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A Stochastic Production Frontier Estimator of the Degree of Oligopsony Power in the U.S. Cattle Industry

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Abstract

The objective of this study is to estimate the degree of oligopsony power in the U.S. cattle industry with the use of the recently developed stochastic frontier estimator of market power. Unlike the seminal paper where estimation of the mark-up in an output market at firm level was the main objective, this work proposes a stochastic production frontier estimator in order to estimate the mark-down in an input market at aggregate level. Furthermore, with the help of the new estimator we derive and estimate the Lerner index of oligospony power for the U.S. cattle market. For the empirical part of the study we employed annual time series data from the U.S. cattle/beef industry for the time period 1970-2009. Our results suggest that beef packers exert market power when purchasing live cattle for slaughter.

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Notes

  1. For a translog representation of a stochastic production frontier one can refer to Ray (1999), Kumbhakar and Lovell (2003), Kumbhakar (2011).

  2. Red meat includes beef, pork, lamb and veal.

  3. Assuming a 20-year equipment working life in the food processing industry and a linear form, a value of 0.05 was applied to the depreciation rate (Lopez et al. 2015).

  4. Due to non-convergence, the labor parameter has been omitted.

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Authors and Affiliations

  1. Department of Economics, University of Ioannina, Ioannina, Greece

    Dimitrios Panagiotou & Athanassios Stavrakoudis

Authors
  1. Dimitrios Panagiotou
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  2. Athanassios Stavrakoudis
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Correspondence to Dimitrios Panagiotou.

Appendix

Appendix

Description of the variables and their sources are as follows:

$$\begin{array}{@{}rcl@{}} Source\!: \!N\!B\!E\!R\,-\,- C\!ES \,\,Manufacturing \,\,\!Industry\, \,\!Database\!\, / \,\!S\!I\!C2011\, \,\!(meatpacking) \end{array} $$
$$\begin{array}{@{}rcl@{}} L &=& \text{Production worker hours for SIC2011 (million hrs)} \\ K & =& \frac{\text{Real capital stock for SIC2011 (million \$)}} {\text{Cost of capital = interest rate + depreciation rate}} \\ E & =& \frac{\text{Cost of electricity and fuels for SIC2011 (million \$)}} {\text{Deflator for the energy input in SIC2011 (1987=1.00)}} \end{array} $$
$$\begin{array}{@{}rcl@{}} Source\!: \!United \,\,\!States \,\!Department \,\,\!of\,\, \!Agriculture \,-\,- Economic \,\,Research\,\, Service \end{array} $$
$$\begin{array}{@{}rcl@{}} X&=&\text{Commercial cattle slaughter (1,000 heads) times dressed weight (pounds/head)}\\ W&=& \text{Beef net farm value (cents per retail pound equivalent)}\\ Q&=& \text{Commercial beef production (carcass weight, million pounds)}\\ P&=& \text{Beef wholesale value (cents per retail pound equivalent)} \end{array} $$

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Panagiotou, D., Stavrakoudis, A. A Stochastic Production Frontier Estimator of the Degree of Oligopsony Power in the U.S. Cattle Industry. J Ind Compet Trade 17, 121–133 (2017). https://doi.org/10.1007/s10842-016-0233-0

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