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AEC 841-IO
Empirical Modeling
Υ Traditional S -C-P Models Ψ High CR implies anticompetitive behavior Ψ Anticompetitive pricing inferred from accounting measures of profitability Υ New Empirical Industrial Organization Ψ Microeconomic foundations Structural models – market equilibrium Game Theory applications Ψ Measures difference between actual price and “competitive price” Ψ High CR doesn’t necessarily imply anti- competitive behavior
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Basic Modeling Assumptions
? S-C-P Basic Assumptions ? Economic price-cost margins are directly observable in accounting data. ? Cross-section variation in industry structure easily captured by a few observable measures. ? Empirical work should focus on relationship between structure an d performance.
? NEIO Basic Assumptions ? Shift in focus of IO empirics (Appelbaum, Bresnahan, Lau (1979, 1982)) ? Typically based on time series data from single industries or closely related markets ? Econometric model of an industry ? Industries have unique characteristics that affect firm conduct ? Firm and industry conduct are unknown parameters to be estimated ? Data can choose among alternative hypotheses, including perfect competition. GOAL:Estimate parameters that directly measure degree of imperfect competition or specific pricing behaviors
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Traditional Structure-Conduct-
Performance PCM = f(CR, Advertising, Min. Efficient Scale, Capital Intensity, Market growth rate, Policy, Firm Structure)
? Reduced form estimation
? Market power effects directly observable
? Possible proxies for market power: price-cost margin, profits, rate of return
? Focus: Variations in market power effects due to? in endogenous variables ... advertising, concentration ratio, etc.
Traditional S-C-P Findings
? Parker and Conner (1979) ? CR4 and Advertising/Sales--significant positive effects on Price-Cost Margin ? Rogers (1985) ? Rising significance of CR4 and falling significance of MES over time ? Rogers and Petraglia (1994) ? Presence of cooperatives negatively related to PCM ? Ward (1981, 1992)
? Cattle feedlot prices positively correlated with number of buyer s
Schmalensee--Cross-sectional studies.....guide construction and analysis of particular industries.”
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NEIO Models
? Nature of oligopoly interaction in the real world ? Price and Quantity determination in oligopoly/oligopsony ? Advertising as strategic variable in 2 stage game ? Formation and enforcement of tacitly collusive agreements ? Degree of single-firm market power under product differentiation (Product level elasticities – Demand System)
? Size & determinants of firm and industry price-cost margins ? Econometric estimation ? Nonparametric estimation (mathematical programming)
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Econometric Estimation
Υ Industry level (with or without firm level equations) Υ SYSTEM ESTIMATION using non-linear estimation technique Ψ Downstream demand for product Ψ Upstream supply of product Ψ Other input demand equations for both Upstream and Downstream
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IO Applications to U.S. Beef
? Market power/efficiency tradeoffs Azzam (1997)
- Farm/Wholesale Beef Price Margin = f(Labor, Energy, Transportation, Market power component, efficiency component)
- Estimate jointly with cattle supply equation
? Definition of Regional Cattle Procurement
Markets Hayenga, Koontz & Schroeder (1996)
- F(Distance, ProcurementOverlap, Cash purchases, Slaughter, Available price data, Same parent firm)
- Dickey -Fuller Cointegration test
Beef Packing Plant Location
Major states (29 plants)
Fringe states (9 plants)
Source: Love, Burton, Raper and Shumway GIPSA Study, 1998
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Is there Monopsony Power in
Beef Packing?
ΥGIPSA Funding ΥLove, Burton, Raper, and Shumway Υ38 major packing plants ΥWeekly plant level cost information for one year Υ5 different tests for anti-competitive cattle prices (Nonparametric methods) ΥMonopsony power in 3 “fringe” plants, 3 “major” plants
“Only theory can separate the competitive from
the anticompetitive.”
Robert Bork, The Antitrust Paradox
