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Testing Oligopolistic and Oligopsonistic Behavior: An Application to the U.S. Meat-Packing Industry

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Recent empirical work in industrial organization has popularized the use of conjectural-elasticity models to test price-taking behavior. In these models, firms are hypothesized to simultaneously and independently choose their output levels given their beliefs about rivals' reactions to their output choice, and these beliefs are called conjectural variations. A firm's conjectural elasticity is the conjectural variation of the firm multiplied by its market share. Several studies have estimated such models (see Geroski (1988) and Bresnahan (1987) for surveys), but virtually all applications consider price-taking behavior only in the output market. Only one (Schroeter 1988) considers the possibility of imperfections in output and factor markets. From the standpoint of econometric estimation, inferring pricing distortions from an oligopoly/oligopsony model would involve a simple adaptation of an oligopoly model (such as that of Appelbaum (1982) for example) where, in addition to the parameter estimates of a cost function, an output demand function, and conduct as parameterized by the conjectural elasticity, one also needs information on the parameter estimates of the supply function(s) of the oligopsonized input(s). However, the problem is that such adaptation is possible only if certain restrictions are imposed on the firm/s cost function.

Since the cost function has as arguments the price(s) of the input(s), deriving an expression for the conjectural elasticity in the factor market is not straightforward unless the production technology is restricted to be of fixed proportions between the output and the oligopsonistically purchased input. Consequently, the conjectural elasticities in the imperfect output and input markets turn out to be identical since the oligopsonized input and output can be represented by the same variable in the profit function (see Schroeter (1988)). The problem with this formulation is that identical conduct in the two markets is not an implication of oligopoly/oligopsony theory but a result of the imposed technology.
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Document Type: Research Article

Publication date: January 1, 2006

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