Market conduct in the United States pork industry and the impact of changing market conditions and capacity constraints

Jason R Henderson, Purdue University

Abstract

The U.S. pork industry is in the midst of substantial structural changes. Hog slaughter and hog production is being concentrated into fewer, larger hands. Meanwhile, hog prices have experienced unprecedented volatility, raising concerns about market power in the pork industry by policy makers, producers, academic researchers and consumers. A model using the NEIO framework is developed to test the perfectly competitive hypothesis and analyze both oligopoly and oligopsony market conduct in the U.S. pork industry. The model extends the literature by simultaneously estimating the input supply and output demand elasticities needed for identification of oligopoly and oligopsony conduct parameters. Theoretically motivated time varying market conduct parameters are also incorporated into the econometric model. Specifically, the role of unanticipated and anticipated changes in aggregate input supply and output demand and capacity constraints on the level of industry competitiveness is analyzed. Results reject the perfectly competitive hypothesis. Pork packers are not found to strategically influence the price of live hogs, oligopsony conduct, by controlling the quantity of live hogs purchased in the market. However, evidence suggests that pork packers strategically influence the marginal revenues they receive, oligopoly conduct, by controlling the supply of wholesale pork sent to the market. Moreover, oligopoly conduct and the associated mark-up vary by unanticipated demand and capacity constraints suggesting that firms operate in the market with imperfect information. Increased competitive activity that generates a pound per capita increase in unanticipated demand reduces oligopoly conduct and lowers the mark-up from 33 to 26 percent. But, a pound per capita increase of pork in cold storage associated with increased production and capacity constraints expands oligopoly conduct and raises the mark-up from 33 to 41 percent. Evidence also indicates a structural change in competitiveness during the 1990s. Periods of increased capacity constraints in the 1980s were associated with higher degrees of imperfectly competitive activity. However, coinciding with a period of restructuring and consolidation, changes in unanticipated demand drive fluctuations in market competitiveness in the 1990s. By the end of the decade, the capacity constraint variable re-exerted its influence on the variation in competitive conduct as restructuring slowed.

Degree

Ph.D.

Advisors

Foster, Purdue University.

Subject Area

Agricultural economics

COinS