmetry may not hold n the short run, homogenety holds by vrtue of the addng up propertes. Emprcal Results Followng Steen and Salvanes (); Gohn and Guyomard (000) and Jaffry et al (00) the demand system equatons and the system of equlbrum condtons were estmated sequentally to accommodate the large number of parameters n equatons () and (0) and to control for the attendant multcollnearty problems. Sequental estmaton of the demand and margn equatons n ths way s common n the lterature and has been shown to produce results that dffer lttle from those obtaned wth smultaneous estmaton (Vllas-Boas and Zhao, 00).

18 Page of Journal of Economc Studes The demand system () was estmated usng a seemngly unrelated regresson (SUR) technque whch accounts for cross-equaton contemporaneous correlaton and as a result takes nto account the optmzaton process that s essental n any demand system. For Peer Revew The demand system s estmated by ncorporatng the theoretcal restrctons of addng-up, symmetry and homogenety. Followng Anderson and Blundell (), one equaton (we dropped the whole salmon share equaton) was dropped to avod sngularty durng estmaton and the addng-up restrcton was used to recover the equaton after estmaton. The estmated parameters are reported n Table. [Insert Table Here] The model specfcaton s robust and fts the observed data for both product forms as measured by system R-square 0 of %. The hypotheses of homogenety and symmetry condtons mpled n economc theory are tested wth a Wald test. The computed test statstcs for symmetry restrcton s 0. and the tabulated χ statstcs s. for one degree of freedom, whch allowed the rejecton of the hypothess at the % level of sgnfcance. On the other hand, the homogenety restrcton was accepted at the % level of sgnfcance. The correspondng computed value of the test statstcs for homogenety s.0 and the tabulated χ statstcs for degrees of freedom s.. The rejecton of the symmetry condton found n ths study s not unusual. Ths mples that emprcal demand studes often found that some theoretcal restrctons do not hold (Deaton and Muellbauer 0b, Cozzarn and Glmour ). Cozzarn and Glmour conducted a survey on these restrctons n emprcal demand studes and found homogenety (symmetry) was tested n of the models and the restrcton was rejected % percent of the tme. A jont test for homogenety and symmetry were also conducted. The computed test

19 Journal of Economc Studes Page of statstcs s. and the correspondng crtcal value at % level of sgnfcance s., whch means that we can t reject the null of a jont homogenety and symmetry restrcton. We use the Lagrange Multpler (LM) to test for the presence of autocorrelaton. In the LM test the null hypothess of H : ρ 0 (no autocorrelaton) s tested aganst the alternatve hypothess 0 = of the presence of autocorrelaton. The LM test has a For Peer Revew χ dstrbuton wth degrees of freedom equvalent to the number of lagged resduals. Usng the aforementoned test the computed statstcs are 0. and 0. and the tabulated crtcal s. for degrees of freedom. The test suggests that there s no problem of autocorrelaton detected n both estmated share equatons. Followng from the results obtaned, the results ndcate that the system model estmated for retal demand for salmon possesses both theoretcal propertes of homogenety and symmetry. The economc content of the LAIDS model s presented n Table n terms of elastctes. The own prce elastctes have correct sgns (negatve) consstent wth economc theory. Estmates of elastcty n the retal market for dfferent salmon products n the UK are not commonly reported n the lterature except for fresh fllets. Compared wth earler studes of salmon market n the UK, the results of ths study appear n lne wth fresh fllets estmates reported n the past. For example Clay and Fofana () and Jaffry et al. (00) reported own prce elastcty estmate values of 0. and 0. for fresh salmon fllets. It s nterestng to note that our calculatons ndcate that whole salmon s relatvely more elastc compared wth fresh fllets or smoked salmon. Ths s typcal of unprocessed food, meanng that a slght ncrease n the prce of whole salmon trggers hgher than proportonate decrease n demand. Unlke smoked or fresh fllet whch are to some degree processed and hgher value goods a slght ncrease n prce would not χ

20 Page of Journal of Economc Studes change demand a great deal. Also worth notng s that the elastcty estmate for fresh salmon fllets appears to be ncreasng n value wth tme. Ths trend ndcates the ndependence of consumers and that the market demand curve s gradually dscplnng the market. That s customers react more strongly n later years to changes n prce as compared wth earler years; ths s a sgn of compettveness n the ndustry. For Peer Revew [Insert Table Here] The own prce elastctes for smoked and fresh fllets of 0. and.0 are not sgnfcantly dfferent from (mnus) one, mplyng that consumers almost make proportonal responses n the quantty demanded when the prces of these products change. However, the own prce elastcty for whole salmon (-.) depcts elastc demand. All other thngs remanng unchanged, f the prce of whole salmon n the retal market ncreases by 0% consumers cut back on the quantty demanded by almost %. Ths adjustment by consumers for whole salmon s not surprsng for a product that s unprocessed and mostly dsplayed on wet fsh counters n supermarkets, thus competng drectly wth other unprocessed fsh products. The expendture elastctes are statstcally sgnfcant ndcatng that total expendture on salmon products s a sgnfcant determnant of the demand for all the product forms of salmon that were nvestgated. However, we note the elastctes estmates are not sgnfcantly dfferent from one for smoked fllets and whole salmon. The expendture elastcty for fresh fllets s, however, greater than one ndcatng that demand s expendture elastc. Earler studes of salmon n the 0s to md 0s typcally estmated hgher expendture elastcty values as

21 Journal of Economc Studes Page 0 of compared wth those found n ths study. Our estmates are dssmlar from earler studes due to recent changes n the market and the demand structure for salmon. These changes are fuelled by marked shfts n food consumpton patterns due to changng lfestyle of the UK consumer, along wth economc, socal and demographc changes. Furthermore, the demand system specfcaton and the estmaton technques used n ths artcle are more robust n contrast to many earler studes when the market was mmature. Thus, the results n ths study are comparable wth For Peer Revew ncome elastctes of Asche et al. (). On the whole, the elastcty estmates are plausble and meanngful and further lend support to the satsfactory nature of the LAIDS-ECM model estmated. Non-lnear three-stage least squares (NLSLS) procedure wth nstruments was used for estmaton. Intal startng value estmates were obtaned n a two-stage estmaton procedure usng an nstrumental varable method to avod smultanety bas. The nstruments used were GDP, tme trend, UK money supply (M), quarterly average of UK Banks' base nterest rates, UK CPI, ndex of producton by Standard Industry Classfcaton () and an ndex of expendture on food and non-alcoholc beverages. Our estmates of the margnal cost equaton for each product form and the correspondng market power estmates are presented n Table.. 0

22 Page of Journal of Economc Studes A key problem wth nstrumental varable s that nstruments are requred whch are at least asymptotcally uncorrelated wth the error term n the regresson equaton. In order to test the valdty of the nstruments we used a Sargan () valdty test of nstruments. Under the null hypothess, the Sargan statstc s asymptotcally dstrbuted as χ wth p-k degrees of freedom; and s wrtten down as: n W εˆ εˆ W W εˆ () = S = εˆ W For Peer Revew where W s the chosen matrx of nstruments, p ndcates the number of columns n W and k the number of parameters to be estmated. The test statstcs were.,. and. for smoked fllet, fresh fllet and whole salmon margnal cost equatons respectvely. From the results, we accept the valdty of nstruments for all the margnal cost equatons when compared wth the crtcal value of. for degrees of freedom and % level of sgnfcance. [Insert Table Here] The model fts the data well wth satsfactory R values. An autocorrelaton test (DW test) was performed to check for the exstence of autocorrelaton n each of the margnal cost equaton. The results also suggest that no autocorrelaton n these equatons. Consderng the effects of the retal wage rate on retal margnal cost, these were found to be of mnmal mpact wth those for salmon steak and whole salmon not beng statstcally sgnfcant. Ths effect was as expected n that the retal wage rate s generally close to the mnmum wage. More mportantly, however, s the fact that employees n the retal sector have lttle nfluence on ther wage rates and are therefore prce-takers. Wth respect to the market power parameters,λ,

23 Journal of Economc Studes Page of these were found not to be sgnfcant at the % sgnfcance level for fresh fllet and whole salmon but sgnfcant for smoked salmon. More mportantly however, s that the market power estmates for fresh fllet and whole salmon are close to zero for us to conclude that the market for these products s near perfectly compettve. However, n relatve terms the market power estmate for smoked salmon s sgnfcant and of hgher magntude as compared wth other two products. Ths suggests that retalers exercse some degree of market power for smoked fllet. For Peer Revew Furthermore, the correspondng Lerner ndex for smoked salmon s 0.0 whle the estmated ndces for fllets and whole salmon are and respectvely. It can be seen that the Lerner ndexes for fresh fllet and whole salmon were neglgble and suffcently close to zero to ndcate that they are compettve whle the value for smoked salmon was dfferent from zero suggestng some relatve degree of market power. We also tested whether the retal margnal cost functon and the market power parameter for each salmon product are dentcal. The Wald test statstcs for dentcal margnal cost functon s. and the correspondng tabulated value s. for degrees of freedom and % level of sgnfcance. The test clearly rejects the hypothess that the margnal cost functons of each salmon product are equal. Ths further shows that there are physcal as well as cost dfferences between the dfferent products of salmon that affects retal margnal costs. The cost dfferences are reflected n the degree to whch each product form s processed,.e. smoked fllet s hghly processed whle whole salmon s the least processed. Ths gves rse to dfferent varable cost structures assocated wth dfferent market structures, hgher costs beng assocated wth noncompetton. The Wald test statstcs for equal market power measure for each product form s. and the correspondng tabulated value s. for degrees of freedom at the % level of

24 Page of Journal of Economc Studes sgnfcance. These results further show that the market power estmates for each salmon product are not dentcal, lendng support to the noton that retalers mght be exercsng some degree of market power for smoked fllet. Indeed, there are reasons n the ndustry to suggest that retalers of smoked salmon fllet mght have some degree of market power. Salmon or ndeed fsh processng n the UK ndustry s a For Peer Revew mature and a conservatve one based on tradtonal practces wth some methods of processng stll unaltered by recent technologcal nnovatons. A survey conducted by the UK Sea Fsh Industry Authorty n 000 revealed that close to 0% of prmary processors ether have no nternet web ste or do not use computers even n basc tasks n ther busnesses, such as bookkeepng or nventory purposes. Moreover, there has been more consoldaton, lqudatons and ratonalzaton of salmon smokng frms or actvtes wthn frms than any other frms specalsng n other forms of processng of salmon. Conclusons Salmon products have now become affordable to the ordnary consumer despte the hghly concentrated channels by whch the supples are obtaned. In order to gan an understandng of the transformaton of the retal sector for salmon products, we appled a new approach n Industral Economcs to the salmon retal market. The methodology, unlke ts predecessors, s theoretcally more robust. Modellng the formaton of prces n the market, we estmated an ECM LAIDS model that approxmates consumer behavour well. Ths s the frst study to use such a model wthn a structural econometrc framework of frms to test for market power for salmon products n the UK. Applyng these models to salmon products at the retal level yelds

25 Journal of Economc Studes Page of robust demand and margnal cost models wth theoretcally acceptable model dagnostcs, suggestng that the system s well represented. The emprcal results were derved wth data for -00 and the results show compettve prcng behavour n general but that the retaler mght have some degree of market power over consumers for smoked salmon fllet. Largely the fndngs from ths study support prevous fndngs (Jaffry et al (00); Steen and Salvanes, ()). In addton, our fndngs support the clams made by supermarkets n the UK, that, For Peer Revew regardless of ther huge market share and hgh concentraton, retal sales for salmon reman compettve.

26 Page of Journal of Economc Studes References Anderson, G.J. and R.W. Blundell (), Estmaton and hypothess testng n dynamc sngular equaton systems. Econometrca. 0: -. Anderson, G.J. and R.W. Blundell (), Testng restrctons n a flexble dynamc demand system: an applcaton to consumers expendture n Canada. Revew of Economc Studes 0, -0. Asche, F., and C.R. Wessells (), On Prce Indces n the Almost Ideal Demand System. Amercan Journal of Agrcultural Economcs, : -. Ashe, F., K. G. Salvanes and F. Steen (), Market Delneaton and Demand Structure Amercan Journal of Agrcultural Economcs,:-0. Bjørndal, T., K.G. Salvanes, and H. Andeassen (), The demand for salmon n France: the effects of marketng and structural change Appled Economcs :0-0. Breshnahan, T. F (), The olgopoly soluton concept s dentfed. Economcs Letters,0:. Burt, S., and L. Sparks (00), Power and Competton n the UK Retal Grocery Market. For Peer Revew Brtsh Journal of Management, :-. Burton, M., and T. Young (), The structure of changng taste for meat and fsh n Great Brtan. European Revew of Agrcultural Economcs,:-0. Burton, M. and T. Young (), The Impact of BSE on the demand for beef and other meats n Great Brtan. Appled Economcs,, -. Chalfant, J.A. (), A Globally Flexble, Almost Ideal Demand System, Journal of Busness and Economc Statstcs. : -.

27 Journal of Economc Studes Page of Chen, K.C., D.C. Cheng, and G.L. Hte (), Systematc Rsk and Market Power: An Applcaton of Tobn s q. Quarterly Revew of Economcs and Busness : -. Clay P., and A. Fofana, (), Prce and ncome elastctes for the demand for farmed salmon Unpublshed, Report for the Scottsh Executve. Clarke, R., S. Daves, P. Dobson, and M. Waterson (00), Buyer Power and Competton n European Food Retalng, Cheltenham, UK, and Northampton, MA, USA: Edward Elgar. For Peer Revew Competton Commsson (000) Supermarkets: A report on the supply of groceres from multple stores n the Unted Kngdom. Connor, J.M. (). North Amerca as a precursor of changes n Western European foodpurchasng patterns. European Revew of Agrcultural Economcs, : -. Cotterll, R. W., W. P. Putss Jr. and R. Dhar. (000), Assessng the Compettve Interacton between Prvate Labels and Natonal Brands. Journal of Busness :0-. Cozzarn, B and B.Glmour (), A methodologcal evaluaton of emprcal demand systems research. Canadan Journal Agrcultural Economcs :-. Deaton, A. and J. Muellbauer (0), An Almost Ideal Demand System. Amercan Economc Revew 0: -0. Deaodhar, S.Y. and I. M. Sheldon (), Is foregn Trade (Im) Perfectly Compettve? Journal of Agrcultural Economcs,, -. Fsh Farmng Today (00) November, 00. No. 0.

28 Page of Journal of Economc Studes Fofana, A. and S. Jaffry (00), Measurng Olgopsony power of UK salmon retalers. Marne Resource Economcs,, 0 Genesove, D. and W. P. Mulln (), Testng statc olgopoly models: Conduct and cost n sugar Industry 0-. Rand Journal of Economcs, : -. Green, R. and J. M. Alston (0) Elastctes n AIDS Models. Amercan Journal of Agrcultural Economcs : -. For Peer Revew Hausman, J., G., Leonard and J. D. Zona (), Compettve Analyss wth Dfferentated Products. Annales D Econome et de Statstque : -0. Hausman, J. and G. Leonard (000), The Compettve Effects of a New Product Introducton: A Case Study, Mmeo, MIT. Hatrl, A.S., E. Jones and A.R. Aktas (00), Measurng the Market Power of the Banana Import Market n Turkey. Turksh Journal of Agrculture and Forestry, :.-. Hyde, C. and J. M. Perloff (), Multmarket market: the Australan power estmaton retal meat sector. Appled Economcs 0:-. Jaffry, S., A. Fofana, and A. D. Murray (00), Testng for market power n the UK retal sector. Aquaculture Economcs and Management : -0. Jumah, A. (00), The long run, market power and retal prcng. Emprcal Economcs : 0-0. Jean Knsey, J. and B. Senauer (). Consumer Trends and Changng Food Retalng Formats. Amercan Journal of Agrcultural Economcs, -

29 Journal of Economc Studes Page of Kumbhakar, S. C., S. Baardsen and G. Len (0), A New Method for Estmatng Market Power wth an Applcaton to Norwegan Sawmllng. Revew of Industral Organzatons 0:0. Lau L. J (), On dentfyng the degree of compettveness from ndustry prce and output data. Economcs Letters 0:. Murray, A. and A. Fofana (00), The changng nature of UK fsh retalng. Marne Resource Economcs : -. For Peer Revew Nevo, A. (00), Measurng Market Power n the Ready-to-Eat Cereal Industry. Econometrca : 0-. Ng, S. () Testng for homogenety n demand systems when the regressors are nonstatonary. Amercan Journal of Agrcultural Economcs 0: -. Porter, M.E. (), Compettve Strategy: Technques for Analyzng Industres and Compettors. The Free Press, New York, NY Sargan, J.D (), Wages and prces n the Unted Kngdom: A Study n econometrc methodology, London; Butterworth. Reprnted n D.F. Hendry and K.F. Walls, Econometrcs and Quanttatve Economcs. Oxford:Basl Blackwell. Seafsh Industry Authorty (000) UK Sea Fsh Processng Industry key features. Sea Fsh Industry Authorty Press. Seafsh Industry Authorty (00) Retal Market Overvew. Sea Fsh Industry Authorty Press. Smth, H (00), Supermarket Choce and Supermarket Competton n Market Equlbrum. Revew of Economc Studes : -. Steen, F and G.K. Salvanes (), Testng for market power usng a dynamc olgopoly model., Internatonal Journal of Industral Organzaton :.

30 Page of Journal of Economc Studes Stone, J. (), Lnear Expendture Systems and Demand Analyss: An Applcaton to the Pattern of Brtsh Demand. Economc Journal : -. Sunday Tmes (). rd August, Vllas-Boas, J. M. and Y. Zhao (00), Retalers, Manufacturers, and Indvdual Consumers: Modelng the Supply Sde n the Ketchup Marketplace. Journal of Marketng Research : -. For Peer Revew Wolfram, C. (), Measurng Duopoly Power n the Brtsh Electrcty Spot Market. Amercan Economc Revew : 0-. Worthngton, P. (0), Strategc Investment and Conjectural Varatons. Internatonal Journal of Industral Organzaton : -.

31 Journal of Economc Studes Page 0 of Usng Bank of England 00 average annual exchange rate. Shopped by Joanna Blythman and Not on the Label by Felcty Lawrence New Economcs Foundaton Clone Town Brtan Steen and Salvanes (), Park and Welwta (), Jaffry, Fofana and Murray (00) ncluded measures of captal cost n the margnal cost equatons n determnng olgopoly power. Absolute cost advantage s used to descrbe a number of potental cost advantages that ncumbents may have over new entrants, other than economes of scale. Although derved n a statc context, these tests provde a vald emprcal test of dynamc equlbrum (Worthngton (0)). Consequently we do not ntroduce any dynamcs n the optmalty model durng estmaton. For Peer Revew SQS s an ndustry body that represents Scottsh Salmon Growers Assocaton, the Scottsh Salmon Board and Scottsh Qualty Salmon. A new expanded trade assocaton, Scottsh Salomon Producer Organsaton, was created n 00 that has taken over the operatons of SQS. See Asche at al. () and Duffy (00) for detals of the specfcaton of dynamc ECM AIDS usng the Anderson and Blunder () approach. In all, we attempted to estmate fve equatons system wth demand theoretcal restrctons mposed usng non lnear three- stage least square to acheve maxmum effcency. Unfortunately we were not able to acheve convergence may be due to the large number of parameters to be estmated. The potental problem assocated wth sequental estmaton s revewed by Love (). However a number of market power studes have used sequental estmaton method (e.g. see Steen and Salvanes, ; Gohn and Guyomard, 000; Jaffry et al, 00). GDP, CPI, ndex of productvty, and Index of expendture on food and non-alcoholc beverages were collected from the Offce for Natonal Statstcs. M and base nterest rate were obtaned from the Bank of England. L p MC λ = = ; where MC s the margnal cost for salmon product. p ε 0

32 Page of Journal of Economc Studes Tables Table : Descrptve Statstcs Varable descrpton Coeffcent Mean Standard devaton Demand equaton: Budget Share Smoke salmon Salmon fllet z t z Whole salmon z t Prce Smoke salmon γ.. Salmon fllet γ. 0. Whole salmon γ. 0. Expendture β.0 0. Margnal cost equaton: Wholesale prce of smoked salmon v.. Wholesale prce of salmon fllet v.. Wholesale prce of whole salmon v. 0. Prce of labour (wage ndex) w 00.. Captal cost (ndex) e For Peer Revew Table : Statonarty and Contegraton Tests for Salmon Retal Products Varable Level Unt root test Frst dfference t Contegraton test Constant Constant + Constant Constant ncluded trend ncluded + trend ξ Max Included ncluded Z smoked fllet a -0. a. a. a Z fresh fllet a -. a.0 a 0. a Z whole a -. a. b 00.0 a LnP smoked a -. a lnp fresh fllet a -.0 a LnP whole a -. a Ln(Exp) a -. a a sgnfcant at % level, b sgnfcant at %. ξ Trace

33 Journal of Economc Studes Page of Table : Estmated Parameters of an LAIDS-ECM for Retal Salmon Products Share Equaton Smoked Fllets Fresh Fllets Varable Paramet t rato Paramete t -rato α (constant) z b. 0. b. Smoked Fllet t 0. c. -0. b -. Fresh Fllet t -0.0 c c. Whole t b. Expendture t Smoked Fllet t b -. Fresh Fllet t- 0. c Whole t- 0. b.0-0. b -. Expendture t- -0. c b. Smoked Fllet t- (z t Fresh Fllet t- (z t- ) c -.0 Whole t- (z t- ) c -. Smoked Fllet t Fresh Fllet t b.0 Whole t- 0. b b -. Expendture t c. S S S b. System R 0. R b sgnfcant at % level; c sgnfcant at 0% level For Peer Revew Table : Uncompensated Elastcty Estmates for Retal Salmon Products Estmate Coeffcent t-rato Own prce Smoked Fllet -0. a -. Fresh Fllet -.0 a -. Whole -. a -. Expendture Smoked Fllet 0. a. Fresh Fllet. a. Whole 0. a. a sgnfcant at % level

34 Page of Journal of Economc Studes Table : Parameter Estmates for Margnal Costs Equatons Constant V W K λ R DW Smoked a a -0.0 b 0..0 (0.) (.) (.) (.0) (-.) Fresh Fllet b 0.00 b b (-0.) (.) (.) (.) (0.) Whole 0.00 a b b (.) (.) (.) (.) (-0.) For Peer Revew V=wholesale prces; W=ndex of retal wage; λ=market power measure, K= ndex of captal cost, DW=Durbn-Watson test statstcs; student t-test statstcs n parenthess. b sgnfcant at %, c sgnfcant at 0% level