In this paper a new approach for the estimation of oligopsony market power along a supply chain is developed. The theoretical framework relies on NEIO theory. Two subsequent markets with oligopsony power are modeled. Price equations, farm-processor and processor-retailer, are embedded in a price transmission framework. The reduced error correction representation is estimated via the Kalman-Filter to allow for time-variation in the long-run cointegration parameters. A dynamic factor model is applied to extract common factors from the time-varying coefficients and with the estimated results the processing industry’s and retail sector’s average input conjectural variations are calculated. The framework is applied to the German dairy supply chain over the time period January 2000 to March 2011. Results indicate lower levels of market imperfections on the raw milk and dairy output market.


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