Current Agriculture, Food & Resource Issues
C. E. Ward
One limitation of conjectural variation studies reviewed to date is the extent of data
aggregation. Azzam and Schroeder (1991) recognized this problem especially as it relates to
the input market for beefpacking where markets were believed to be more regional or local in
nature. They developed a model to estimate oligopsony price distortions in 13 regional, fed
cattle procurement markets. They calibrated the model to approximate the distortion across
markets in 1986, then used simulation to determine the price distortion estimates for varying
levels of regional beefpacking concentration and behavior. Subjecting the model to sensitivity
analysis, they compared their results with previous research using econometric modeling.
Azzam and Schroeder found slightly lower price effects across market areas, less than 1
percent of the price level, compared with about 1.2 percent to 2.5 percent across market areas
or time periods in previous research (Ward, 1981; Menkhaus, St. Clair, and Ahmaddaud,
1981; Quail, et al., 1986). They concluded that their results indicated less danger of falling
fed cattle prices (i.e., oligopsony price distortion) as a result of increasing buyer concentration
than had been found in previous research.
Limitations of the conjectural variation approach were noted by Koontz, Garcia, and
Hudson (1993). They argued that conjectural variations say nothing about optimal pricing
strategies of firms and that often data used are highly aggregated. They studied non-
competitive behavior in short-run pricing of fed cattle by beefpacking firms. Non-cooperative
game theory was used to explain possible tacit collusion among rival packers. They showed
that in order for collusive behavior to be optimal, rival firms follow a dual strategy. Firms will
follow a cooperative pricing strategy at times and pay sub-competitive prices, while at other
times they follow a non-cooperative strategy and pay competitive prices. Daily fed cattle
prices from four regional markets for two time periods were used in the empirical estimation.
Times chosen were two periods of relative structural stability in the beef industry, 1980-82
and 1984-86. They found evidence of oligopsony behavior consistent with trigger pricing
strategies in all regions and both time periods. Their estimated conjectures of price distortion
were in the range of 0.5 percent to 0.8 percent. However, they found a reduction in the
oligopsony effect in the later period when buyer concentration was higher. Overall, behavior
was consistent with cooperative pricing strategies.
Stiegert, Azzam, and Brorsen (1993) constructed a system of demand and supply
equations in an imperfect market setting to examine pricing implications when fed cattle
supplies are anticipated or unanticipated. They recognized that beefpacking firms are
quantity-driven. Economies of size and utilization affect costs; which in turn directly affect
profitability. Therefore, fed cattle supplies are critically important in measuring market
behavior and its impacts. They used quarterly data for 1972-86. Their results suggest
beefpacking firms follow average-cost rather than marginal-cost pricing, consistent with
Ward’s (1988) hypothesis and other research. Fed cattle were priced below marginal value in
31 of 59 quarters. The markdowns during periods of anticipated supply were consistent with
average-cost pricing. Packer response to unanticipated supplies suggested that pricing
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