Advertisement

Investigating market power in the Belgian pork production chain

  • Dries MaesEmail author
  • Mark Vancauteren
  • Steven Van Passel
Research article
  • 8 Downloads

Abstract

Belgian pork production has faced stagnating prices for decades. It remains unclear whether excessive market power from slaughterhouses or meat retailers has played a role in this trend. While market power studies can reveal some of the market dynamics in this setting, this type of research has not yet been applied to the Belgian pork market. The present paper investigates oligopolies and oligopsonies in the pork production sector. We build a new model that focuses on market power dynamics in the market for live pigs and distinguishes horizontal and vertical market power parameters, both for pig farmers and for slaughterhouses. The results follow from an empirical application using unique slaughterhouse data for 2001–2015. The results indicate that the farmers benefit from a significant power advantage in the live pig market, when very modest price demands are taken as a reference. The final market price of live pigs approaches the price requested by the farmers. On the other hand, the measured vertical market power also suggests that a pig farmer does not receive the (modest) full-wage-based salary. The market power of the slaughterhouses is also limited. Market power as a result of collusion—that is, horizontal market power—is present, but is not strong. However, there are significant differences between the slaughterhouses in terms of mark-up on the input prices. These differences reflect differences in company strategy, and this diversity further reduces the possibility to create sector-wide collusive behaviour.

Keywords

Market power Slaughterhouse Input elasticity Mark-up 

Notes

Acknowledgements

This research has been made possible with the assistance, information and guidance of several administrations and organisations. We are much indebted to Mr. Robijns and Ms. Kestens from the Federal Agency for Safety of the Food Chain (FAVV), Mr. Seynaeve and the team of Carcass classification of the Ghent University, Mr. Pattyn and Mr. Ingelbrecht from the National Price Observatorium and Ms. Vandenberghe from VEVA, the cooperation of Pig farmers. This article reflects the position of the authors alone, and is not indicative of the position of the Flemish Government. All remaining errors are the sole responsibility of the authors. We thank participants of the EAAE conference held in Parma (August 2017), the 149th EAAE Workshop on vertical food chains held at INRA in Rennes (October 2017) and the JRSS day held in Nantes (December 2018) for fruitful discussions.

Funding information

This project has been financed by the interuniversitary fund tuL - Impuls (transnational university Limburg). This research was also partly performed within the frame of the HORIZON 2020 project SUFISA with the grant agreement number 635577.

References

  1. Amoroso, S., Kort P., Melenberg, B, Plasmans J and M. Vancauteren (2015), Productivity, price- and wage-markups: an empirical analysis of the Dutch manufacturing industry. Munich, CESifo Working Papers 5273.Google Scholar
  2. Appelbaum, E. (1982). The estimation of the degree of oligopoly power. Journal of Econometrics, 19(2–3), 287–299.CrossRefGoogle Scholar
  3. Azzam, A. M. (1996). Estimating the degree of dominance in a bilateral oligopoly. Applied Economics Letters, 3(4), 209–211.CrossRefGoogle Scholar
  4. Azzam, A., & Pagoulatos, E. (1990). Testing oligopolistic and oligopsonistic behaviour: an application to the US meat-packing industry. Journal of Agricultural Economics, 41(3), 362–370.CrossRefGoogle Scholar
  5. Azzam, A. M., & Schroeter, J. R. (1991). Implications of increased regional concentration and oligopsonistic coordination in the beef packing industry. Western Journal of Agricultural Economics, 16(2), 374–381.Google Scholar
  6. Bresnahan, T. F. (1982). The oligopoly solution concept is identified. Economics Letters, 10(1), 87–92.Google Scholar
  7. Bresnahan, T. F. (1989). Empirical studies of industries with market power. Handbook of industrial organization, 2, 1011–1057.Google Scholar
  8. Chung, K. C., & Griffith, G. R. (2009). Another look at market power in the Australian fresh meat industries. Australasian Agribusiness Review, 17, 218–234.Google Scholar
  9. Chung, C., Eom, Y. S., & Yang, B. W. (2014). Optimal generic advertising under bilateral imperfect competition between processors and retailers. Agribusiness, 30(4), 438–455.CrossRefGoogle Scholar
  10. Corts, K. S. (1999). Conduct parameters and the measurement of market power. Journal of Econometrics, 88(2), 227–250.CrossRefGoogle Scholar
  11. Delis, M. D., & Tsionas, E. G. (2009). The joint estimation of bank-level market power and efficiency. Journal of Banking and Finance, 33(10), 1842–1850.CrossRefGoogle Scholar
  12. Deuninck, J., J. D’Hooghe, and A. Oeyen (2009), Technische en economische resultaten van de varkenshouderij op basis van het Landbouwmonitoringsnetwerk, boekjaren 2006–2008. Vlaamse Overheid, Departement Landbouw en Visserij, afdeling Monitoring en Studie Brussels.Google Scholar
  13. Diewert, W. E., & Fox, K. J. (2008). On the estimation of returns to scale, technical progress and monopolistic markups. Journal of Econometrics, 145, 174–193.CrossRefGoogle Scholar
  14. FOD Economie (2009), Analyse van de kosten en prijzen in de verschillende schakels van het productieproces van rundvlees. FOD Economie, K.M.O, Middenstand en Energie, Algemene Directie Statistiek en Economische Informatie (ADSEI): Brussels.Google Scholar
  15. FOD Economie (2010), Prijzen, kosten en rendabiliteit in de varkenskolom. FOD Economie, K.M.O, Middenstand en Energie, Algemene Directie Statistiek en Economische Informatie (ADSEI): Brussels.Google Scholar
  16. FOD Economie (2015), Actualisatie van de studie over de varkenskolom Prijzenobservatorium.Google Scholar
  17. Gohin, A., & Guyomard, H. (2000). Measuring market power for food retail activities: French evidence. Journal of Agricultural Economics, 51(2), 181–195.CrossRefGoogle Scholar
  18. Gonzales, F., Guillotreau P., and Le Grel L. (2002), The transmission of price variability along the French cod value chain in XIVth EAFE Conference Proceedings.Google Scholar
  19. Hall, R. (1988). The relation between price and marginal cost in U.S. industry. Journal of Political Economy, 96(5), 921–947.CrossRefGoogle Scholar
  20. Hayenga, M., Schroeder, T., Lawrence, J., Hayes, D., Vukina, T., Ward, C., and W. Purcell (2000), Meat packer vertical integration and contract linkages in the beef and pork industries: an economic perspective. American Meat Institute.Google Scholar
  21. Hirschman, A. O. (1964). The paternity of an index. American Economic Review, 54(5), 761.Google Scholar
  22. Iwata, G. (1974), Measurement of conjectural variations in oligopoly. Econometrica: Journal of the Econometric Society, p. 947–966.Google Scholar
  23. Jensen, J. D. (2009). Market power behaviour in the Danish food marketing chain. Journal on Chain and Network Science, 9(1), 43–58.CrossRefGoogle Scholar
  24. Kinoshita, J., Suzuki, N., & Kaiser, H. M. (2006). The degree of vertical and horizontal competition among dairy cooperatives, processors and retailers in Japanese milk markets. Journal of the Faculty of Agriculture of Kyushu University, 51(1), 157.Google Scholar
  25. Kutlu, L., & Sickles, R. C. (2012). Estimation of market power in the presence of firm level inefficiencies. Journal of Econometrics, 168(1), 141–155.CrossRefGoogle Scholar
  26. Lau, L. J. (1982). On identifying the degree of competitiveness from industry price and output data. Economics Letters, 10(1), 93–99.CrossRefGoogle Scholar
  27. Lloyd, T. A., McCorriston, S., Morgan, C. W., & Rayner, A. J. (2006). Food scares, market power and price transmission: the UK BSE crisis. European Review of Agricultural Economics, 33(2), 119–147.CrossRefGoogle Scholar
  28. Lopez, R., Azzam, A., & Lirón-España, C. (2002). Market power and/or efficiency: a structural approach. Review of Industrial Organization, 20(2), 115–126.CrossRefGoogle Scholar
  29. McCorriston, S., Morgan, C., & Rayner, A. (2001). Price transmission: the interaction between market power and returns to scale. European Review of Agricultural Economics, 28(2), 143–159.CrossRefGoogle Scholar
  30. Mei, B., & Sun, C. (2008). Assessing time-varying oligopoly and oligopsony power in the US paper industry. Journal of Agricultural and Applied Economics, 40(3), 929–939.CrossRefGoogle Scholar
  31. Mérel, P. (2011). Institutional market power in Comté: insights from a ‘double marginalisation’ model. Journal of Agricultural Economics, 62(3), 585–603.CrossRefGoogle Scholar
  32. Morrison Paul, C. J. (2001). Market and cost structure in the U.S. beef packing industry: a plant-level analysis. American Journal of Agricultural Economics, 83(1), 64.CrossRefGoogle Scholar
  33. Myers, R. J., Sexton, R. J., & Tomek, W. G. (2010). A century of research on agricultural markets. American Journal of Agricultural Economics, 92(2), 376–403.CrossRefGoogle Scholar
  34. Perekhozhuk, O., Matyukha, A., & Glauben, T. (2011). Estimating the degree of buyers’ market power: evidence from the Ukrainian meat processing industry, in 2011 International Congress, August 30–September 2, 2011. Zurich: European Association of Agricultural Economists.Google Scholar
  35. Perekhozhuk, O., Glauben, T., Teuber, R., & Grings, M. (2015). Regional-level analysis of oligopsony power in the Ukrainian dairy industry. Canadian Journal of Agricultural Economics/Revue canadienne d’agroeconomie, 63(1), 43–57.CrossRefGoogle Scholar
  36. Perloff, J. M., & Shen, E. Z. (2012). Collinearity in linear structural models of market power. Review of Industrial Organization, 40(2), 131–138.CrossRefGoogle Scholar
  37. Perloff, J. M., Karp, L., & Golan, A. (2007). Estimating market power and strategies. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
  38. Roy, A., Kim, N., & Raju, J. S. (2006). Assessing new empirical industrial organization (NEIO) methods: the cases of five industries. International Journal of Research in Marketing, 23(4), 369–383.CrossRefGoogle Scholar
  39. Schroeter, J. R. (1988). Estimating the degree of market power in the beef packing industry. The Review of Economics and Statistics, 70(1), 158–162.CrossRefGoogle Scholar
  40. Schulze, B., Spiller, A., & Theuvsen, L. (2006). Is more vertical integration the future of food supply chains? Empirical evidence and theoretical considerations from German pork production. In J. Bijman et al. (Eds.), International agri-food chains and networks: management and organization (pp. 49–63). Wageningen: Wageningen Academic Publishers.Google Scholar
  41. Sexton, R. J. (2000). Industrialization and consolidation in the US food sector: implications for competition and welfare. American Journal of Agricultural Economics, 82(5), 1087–1104.CrossRefGoogle Scholar
  42. Sexton, R. J., Sheldon, I., McCorriston, S., & Wang, H. (2007). Agricultural trade liberalization and economic development: the role of downstream market power. Agricultural Economics, 36(2), 253–270.CrossRefGoogle Scholar
  43. Sheldon, I., & Sperling, R. (2003). Estimating the extent of imperfect competition in the food industry: what have we learned? Journal of Agricultural Economics, 54(1), 89–109.CrossRefGoogle Scholar
  44. Van Hecke, E. (2001). Measuring poverty among farmers in Belgium. Belgeo, 2001., 2001(3), 247–262.Google Scholar
  45. Vrints, G., and Deuninck J. (2013), Technische en economische resultaten van de varkenshouderij op basis van het Landbouwmonitoringsnetwerk. Boekjaren 2010–2012. Vlaamse Overheid, Departement Landbouw en Visserij, afdeling Monitoring en Studie Brussels.Google Scholar
  46. Weldegebriel, H. T. (2004). Imperfect price transmission: is market power really to blame? Journal of Agricultural Economics, 55(1), 101–114.CrossRefGoogle Scholar
  47. Yanaura, K., & Xia, T. (2016). Measuring bilateral market power in international markets of vertically differentiated agricultural commodities. Journal of Agricultural and Food Industrial Organization, 14(1), 1–10.CrossRefGoogle Scholar

Copyright information

© INRA and Springer-Verlag France SAS, part of Springer Nature 2019

Authors and Affiliations

  • Dries Maes
    • 1
    • 2
    Email author
  • Mark Vancauteren
    • 1
    • 3
  • Steven Van Passel
    • 1
    • 4
  1. 1.Faculty of Business EconomicsHasselt UniversityDiepenbeekBelgium
  2. 2.Departement of Economy, Science and InnovationFlemish GovernmentBrusselsBelgium
  3. 3.Statistics NetherlandsHeerlenThe Netherlands
  4. 4.Faculty of Business and EconomicsUniversity of AntwerpAntwerpBelgium

Personalised recommendations