Current Agriculture, Food & Resource Issues
C. E. Ward
response is dependent on the size of the supply shock. Small shocks tend to be associated with
average-cost pricing. They concluded that decreasing buyer concentration is unlikely to result
in improved (i.e., higher) fed cattle prices.
Economies of size suggest increased efficiencies have occurred over time in meatpacking
as structural changes have taken place. Several studies also have found oligopoly or oligopsony
price distortions associated with the same structural changes, and leading to increased
concentration in meatpacking. Azzam and Schroeder (1995) addressed the trade-offs in
efficiency gains and oligopsony losses. They developed the model for the beefpacking
industry in general, and then specifically for regional fed cattle procurement. They used a
baseline period which corresponds in their estimation to the 1986-88 period, then used
sensitivity analysis to consider impacts from further structural changes (i.e., increases in
regional concentration but lower processing costs) and increased oligopsony pricing. Overall
they found that when consolidation leads to economies-of-size efficiencies and increased
oligopsony pricing behavior, even modest efficiency gains offset the oligopsony or welfare
losses. They estimated that cost savings of 2.4 percent or less would offset anti-competitive
effects from a 50 percent increase in beefpacking concentration. Their estimate of actual cost
savings was 4 percent. Thus, they concluded structural changes have been welfare enhancing
in the beefpacking industry.
Concomitant with structural changes in the meatpacking industry has been the decreased
consumer demand for red meats (Purcell, 2000). Weliwita and Azzam (1996) considered
declining demand’s impacts on beefpacking behavior. They argued that an oligopoly or
oligopsony will behave as a cartel and become more competitive with an unexpected decline
in output demand. In a game theory framework, firms will not distinguish between declining
demand and rivals cheating, thus inducing a punishment period. Weliwita and Azzam tested
for cooperative pricing behavior after unexpected declines in beef demand. They developed
the conceptual model and applied it to quarterly data for 1978-93. Results indicated that
declining demand did not increase the competitiveness of packers, either in fed cattle or beef
markets. Packers did not follow a cooperative pricing strategy either in fed cattle or beef
markets. Oligopsony price distortions of about 2.7 percent were found, within the range of
those found in previous research.
Driscoll, Kambhampaty, and Purcell (1997) tested for short-run profit-maximizing
behavior of beefpacking firms. They argue that if profit maximization is not followed, then
estimates of conjectural elasticities are biased. They devised a nonparametric test for profit
maximization and applied it to weekly data from 15 plants in two regions for a one-year
period in 1992-93. They applied the test to weekly, plant-level data, then merged data into
four levels of aggregation, ultimately to monthly, firm-level data. They found, both for
weekly and monthly data, that plants and firms did not appear to follow profit-maximizing
behavior. Plants regularly operated at production levels below those needed to achieve static
profit maximization. Results were consistent with hypothesized behavior proposed by Ward
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