Market Conduct under Government Price Intervention in the U.S. Dairy Industry

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The U.S. dairy industry has become more concentrated over the last several decades. For example, between 1963 and 1987, the twentyfirm concentration ratios for wholesale butter, cheese, and fluid-milk companies increased from 31 percent to 94 percent, 59 percent to 68 percent, and 48 percent to 67 percent, respectively (U.S. Department of Labor, Bureau of the Census). These concentration ratios suggest that models of the dairy industry should account for the market power of processors.

A framework that became popular in the 1980s for assessing the degree of market power was developed by Appelbaum (1982). Rather than assuming a certain market conduct, the Appelbaum procedure uses the concept of conjectural variation, which is estimated endogenously as a measure of the degree of market power. There have been several applications of this technique to agricultural industries (Schroeter 1988; Schroeter and Azzam 1990, 1991; Azzam and Pagoulatos 1990; Buschena and Perloff 1991; Durham and Sexton 1992; Wann and Sexton 1992; Azzam and Park 1993). However, with few exceptions, models of the U.S. dairy industry have assumed that the market is perfectly competitive (e.g., Kaiser, Streeter, and Liu (1988) and La France and de Gorter (1985)). To our knowledge, Suzuki et al. (1994) is the only U.S. dairy study that incorporated a market-power parameter of cooperatives and fluid processors. However, the role of government intervention was ignored in Suzuki et al. In the U.S. dairy industry, government intervention through the dairy price-support program causes prices to be determined under two different structural regimes: a “market equilibrium” regime where the market price is above the support price and a “government supported” regime where the support price is the effective price. In a recent study, Liu et al. (1991) presented an econometric model that allows for endogenous switching between the two market regimes. Under this framework, government intervention becomes part of the market structure since the reduced-form equations for each regime are different. However, Liu et al. assumed no market power on the part of industry participants.

Document Type: Research Article

Publication date: January 1, 2006

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  • New Empirical Industrial Organization and the Food System
    The new empirical industrial organization (NEIO) is a pioneering framework developed by economists to measure the degree of competitiveness of economic sectors. The primary contribution of NEIO is the generalization of perfect-competition and monopoly models to intermediate imperfect-competition models that can be empirically estimated. This framework has been applied to many sectors to provide policymakers dealing with antitrust issues with empirical evidence of market power throughout the marketing channel. This is the first book to provide a detailed, systematic overview of NEIO. The authors present a comprehensive synopsis of the theory and application of NEIO as well as selected case studies to the food sector.
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