Regime Switching and Oligopsony Power: The Case of U.S. Beef Processing

In this article, we estimate a Green and Porter (GP 1984) trigger pricing model to analyze weekly marketing margin data for the U.S. beef packing industry from 1992-2000. Oligopsonists are hypothesized to follow a discontinuous pricing strategy in equilibrium, and we focus on shocks in the normal throughput of supply as a potential catalyst for regime switching between cooperative and noncooperative phases. We use an algorithm developed by Bellone (2005) that relies on Hamilton's (1989) multivariate first-order Markov process to test for the cooperative/noncooperative switching behavior. We find strong evidence that links switching conduct by packers to disruptions in coordinating the derived demands for processed beef with the supply of live cattle. Once switched, cooperative regimes lasted an average of 21 weeks, while noncooperative regimes averaged 33 weeks. The average marketing margin for processed beef was 66% higher in the cooperative regimes compared to the noncooperative regimes. This implies an annual average increase in profits of 491 million dollars to the beef packing industry.

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 Record created 2017-04-01, last modified 2017-08-28

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