Measuring Oligopolistic Distortion in the U.K. Frozen-Potato-Product Sector: A Calibration Modeling Approach

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Abstract:

Dutch import penetration of the U.K. frozen-potato-product market has increased substantially since 1980, which is of concern to the U.K. potato industry. U.K. processors (Potato Processors' Association 1991) have argued that such imports result from the competitive disadvantage created by the Potato Marketing Scheme, which restricts British potato production and raises the average potato price. However, the effects of imperfect competition on frozen-potato-product trade have been largely ignored in the literature. We estimate these trade effects assuming that neither country has a comparative advantage in frozen-potato-product production. We also estimate the welfare distortion effects of imperfect competition in the U.K. sector. The frozen-potato-products classification represents all chilled and deep frozen potato French fries, chips (excluding those produced from fresh potatoes on the premises where they are to be consumed), slices, quarters, saut├ęs, rissoles, croquettes, waffles, skins, and jacket potatoes.

The Herfindahl (H) Index of concentration (Clarke 1985) is used to describe the structure of the U.K. and Dutch frozen- potato-product sectors. The H-Index varies between unity for a monopoly and zero for perfect competition, hence a high value results from a low number of firms and/or a high market share inequality. The U.K. sector has a high HIndex of concentration of 0.36 where five processors account for around 84 percent of the sector's capacity. The largest U.K. processor (McCain Foods) accounts for around 60 percent of total capacity. The Dutch sector is less concentrated with a Herfindahl Index of 0.12: five processors account for around 65 percent of capacity and the largest Dutch processor (Cebeco Handelsraad) accounts for 25 percent.

The differing structure in each sector is indicative of their contrasting development. The U.K. sector began as an offshoot of the rapidly developing frozen-food sector in the 1960s rather than as a separate industry as in the Netherlands. Consequently, it has traditionally been dominated by large, highly diversified (into nonpotato products) processors, whereas the Dutch sector is more equally shared with little diversification.

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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