Vertical integration to avoid monopsonistic exploitation

Abstract

For decades, the suppliers of fed cattle have complained about monopsonistic exploitation by the dominant meatpackers. Recently, a group of ranchers and feedlot operators joined forces to build their own meatpacking plant in an effort to avoid such exploitation. In this context, we show that forward vertical integration by the suppliers of fed cattle will increase their profits while increasing output and lowering prices for consumers. In addition, we show that vertical integration improves both consumer welfare and social welfare. We also examine the use of a joint sales agency, which is an economically equivalent alternative to vertical integration.