Meatpacker conduct, oligopsony power, and live cattle price dynamics
Koontz, Stephen R.
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Permalink
https://hdl.handle.net/2142/21318
Description
Title
Meatpacker conduct, oligopsony power, and live cattle price dynamics
Author(s)
Koontz, Stephen R.
Issue Date
1991
Doctoral Committee Chair(s)
Garcia, Philip
Department of Study
Agricultural and Consumer Economics
Discipline
Agricultural Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Agricultural
Language
eng
Abstract
The influence of meatpacker conduct on daily cattle prices is examined in this study. Noncooperative game theory is used to model behavior in the meatpacking oligopsony. Theory suggests that for collusive behavior to persist in equilibrium, the oligopsony will follow a strategy with two actions: (1) a cooperative phase where low prices are paid for cattle, and (2) a noncooperative phase where cattle are purchased at more competitive levels. The threat of low profits in the noncooperative phase enforces collusive behavior. Thus, if market power is exercised, prices should be observed alternating between low and high levels associated with the two actions in the strategy.
An econometric model is developed testing for the cooperative/noncooperative dynamics and measuring the extent of market power exercised. Cattle prices for eight direct and two terminal markets in the central U.S. were examined. The time periods included: May 1980 through September 1982, and July 1984 through July 1986. Consolidation occurred in the meatpacking industry between these periods, precluding their use in the analysis.
The empirical results find evidence of the cooperative/noncooperative dynamics in all markets for both periods. The extent of market power exercised is smaller than, but consistent with, the findings of other studies. The overall market power exercised has declined between the periods. The conjectures, dollar per hundredweight reductions in cattle prices, increase in the two periods; however, the probability of observing cooperation decreases. Finally, the degree of market power exercised appears to be directly related to market volume, and inversely related to meatpacker numbers and to the extent of excess capacity in the market region.
The study illustrates the need to examine conduct in the meatpacking industry as well as the structure/performance linkage. Conduct varies in the cattle markets for different periods and for different markets. Increased monitoring of meatpacker behavior is warranted. While the actual exercise of market power may have been limited in the more recent period, the potential for losses to cattle feeders may be large. Assessment of gains to oligopsonists and losses to cattle feeders will likely continue to be important given the structural dynamics of the industry.
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