The Farm‐Retail Price Spread in an Imperfectly Competitive Food Industry

Abstract

Gardner's popular model of perfect competition in the marketing sector is extended to a conjectural-variations oligopoly with endogenous entry. Revising Gardner's comparative statics on the "farm-retail price ratio," tests of hypotheses about food industry conduct are derived. Using data from a recent article by Wohlgenanr, which employs Gardner's framework, tests are made of the validity of his maintained hypothesis-that the food industries are perfectly competitive. No evidence is found of departures from competition in the output markets of the food industries of eight commodity groups: (al beef and veal, (bl pork, (e) poultry, (d) eggs, (e) dairy, (f) processed fruits and vegetables, (g) fresh fruit. and (h) fresh vegetables.Key words: conjectural-variations oligopoly, farm-retail price ratio, food industry conduct.In a previous article in this JournaL, Gardner investigated the effects of three distinct forces affecting food system equilibria: shifts in retail demand, shifts in farm commodity supply, and shifts in marketing input supply. He derived comparative-static predictions about how the quotient of retail and farm prices-the "retailfarm price ratio~-would adjust to changes in each of these exogenous effects. The investigation was conducted within a framework that has since been applied to a number of important marketing system issues, including the quantification of downstream research benefits (Alston and Scobie; Freebairn, Davis, and Edwards), the characterization of marketing industry efficiency (Kilmer), and the incorporation of marketing group behavior in modeling the deGarth J.Weinberg. several Journal reviewers, and seminar participants at the University of California, Davis. mand for farm output (Wohlgenant). Yet, despite this clear popularity as a paradigm for food market analysis, the model's applicability is limited by a number of restrictive assumptions. Perhaps the most stringent of these assumptions is that of perfect competition in the food industries. Indeed, since Gardner's paper, an extensive literature has developed about the potentially noncompetitive conduct of firms in these industries (e.g., Gisser, Mueller and Marion, Connor et al.).Given the frequency of use of the Gardner framework, two questions arise for applied economic analysis, The first is how Gardner's model may be extended to allow for noncompetitive behavior in food marketing; the second is how some of Gardner's concepts may be applied to identify empirically departures from perfect competition. This paper investigates these issues by identifying the causes and consequences of noncompetitive conduct in the food industries, The specific objectives are to (a) provide a conceptual framework for the analysis of imperfect competition in these industries, (b) assess the analytical consequences of noncompetitive behavior, and (c) determine the empirical significance of such behavior.The first objective is achieved through an oligopolistic generalization of the Gardner model, which explicitly allows for the entry of new firms...

Testing for market power in the Australian grains and oilseeds industries

“…The study of competition in food processing and marketing has had a long history in the North American and European economics and agricultural economics literatures~see, Holloway, 1991;Marlon, Mueller, Cotterill, Geithman, & Schmeizer, 1979;McDonald, Rayner, & Bates, 1989!+ However, it has only recently become an important area of research in Australia, for two main reasons+ 1 First, there has been substantial deregulation of agricultural product marketing structures+ Under National Competition Policy guidelines, many marketing boards, corporations and commissions that previously regulated prices~and sometimes quantities! in the food products market have been abolished+ Second, and perhaps relatedly, there has emerged a growing level of concentration in the food processing and retailing sectors~Australian Parliament, 1999!+ Regarding the latter, the business media regularly reports on merger or takeover activity in the food production, processing and retailing sectors+ The Australian Competition and Consumer Commission~ACCC!…”

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“…;Palaskas, 1995;. Related studies in which imperfect market assumptions are invoked have employed other a pproaches such as structural methods (e.g., Azzam and Pagoulatos, 1990;Holloway, 1991;Hyde and Perloff, 1998) and reduced-form techniques (e.g., Panzar and Rose, 1987;Hall, 1988;Zhoa et al, 1996) among others. Barrett (1996) a rgues that the implicit perfectly competitive market assumption is flawed in that even if price differences exactly equal transfer costs, one cannot reasonably presume perfect competition, since this is equally consistent with monopolistic limit pricing, with collusive pricing by a spatial oligopoly (Faminow and Benson, 1990) or with Pareto inferior trade (Newbery and Stiglitz, 1984).…”

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“…There is no discussion of the dynamics of the adjustment process nor is there any suggestion of how long an adjustment should take once there is a perturbation from equilibrium. 16 Holloway (1991) reaches analogous results for an imperfectly competitive industry~ Rio Grande, Brazil FOB, bulk rate. The data for the United States and Rotterdam cover the period October 1979 through January 1992.…”