Output market power and firm characteristics in dairy processing: Evidence from three EU countries

Abstract

The dairy processing industry is the largest subsector in the EU food industry and is characterised by high concentration. We investigate the extent of output market power exerted in EU dairy processing, applying an advanced stochastic frontier approach to estimate firm‐level markups of price over marginal cost using data for France, Italy and Spain from 2008 to 2017. We further relate markups to firm characteristics to identify what type of dairy processors possess the highest power in the sector. Our findings only reveal small average deviations from perfect competition but we find considerable heterogeneity of markups within and between the three countries. We identify a strong positive relationship between markup and profitability, though we find firm size and markups to be inversely related. This indicates that small firms operating in differentiated niche markets are able to charge higher markups, thereby ensuring their profitability. This result can serve EU dairy processors for future strategic alignment, and is particularly interesting from a policy perspective as large firms are mostly blamed in the exercise of market power in public and policy debates.

Markups, organic agriculture and downstream concentration at the example of European dairy farmers

“…This is mainly driven by the fact that the fixed cost share, that is, the share of quasi-/fixed in total costs, is much larger in agriculture compared to other sectors. For instance, Koppenberg and Hirsch (2022b) investigate markups in three European dairy processing sectors (France, Italy, and Spain) where firms have a mean fixed cost share of approximately 20% whereas the fixed cost share in my sample amounts to 54%. Using the lower (.039; cf.…”

“…It is noteworthy that my mean and median markup estimates far exceed those of earlier studies estimating markups for other sectors (e.g., Autor et al., 2020; De Loecker et al., 2020). Recent applications in the food sector find mean markups ranging from 1.07 to 2.57 for the food manufacturing industry (Curzi et al., 2021; Jafari et al., 2022; Koppenberg & Hirsch, 2022b; Lopez et al., 2018) and from 1.18 to 3.57 for the food retailing sector (Hirsch & Koppenberg, 2020; Koppenberg & Hirsch, 2022a; Sckokai et al., 2013). However, two pivotal differences between manufacturing and service industries and the farming sector drive this result.…”

“…Alternatively, it would be possible to use the stochastic frontier approach introduced by Kumbhakar et al ( 2012) which comes at the cost of assuming markups being strictly larger than or equal to one. But, since farmers receive a considerable number of subsidies, they may continue their operations even though they incur markups being smaller than one (Caselli et al, 2018;Koppenberg & Hirsch, 2022a, 2022b. Last, demand side approaches to estimate markups (Berry et al, 1995;Nevo, 2001) are not possible to apply in my case since the necessary data are not available.…”

Conceptual System Dynamics and Agent-Based Modelling Simulation of Interorganisational Fairness in Food Value Chains: Research Agenda and Case Studies

“…To substantiate further the governance analysis in the dairy chain in France, UK and Germany, economic analysis identified certain level of oligopsony and oligopoly power at the level of producers and processors [63]. Similarly, in another study a certain level of oligopoly for dairy processors in France, Italy and Spain has been reported [74]. Results from technical efficiency analysis in the European dairy industry indicate a certain degree of systematic failure, e.g., permanent managerial failures and structural problems in European dairy processing industry [75].…”

Markups in US food manufacturing accounting for non‐neutral productivity

“…To our knowledge, no previous study of US food manufacturing productivity or markups has included non-Hicks-neutral productivity, particularly considering labour-augmenting technical 1 Melitz and Polanec (2015) explain how to describe this productivity in what they call 'dynamic OP decomposition of productivity'. 2 Analysis of production integrated with markups in food manufacturing was mainly addressed using the New Empirical Industrial Organisation (NEIO) approach (Bhuyan & Lopez, 1997;Lopez et al, 2002;Lopez et al, 2018;and Koppenberg & Hirsch, 2021;Lee & Van Cayseele, 2022; see Sexton &Lavoie, 2001, andKaiser &Suzuki, 2006 for a review of earlier NEIO studies).…”