TACIT COLLUSION IN THE HUNGARIAN MARKET FOR RAW MILK

Transcription

1 TACIT COLLUSION IN THE HUNGARIAN MARKET FOR RAW MILK HEINRICH HOCKMANN, ÉVA VŐNEKI ABSTRACT The paper attempts to dentfy the mpact of market power n the Hungaran mlk chan. Snce the conventonal conjectural varaton approach provdes suspcous results the ncentves to collude are dscussed n an alternatve framework. It s argued that the hgh degree of market transparency, the hgh frequency of nteracton, the low number of large frms whch could actually nfluence market prces, the threat of severe sanctons due to the underutlsaton of processng capactes as well as opportunstc behavour make collusve behavour more lkely than compettve behavour. The emprcal evdence for the perod 998 to 2006 supports ths vew. Keywords: market power, dary processng, Hungary. INTRODUCTION In ths paper developments on the Hungaran mlk market between 998 and 2006 are analysed to assess whether the market results are consstent wth a functonng market or whether frctons are present that allow some partes to approprate the rents assocated wth mlk producton. Two theoretcal approaches are consdered: conjectural varaton (Secton 3) and tact colluson (4). The frst allows dervng an ndcator of market power and ts econometrc estmaton, however, the nterpretaton s not unambguous. Moreover, ths approach s theoretcally less satsfactory than the second, snce strategc nteractons are not consdered consstently. The tact colluson model s theoretcally more reasonable, however, t provdes no defnte answer about the etent of market falures resultng from market power snce only qualtatve statements regardng determnants facltatng and hnderng co-ordnated behavour of frms are possble. It s shown that both approaches lead to dfferent conclusons regardng the sgnfcance of market power on the Hungaran market for raw mlk. Lebnz-Insttute of Agrcultural Development n Central and Eastern Europe Insttute of Agrcultural Development n Central and Eastern Europe (IAMO), Halle (Saale), Germany. Emal: penadz@amo.de. Agrcultural Economcs Research Insttute, Zsl u. 3-5, 093 Budapest, Hungary. Emal: vonek.eva@ak.hu..

2 2 Contrbuted Paper presented at IAMO Forum 2008 We focus on the dary chan for several reasons. Frst dary producton s an mportant source of farm ncome n Hungary. Second, the Hungaran mlk market was subject to polcy shocks whch nduces sgnfcant adjustment n mlk producton and processng. Thrd, mlk processng s relatve hghly concentrated and domnated by foregn captal. Forth mlk prces n Hungary belong to the lowest n the new EU member states, untl Especally the two latter condtons mght suggest the estence of consderable market power. 2 DESCRIPTION OF THE HUNGARIAN DAIRY CHAIN 2. Development of mlk producton and consumpton Before 2004 mlk producton rose to about 2.m t. Due to the abolshment of the natonal prce support system n 2004 and the nduced declne of mlk prces, mlk producton n Hungary shrank untl 2006 by about 5% to.8m t. Only 79-83% of total producton was delvered to dary companes. Ths shows the great mportance of drect marketng and nternal consumpton on farms. Moreover, the share of raw mlk delvered to domestc dary companes decreased after 2004 (Fgure ). Fgure : Producton and consumpton of raw mlk, Hungary, 996/7-2005/ t producton delvery quota consumpton Source: TEJ TERMÉKTANÁCS, KSH STATISZTIKAI ÉVKÖNYV, ÁLLATÁLLOMÁNY The man reason for the reducton s the dynamc ncrease of raw mlk eport to Italy. Eport quanttes have ncreased from 43,000 t n 2004 to t n In 2006 eports to Italy amounted to already 230,000 t. At the same tme, mport of raw mlk has also ncreased, manly from Slovaka, however to a less etend. However, mported raw mlk stll has a margnal share on total mlk processng. The consumed volume of dary products hasn t chanced sgnfcantly n recent years. However, n the case of hgh value added products (especally by cheese) some ncrease could be observed.

3 Tact colluson n the Hungaran market for raw mlk Structure of mlk producton Snce the accesson, Hungaran cow stock s decreasng contnuously. Between 2003 and 2006, the number of cows has reduced by 9%, from to Appromately cows were hold n enterprses wth an agrcultural area larger than 50 ha. The man part of the stock ( anmals) was hold by legal enttes and less than a thrd of the total stock ( anmals) were at prvate frms. The number of small producer wth -9 cows s relatve hgh yet, 90% of the enterprses belongs to ths category. Despte of ths structure, mlk producton n Hungary s rather concentrated. Appromately 98% of the raw mlk s produced n enterprses wth more than 00 cows. 2.3 Processng ndustry Between 997 and 2004, the number of mlk processors n Hungary has decreased from 04 to 93. In 2004 the ten largest enterprses bought up appromately 70% of the raw mlk. At present, the largest enterprse (Sole-Mzo) has a market share of 26%, followed by Fresland wth 24%. Whle n the second half of the nnetes and also at the begnnng of ths century the Hungaran dary ndustry was domnated by foregn enterprses, ths has changed slghtly n recent years. The largest enterprse was bought by a Hungaran nvestor and also Parmalat wth appromately 20% market share was taken over n the sprng of 2006 by mlk producers. The bg nfluence of foregn companes on the Hungaran raw mlk market together wth the etremely hgh concentraton suggest that farmers are n a poor barganng poston and processors mght be able to eplot sgnfcant market power. 2.4 Farm gate prces Between 995 and 2003 the target prce was adjusted annually at ncreasng levels. Durng ths perod, the average market prce for raw mlk followed the target prce wthout sgnfcant regonal dfferences between Lowlands, Transdanuba and Northern Hungary (0). Untl 2004, Hungaran mlk producers receved a hgh mlk prce compared wth other new member states such as Poland, the Czech Republc or Slovaka. Snce the accesson, the stuaton has changed n prncple. Before 2004 an eport subsdy system ested. Processors receved eport subsdes when they pad the target prce for raw mlk to the farmers. Ths system kept the mlk prces artfcally hgh. The abolshment of the natonal prce support system n the begnnng of 2004 led to decrease of the raw mlk prce.

4 4 Contrbuted Paper presented at IAMO Forum 2008 Fgure 2: Regonal market prces of raw mlk n Hungary, HFt 60 Source: AKI PÁIR :0 998:07 999:0 999: :0 2000:07 200:0 200: :0 2002: :0 2003: :0 2004: :0 2005: :0 2006:07 Lowland Transdanuba Perod Northern Hungary 3 THE CONJECTUAL VARIATION APPROACH 3. A structural Market Model We follow the methodology developed by BRESNAHAN (982 and 989) and MUTH, WOHLGENANT (999) to test for olgopsony market power. The proft of a representatve processor s gven by: () π = R(, z ) wx w Z ' z where p s a vector of dary product prces, R(, z ) represents the revenue functon dependng n addton on raw mlk demand ( ) and other nputs (z ). The symbol w s used for the correspondng factor prces. The raw mlk supply functon s: (2) = g(, s) or = g (, s) w w Here, s s a vector of supply shfters and s the total supply of raw mlk. However, for analysng optmal demand of the processor t s more convenent to use the nverse supply functon: Gven () and (2) the frst order condton for proft mamsaton s: R(, g (, s) (3) wx = 0,

5 Tact colluson n the Hungaran market for raw mlk 5 where / represents the ncrease of total farm supply nduced by an ncrease of processor 's mlk demand. The frst order condton can be aggregated over all n processors. After defnng n n = R(, z (3) can be wrtten as: ) R(, = (4) where w X Θ R(, + =, ε g (, s) w ε = = denotes the prce elastcty of raw mlk supply and g (, s) w Θ = n n = s the average nput conjectural elastcty and captures the degree of market power (BRESNAHAN 989). The parameter range s 0 < Θ <. Θ = 0 corresponds to perfect competton, whle Θ = characterzes a monopsonstc market. In addton we use a dummy varable (D) to capture effects resultng from the abolshment of eport subsdes and allow Θ to change over tme,.e. 3.2 Results 3.2. Emprcal mplementaton Θ = Θ + Θ D + lnt. 0 D Θt Raw mlk supply was appromated by a translog functonal specfcaton n order to be able to dentfy relatonshps among the varables wthout mposng e ante restrctons on economc relevant parameter (CHAMBERS 988): 2 ln = α 0 + α ln w + α ln w + α 'lns + lns' A lns + lns' A 2 2 ln w, (5) ( ) s ss sw where α and A are parameters to be estmated. The elastcty of raw mlk supply s: ln (6) ε = = α + α ln w + lns' A sw. ln w The margnal product R( p,, n (4) was derved from a translog appromaton of the processors' revenue functon:

6 6 Contrbuted Paper presented at IAMO Forum 2008 (7) ln R(, = ß ln z' B + ln p' B ß ln + b 2 z p ( ln ) ln + ß ' ln p + ln + p 2 ln p' B 2 pz + ß ' ln z + z ln 2 ln z p' B pp ln 2 ln p z' B zz ln z. The parameters to be estmated are ß and B. It follows: (8) R(, ln R(, R(, = ln = ( ß + b ln + ln z' B ln p' B ) z + p R(, Substtutng (7) and (8) n (5) provdes: (9) w X = ( ß + b ln + ln z' B + lnp' B ) z p Θ0 + Θ DD + Θtt + α + α ln w + lns' A R(,. sw Equatons (5), (7) and (9) consttute a smultaneous nonlnear equaton model. In order to allow for cross equaton co-varaton of the error terms a nonlnear three stage estmaton procedure (NL3SLS) s appled. In order to save on the number of parameters we mposed theoretcally consstent homogenety restrctons on the revenue functon and the supply functon. The ndvdual restrctons are not presented here but are gven n the annotatons of correspondng tables Estmaton results The data set conssts of 06 monthly observatons (from January 998 to October 2006). Table provdes nformaton about the varables used n the estmaton. All monetary values were deflated by the Consumer Prce Inde. The endogenous varables (market results) are the prce of raw mlk and the amount of raw mlk processng. The supply shfters (s) consst of the prces for feedng stuff, and labour nput and the number of cows. The two latter varables were subject to several knds of adjustments. Labour nput n mlk producton was calculated n three steps. Frst, total agrcultural labour nput was weghted by the share of mlk n total agrcultural output. Second, snce only about 80% of the The revenue functon s supposed to be lnear homogenous of degree n prces, the degree of homogenety n prces of the supply functon (CHAMBERS 988).

7 Tact colluson n the Hungaran market for raw mlk 7 Hungaran raw mlk producton s processed by the dary companes, the adjusted labour nput was weghted a second tme. In the thrd step the annual data were transformed nto monthly tme seres. The number of cows was adjusted usng the second and thrd step. In addton, a tme trend was ncluded to account for the mpact of technologcal change on mlk supply. Land was not consdered n the analyss. Data on grassland were avalable, however snce a large part of t s fallow, land would not be scarce and thus, would not affect raw mlk supply. The shfters of the derved demand functon ( nclude a trend varable, the prces of butter and cheese, labour nput n processng. Labour nput has to be transformed nto a monthly seres, the same hold for ndustry revenues. A dummy varable was ncluded n the revenue functon to account for the changes n mlk polcy n Table Varable descrpton Market results Supply functon (s) Revenue funct. (p, Revenue Break Varable Descrpton Mean Standard devaton prce Prce of raw mlk, Ft/kg, deflated by CPI, seasonally adjusted mlk Amount of processed raw mlk, n 000 t, seasonally adjusted 2.8 feed Prce of anmal feed, Ft/kg, deflated by CPI Labour nput n mlk producton, 000 persons, labour adjusted by the rato of processed and produced mlk and the share of mlk on total producton cows Number of cows, n 000 head, adjusted by the rato of processed and produced mlk tme Trend varable butter Prce of butter, 000 Ft/kg, deflated by CPI cheese Prce of cheese, 000 Ft/kg, deflated by CPI labour Labour nput n processng, n 000 persons Source: AKI, own estmaton Revenue of the dary ndustry, bllon Ft, deflated by CPI Dummy varable to account for the abolshment of eport subsdes n 2004 In order to ease the nterpretaton of the estmaton results, all varables were weghted by ther geometrc mean. Because of ths transformaton, the estmates of α, α s, ß and ß z represent elastctes and value shares, respectvely. Table 2 provdes the estmaton results of the system (5), (7) and (9). All parameters have the theoretcally consstent sgn. The value share of butter s postve, (ß butter > 0),and the supply elastcty s postve (ß butter*butter + ß butter (ß butter ) 2 > 0), however, rather the reacton s rather nelastc. An ncrease of mlk processng

8 8 Contrbuted Paper presented at IAMO Forum 2008 affects revenues postvely, and, as epected, at a decreasng rate (ß mlk*mlk + ß mlk (ß mlk ) 2 < 0), suggestng a demand for raw mlk that s decreasng n prces. Techncal change has a postve mpact n mlk processng (β tme > 0). The supply of raw mlk ncreased wth hgher prces (α mlk > 0), however, farmers react relatvely nelastc regardng mlk delveres to dary processors. Mlk supply ncreased wth the number of cows and the amount of labour nput. Techncal change has no sgnfcant mpact on raw mlk supply. However, the rather large parameter values estmated for the second order terms of the supply functon leave doubts about the relablty of the estmates. Table 2 Estmaton results of the full system Revenue functon Supply functon Coeffcent Estmate Coeffcent Estmate β tme 0.002*** α tme β tme*tme α tme*tme β butter 0.02*** α mlk ** β labour *** α labour *** β mlk *** α cows *** β butter*tme 0.050*** α mlk*tme ** β labour*tme 0.074*** α labour*tme 0.228*** β mlk*tme *** α cows*tme β butter*butter 0.24** α mlk*mlk ** β labour*labour 0.092* α labour*labour β mlk*mlk *** α cows*cows * β butter*labour α mlk*labour *** β butter*mlk 0.407** α mlk*cows *** β labour*mlk * α cows*labour Θ ** Θ D Θ t * Notes: ) The homogenety restrctons of the revenue functon are ß butter + ß cheese =, ß butter*tme - ß cheese*tme =0, ß butter*butter - ß cheese*cheese = 0, ß butter*butter ß butter*cheese = 0, ß butter*labour ß cheese*labour = 0, and ß butter*mlk ß cheese*mlk = 0 2) The homogenety restrctons of the supply functon are α mlk + α feed = 0, α mlk*tme + α feed*tme = 0, α mlk*mlk = α feed*feed, α mlk*mlk - α mlk*deed = 0, α mlk*labour + α feed*labour = 0, and α mlk*cows = α feed*cows. *, **, *** denote sgnfcant at the 0%, 5%, and % level, respectvely Source: own estmaton Market power and the nterpretaton of Θ The parameters supposed to capture market power have the epected sgns. Frst, consstent wth the ncrease of prces, market power s declnng n the perod under nvestgaton. Although not sgnfcant, there s ndcaton that the abolshment of eport subsdes enables processors to eplot more market power. Before 2004 processors receved the eport

9 Tact colluson n the Hungaran market for raw mlk 9 subsdes when they pay the target prce to the farmers. Thus the possbltes to etract etra rents by the reducton of raw mlk prces where rather lmted. Moreover, drop of process n 2004 suggested that processors where able to mprove ther market poston. However, n sum, the estmates suggest that the degree of market power (Θ <.) s rather low, and thus may not a serous problem n the Hungaran mlk chan. Ths result s surprsng gven the hgh concentraton of dary processng and the relatvely low mlk prces n Hungary. Even farmers are confronted by a relatvely small number of processors the latter mght not to be able to benefts from ther favourable ndustry structure. One reason s the overcapactes n the dary ndustry whch led to ntense competton among processors on the raw mlk market. The problem of overcapactes s aggravated by the fact that farmers posses dfferent opportuntes to market ther produce. They can sell to Hungaran processors, eport raw mlk, or market ther produce drectly to consumers. These choces mght put, on the average, Hungaran mlk producers, n a relatvely favourable market poston whch hamper the eplotaton of market power by the dary ndustry. In addton, the low prces for raw mlk cannot be regarded as a consequence of market power but nstead of the falure of the processng ndustry to engage n product dfferentaton and to poston tself successvely on the market for premum goods whch allow hgher value added and, n turn, would ncrease the prces for the raw materals. Gven ths nterpretaton, the fact that the evdence for market power s relatvely poor s a coherent estmaton result. However, n ths vew t s dffcult to eplan the drop of raw mlk prces after Moreover, consderng the under utlzed capactes n the processng ndustry, the presumpton that processors optmze wth regard to quanttes s lttle satsfactory. Gven a statc framework, KREPS and SHEIKMAN (983) show that n a homogeneous good ndustry wth capacty constrants, frms behave as they would do n a Cournot settng. In addton, t was shown that the conjectural varaton approach only provdes consstent results when the Cournot outcome s reached (DAUGHETY 985). Gven that about 00 processors ested and not all compete wth each other the estmated results for Θ by the conjectural varaton approach mght be consstent wth a Cournot outcome. Wthout capacty constrants frms wll end up n a Bertrand equlbrum characterzed by severe competton (TIROLE 988). In a Bertrand game, frms do not set quanttes but process. Followng the procedure outlned n secton 3. and takng nto account that raw mlk process are horzontally dfferentated provdes an optmal condton havng the same structure as (9). However, the nterpretaton of the condton s rather dfferent, because Θ captures the mpact

10 0 Contrbuted Paper presented at IAMO Forum 2008 of product dfferentaton nstead of market power. Moreover, gven that raw mlk prces dffer regonally (Fgure 2) and that capactes are underutlzed the correct nterpretaton of Θ may not be market power but the degree of product dfferentaton. So far, market power s derved n a conjectural varaton approach. Correspondngly, the parameter can only be nterpreted consstently wthn ths framework. Because t s ncorporated n a statc settng, t presumes that at each date frms behave as f they have met for the frst tme,.e. there s no memory n the decson makng process. Especally when frms repeatedly meet ths s a very crucal assumpton, especally for food processors and farmers snce transacton are conducted contnuously. Moreover, CORTS (999) shows that the conjectural varaton approach underestmates the amount of market power systematcally compared to a dynamc model allowng for the possblty of tact colluson when permanent shfts n the eogenous varables occur. 4 TACIT COLLUSION The arguments dscussed n the precedng secton provde that t mght be msleadng to regard Θ as an ndcator of market power. Moreover, the theoretcal consstency of Θ s rather poor. In the followng a dfferent approach wll be presented. Contrary to secton 3. no functonal relatonshp between an ndcator and market poser wll be derved, but the varous factors facltatng and hamperng colluson n the Hungaran dary ndustry wll be dscussed. 4. Frm behavour n a dynamc settng: Repeated games Whle theory provdes unambguous results regardng frm behavour n a statc settng (Cournot equlbrum for full capacty utlsaton, Bertrand equlbrum for underutlsed capactes), frms behavour n a dynamc framework s far from unambguous. Game theoretc results ests for fntely and nfntely repeated games. In the frst case backward nducton suggests that frms behave as n a shoot smultaneous game. The soluton becomes more comple, when the game s repeated ndefntely. Accordng to the Folk theorem, every outcome that s better than the worst Nash equlbrum can be reached by an equlbrum strategy (Fgure 3). Ths mples that there ests a plenty of equlbrum solutons and no defnte answer regardng the behavour of the frm n the ndustry s possble (FUDENBERG and TIROLE 990). It may be argued that the assumpton of an ndefntely repeated game s artfcal, however, however, ths requrement may be

11 Tact colluson n the Hungaran market for raw mlk weakened by the assumpton that the probablty of contnuaton from one stage to the net s strctly postve. Fgure 3: Equlbrum soluton n a duopoly under dfferent behavoural assumptons π 2 π 2 monopoly Possble outcomes wth perfect colluson π 2 Cournot Possble Nash equlbra n nfntely repeated games π 2 =0 (Bertrand) π =0 (Bertrand) π Cournot π π monopoly 4.2 Factor hnderng and facltatng colluson Havng defned the prncple soluton set for a stuaton wth dynamc nteractons, t remans to dscuss the determnants that may hnder and facltate soluton. Possble nfluences on colluson wll be dscussed wth an llustratve model. We assume a homogeneous good ndustry wth n frms. Furthermore, demand growth wth rate g 2. When frms coordnate ther prcng behavour, prces wll be larger than margnal cost (p > c) and ndustry profts π C wll be realzed whch are dvded by a predefned key that conssts of the profts shares receved by the ndvdual frms (s ) 3. A frm devatng from ths (mplct) agreement sets a prce slghtly lower than p and receves profts ε π C n the devatng perod and δ π C thereafter, wth ε > δ. In addton we assume that ε > s >δ snce otherwse there would be no ncentve to devate (the frst nequalty) and no ncentve to cooperate (the second nequalty). The parameters ε I and δ I reflect the producton capactes of the frms. The larger ε I,. e. the lower are the capacty constraned of the devatng frm, the easer the frm can serve the whole market. Contrary, hgher δ I ndcate hgh capacty constrans of the compettors. The 2 3 We follow the procedure usually found n the lterature, where colluson s dscussed wth regard to output markets. However, a correspondng nterpretaton for nput or procurement markets s straghtforward. The s can be thought of the ntal market shares or shares on producton capactes of the frms.

12 2 Contrbuted Paper presented at IAMO Forum 2008 dscount factor s gven by ρ. The frequency of whch transactons occur s gven by α. The hgher α, the hgher the frequency,.e. α = corresponds to an annual transacton whle α = 365 ndcates daly transactons. Net, we wll apply the followng strategy. Frms agree to cooperate n the frst stage. As long as there s no devaton from the agreed process, cooperaton wll contnue. However, f one frm devates, the agreement wll break down and frms start to apply compettve prcng. Formally, ths strategy s sustanable, when the followng condton holds: j C C C () s [( + g) ρ] α > ε π + δ π [ ( + g) ρ] π, j= 0 j= Thus, colluson s a vable strategy when frms put more weghts on future than on present profts. Moreover, () can be transformed to present a threshold at whch colluson s sustanable: j α (2) α ( ε s ) ( + g)( ε δ ) a ρ* >, Generally, colluson s easer to sustan, when the threshold s lower, because than even an mpatent frm wth a low dscount factor regards colluson as a benefcal strategy. Condton (2) provdes that the threshold s ncreasng n ε and δ, but decreasng n s, g and α. 4.3 The potental for Colluson n the Hungaran Dary ndustry 4.3. General consderatons Mlk supply s characterzed by steady producton. Ths provdes that the frequency of transactons (α) s hgh whch n turn makes colluson more lkely. Moreover, t can be assumed that market transparency s also relatvely hgh. Processors can detect possble devaton from an agreement relatvely easy from the change of delveres or the negotaton wth farmers. In addton, prce nformaton systems are avalable that provde nformaton about the recent prce developments wthout serous delays. These suggest that devaton may be detected mmedately, and the compettors can react quckly. Thus the hgh degree of market transparency reduces the ncentves to devate from a collusve agreement. A further characterstc of mlk producton s the pershableness of the raw materal. Mlk cannot be stored for a longer tme wthout beng processed. Ths puts farmers n a poor barganng poston because the possbltes to adjust mlk producton mmedately to the changng market condton are rather lmted. From ths t follows that processors possess

13 Tact colluson n the Hungaran market for raw mlk 3 dstnct possbltes to gan from opportunstc behavour,.e., to etract large parts of the producer rents assocated wth mlk producton. However, Fgure shows that mlk producton and mlk delveres decreased snce On the one hand, ths may ndcate structural change n agrculture snce t can be epected that especally small farmers who do not delver to dary companes would abandon mlk producton. However, snce mlk delveres declned almost parallel to mlk producton an addtonal effect s present. It conssts n the development of alternatve marketng channels for raw mlk. Ths development has severe consequences for collusve behavour. Condton (2) provdes that market growth facltates the collusve behavour, because devaton would lead to hgher foregone future profts. However, snce producton as well as delveres of raw mlk n Hungary are decreasng, and gven that capactes of the processors are fed to a large etent, the costs of capacty underutlsaton would ncrease. Ths suggests that the ncentves to swtch to compettve behavour on the raw mlk market were ncreasng over tme. In Chapter 2 the hgh concentraton rato n the dary processng ndustry was mentoned. Moreover, ths also suggests a wde range of frm szes n that ndustres. The ncentves for large and small frms to devate from colluson and also the consequences of devaton wll vary by farm sze. In condton (2) these forces fnd ther epresson n s, ε and δ. Small frms wll have lttle s and ε. On the one hand, the frst reduces whle the second ncreases the ncentves to collude. However, t can be epected that due to capacty constrants ε s not much larger than s. Correspondng to condton (2) the threshold wll be relatvely low,.e. together the two parameters facltates colluson. In addton, f a small frm devates the larger compettors may react wth severe competton. Ths would result n an ncrease n the procurement prce, whch n turn because of the low economes of scale n small frms suggests a rather low δ. or even market et (δ = 0). Summarzng these arguments provdes that small frms may have lttle ncentves to devate from a collusve agreement. On the other hand, even f the frms devate, the sanctons may be less severe than those when a large frm of large frms devates. Snce small frms usually have low capactes, ther addtonal demand when devatng wll be low possbly wthout a notceable mpact on market prces. Ths argument holds as long as not too many small companes try to deceve. In large frms were colluson may lead to hgh unused capactes, ε can be epected to be sgnfcant larger than s whch mples a hgh threshold. However, these low ncentves to collude can be compensated by the threat of ntense competton on the raw mlk market (low δ ) whch n turn requres

14 4 Contrbuted Paper presented at IAMO Forum 2008 that large frms possess suffcent underutlsed capactes to make the threat relable. Eactly ths s observed n the Hungaran dary ndustry. Ths dscusson of the varous determnants of colluson provdes that there s no unambguous answer to the queston whether the stuaton n the Hungaran dary ndustry facltates or hnders colluson. However, n our vew, the ponts n favour of colluson (hgh degree of market transparency, hgh frequency of nteracton, a low number of large frms whch actually could nfluence market prces, threat of severe sanctons due to low capacty utlsaton, opportunstc behavour) make collusve behavour more lkely than compettve behavour. The emprcal evdence suggests ths vew. In Fgure 2 t s shown that prces have dropped sgnfcantly after 2003 wth the change of publc support of dary product eports and have remaned at that level untl the end of More recently, process started to ncrease agan. Ths developments wll be the subject of the net subchapter Publc polcy and the development of new marketng channels It was already descrbed n Chapter 2 that the Hungaran government abandoned eport subsdes n These subsdes were provded to dary processors only when they prove that they pay a least a target prce of raw mlk. Snce especally the large dary processors were eport orented, t can be epected that the addtonal benefts from eports overcompensated the benefts arsng from a possble eplotaton of market power. In ths nterpretaton the eport subsdes can be regarded a an nsttutonal restrcton that hnders colluson on the raw mlk markets. The abolshment of the subsdes provdes more weght to the determnants dscussed n Chapter 5.. Moreover, the dfference between the former market prce and the subsdy asssts n fndng a focal pont for a prce upon whch the processors could agree. Further pressure on prces results from the fact that wthout subsdes the demand for Hungaran eport declned whch put addtonal pressure on the domestc market. In recent years there s an ncreasng eport of raw mlk, especally to Italy. In 2005 the share of raw mlk eported was about 5% of sales but t strongly ncreased and t s estmated that n 2007 t wll reach about 0% of mlk sold by farmers. It can be epected that ths development nduces pressure on the stablty of a collusve agreement, n partcular, because of the regonal pattern of raw mlk eports whch come especally from the Western parts of Hungary. The loss of raw materals resulted n an ncrease n capacty utlsaton and thus led to asymmetrc capacty utlsaton among dares. However, snce asymmetres n capacty

15 Tact colluson n the Hungaran market for raw mlk 5 utlsaton hnder colluson t mght have been epected that the factors favourng colluson mght become less mportant. However, part of the eported raw mlk was substtuted by raw mlk mported from Romana. Interestngly, the prce of the mported raw mlk was hgher than the average prce for domestcally mported mlk provdng addtonal evdence that mlk producton stll suffers from the negatve mpacts of colluson. Consequently, raw mlk prces n Hungary are stll on a rather low level and there s no sgn for a recovery of prces to ther old level or even to the average prce level n Poland, Slovaka and the Czech Republc, whch joned the EU together wth Hungary. 5 DISCUSSION The analyss was motvated by the questons whether the economc and nsttutonal reforms n Hungary provded an envronment n the agr-food chan n whch market allocaton can develop ts full benefts. In order to be able to do a detaled analyss, the analyss was restrcted to mlk producton and processng, one of the pvotal sectors n Hungaran agrculture. We answered the queston by developng a formal model that allows concluson regardng the functonng of market by the nvestgaton of market results,.e. prces on the raw mlk market. The conjectural varaton approach provdes that olgopsony power s sgnfcant but at a rather low level. However, although consstent wth ndustry structure n dary processng and marketng alternatves of farmers, the results have to be questoned from theoretcal and emprcal ponts of vew. Frst the low degree of market power mght not be consstent wth the drop of prces observed after the abolshment of eport subsdes. In addton, gven the underutlzed capactes, Bertrand behavour s more lkely than Cournot suggestng that the estmated ndcator does not measure market power but the degree of product dfferentaton. Moreover, a statc framework may not be approprate at all to dentfy market power. Because of these shortcomngs, we dscussed an alternatve approach,. e., tact colluson dscussed factor affectng the co-ordnaton of behavour among Hungaran mlk processors. Ths dscusson of the varous determnants of colluson provdes that there s no unambguous answer to the queston whether the stuaton n the Hungaran dary ndustry facltates or hnders colluson. However, we argue that the hgh degree of market transparency, the hgh frequency of nteracton, the a low number of large frms whch actually could nfluence market prces, the threat of severe sanctons and opportunstc behavour make collusve behavour more lkely than compettve behavour. The emprcal

16 6 Contrbuted Paper presented at IAMO Forum 2008 evdence suggests ths vew snce prces n Hungary are on a rather low level compared to ts neghbourng countres. In addton, we show that the eport subsdes provded to processors when they pay farmers the target prce for raw mlkx, mght be regarded as an nsttutonal restrcton that prevents processors from the eplotaton of market power. Beyond, the drop of processes after the abolshment of the subsdes n the end of 2003 provde emprcal evdence that the dary processors n Hungary managed to form an agreement whch allows them to etract large parts of the producer rents. REFERENCES BRESNAHAN, T. F. (982): The Olgopoly Soluton Concept s Identfed. Economcs Letters, 0, BRESNAHAN, T. F. (989): Emprcal Studes of Industres wth Market Power. In: R. SCHMALENSEE, WILLIG R. D. (eds.): Handbook of Industral Economcs 2, Amsterdam, CHAMBERS, R. G. (988): Appled Producton Economcs. A Dual Approach. Cambrdge. CORTS, K. S. (999): Conduct Parameter and the Measurement of Market Power. Journal of Econometrcs 88, DAUGHETY, A. (985): Reconsderng Cournot: the Cournot equlbrum s consstent, RAND Journal of Economcs 6, FUDENBERG, D., TIROLE, J. (992): Game Theory. Cambrdge and London. HOCKMANN, H., VŐNEKI, É. (2004): German and Hungaran Mlk Chans: Epectatons and Frst Eperences of accesson and Market Reform. In: POPP, J., KAMARÁSNÉ HEGEDŰS, N. (eds.): Applcaton of the Common Agrcultural Polcy n the Enlarged European Unon. Budapest, KREPS, D., SHEIKMAN, J. (983): Quantty Commtment and Bertrand Competton Yeld Cournot Outcomes. Bell Journal of Economcs 4, MUTH, M. K., WOHLGENANT M. K. (999): Measurng the Degree of Olgopsony Power n the Beef Packng Industry n the Absence of Marketng Input Quantty Data. Journal of Agrcultural and Resource Economcs 24, TIROLE, J. (988): The Theory of Industral Organsaton. Cambrdge and London.