Essays on estimating market power exertion in the U.S. beef packing industry

Abstract

The first essay discusses the aggregation bias issue in estimating the degree of market power for agricultural and food industries and explores ways to improve the conjectural elasticity estimates using proper aggregation procedures. Aggregation biases, caused by ignoring heterogeneity of micro agents, are derived mathematically, and proper procedures to reduce the aggregation biases are proposed by incorporating public micro level data in the empirical model with their distribution information. Conjectural elasticity is estimated with alternative cost functions for the sensitivity analysis. Overall, the degree of conjectural elasticities from newly developed empirical models tend to show more collusion state of market than those from traditional aggregated models. The conjectural elasticity from the distributional model and joint distribution model has closer value with conjectural elasticity from firm level data.

The second paper examines the impact of captive market supply on spot market price in the U.S. cattle procurement market, while considering dynamic interactions between captive and spot markets. Both conceptual analysis and empirical models explore advantages of dynamic models over static models by focusing on the temporal change in the ratio of captive purchase to packers' total procurement and discount factor. Empirical models were estimated using the Kalman filter procedure with three alternative cost functions. Overall, dynamic estimation results found a negative relationship between captive market quantity and spot market prices. However, results of static model showed that the captive market quantity - spot market price relationship was sensitive to assumptions on captive supply and functional forms of cost function. Findings from our empirical analysis clearly suggest that dynamic models are more appropriate than static models in examining the impact of captive supply on spot price in the cattle procurement market.