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An Assessment of the Impact of Food-Industry Market Power on U.S. Consumers

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Abstract:

Marketing activities account for the majority share of costs for most foods, and the share of costs due to marketing is rising over time. Consider that the farm share of the U.S. Department of Agriculture's (USDA's) “market basket” of food products remained stable at about 40 percent from 1960 through 1980 but has declined rapidly since then to 30 percent in 1990 and 22 percent in 1998. In 1996, U.S. consumers spent $547 billion on food, excluding imports and seafood. A second measure of the farm-retail price spread, the marketing bill, was $424 billion, leaving $123 billion in farm value or 23 percent. This measure of the farm share also has been declining steadily over time, falling from 41 percent in 1950 to 31 percent in 1980 and then to 24 percent in 1990.

What explains this growth in the marketing sector's share of the U.S. food dollar? Certainly, changes in consumers’ buying habits are one explanation. Increased demand for convenience, such as reduced time for meal preparation, and consumption of more meals away from home are examples of trends that naturally cause more marketing services to be consumed per food dollar expended. Another consideration is the rapid increase in concentration in all stages of the food marketing sector. High concentration may be associated with the exercise of market power. Fundamental to the exercise of market power is restriction of sales relative to the competitive level so as to influence prices and increase profits. Because consumers’ welfare from food consumption is, in general, monotonic in the quantity of food brought to the marketplace, exercise of market power anywhere in the market chain will reduce consumers’ welfare.

This chapter focuses specifically on the possible impacts on consumers of concentration and market power in the food chain. We first present an overview of key trends in food-market concentration. Then we develop a simple and convenient, but relatively flexible, model of a food- market channel to study the potential impacts of market power at alternative stages of the market chain on the magnitude and distribution of economic welfare. We then turn to the impact of market power in the food sector on economic welfare and the distribution of returns among producers, consumers, and marketers. This topic is of longstanding concern among agricultural economists and has featured some relatively recent contributions. One limitation is that work to date has emphasized food manufacturers’ market power as sellers, yet concerns also have been expressed about manufacturers’ oligopsony power as buyers of raw agricultural products and about the emerging power of retailers in the food chain. What are the potential welfare implications of both buyer and seller market power and of market power at successive stages in a food market? To help answer these questions, we utilize our analytical model to conduct a simulation analysis of potential welfare impacts for plausible ranges of market parameters, including processor and retailer market power. We conclude with policy implications of the analysis.

Document Type: Research Article

Publication date: January 1, 2006

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