Testing for Market Power in Multiple-Input, Multiple-Output Industries: The Australian Grains and Oilseeds Industries

Recent empirical studies have found significant evidence of departures from competition in the input side of the Australian bread, breakfast cereal and margarine end-product markets. For example, Griffith (2000) found that firms in some parts of the processing and marketing sector exerted market power when purchasing grains and oilseeds from farmers. As noted at the time, this result accorded well with the views of previous regulatory authorities (p.358). In the mid-1990s, the Prices Surveillence Authority (PSA 1994)determined that the markets for products contained in the Breakfast Cereals and Cooking Oils and Fats indexes were "not effectively competitive"(p.14). The PSA consequently maintained price surveillence on the major firms in this product group. The Griffith result is also consistent with the large number of legal judgements against firms in this sector over the past decade for price fixing or other types of non-competitive behaviour. For example, bread manufacturer George Weston was fined twice during 2000 for non-competitive conduct and the ACCC has also recently pursued and won cases against retailer Safeway in grains and oilseeds product lines. Griffith obtained his results using highly aggregated data and a relatively simple empirical model. In this study we focus on confirming the earlier results by formally testing for competitive behaviour in the Australian grains and oilseeds industries using a more sophisticated empirical model and a less aggregated grains and oilseeds data set. We specify a general duality model of profit maximisation that allows for imperfect competition in both the input and output markets of the grains and oilseeds industries. The model also allows for variable-proportions technologies and can be regarded as a generalisation of several models appearing in the agricultural economics and industrial organisation literatures. Aggregate Australian data taken from the 1996-97 input-output tables are used to define the structure of the relevant industries, and time series data are used implement the model for thirteen grains and oilseeds products handled by seven groups of agents. The model is estimated in a Bayesian econometrics framework. Results are reported in terms of the characteristics of estimated probability distributions for demand and supply elasticities and indexes of market power. Our results suggest that there is a positive probability that: (a) flour and cereal food product manufacturers exert market power when purchasing wheat, barley, oats and triticale; (b) beer and malt manufacturers exert market power when purchasing wheat and barley; and (c) other food product manufacturers exert market power when purchasing wheat, barley, oats and triticale. What is interesting is that each of the transaction nodes where market power is indicated is one where a farm commodity is sold to a processing sector that is, the evidence suggests oligopsonistic behaviour by grains buyers. The wheat and barley industries seem to be especially disadvantaged by this type of market conduct. A related and equally interesting result is that there was no consistent evidence of market power in the downstream nodes of the data set relating to the sales of flour and other cereal foods, or the sale of bread and other bakery products. These transaction points are where legal judgements against suppliers have been made in the recent past. We have stated our results in quite cautious language, as there is much uncertainty surrounding our estimates. This stems partly from the lack of good quality data, so we suggest that one avenue for future research should be improving the collection and integrity of relevant data (especially including the retail and distributive nodes of the various markets).Industrial Organization, Marketing,

Book reviews

Teaching/Communication/Extension/Profession,

Food Price Policy in Indonesia

Agricultural and Food Policy,

Distribution of Gains from Cattle Development in a Multi-Stage Production System: The Case of the Bali Beef Industry

Beef production in Bali is dominated by smallholders, just like the majority of Indonesian agriculture. A wide range of policies has been implemented to enhance development of the Bali beef industry. Knowledge about the distribution of the returns from the development of the cattle industry, including marketing, informs decision making. This paper examines the benefits from cattle development in a multi-stage production representation of the Bali beef industry using equilibrium displacement modelling (EDM). Benefits are measured as changes in economic surplus. The distribution of benefits among farmers, processors and retailers is also examined.beef production, government policy, EDM, economic surplus., Agricultural and Food Policy,

An Equilibrium Displacement Model of the Bali Beef Industry

Produksi daging sapi di Bali didominasi oleh peternakan rakyat, sama halnya dengankeadaan pertanian pada umumnya di Indonesia. Berbagai kebijakan telah dilaksanakan untukmengembangkan sapi Bali. Pengetahuan mengenai distribusi manfaat/keuntungan yangditerima dari pengembangan sapi sapi Bali akan membantu dalam proses pengambilankeputusan. Tulisan ini menganalisis manfaat dari pengembangan sapi Bali dalam sistemproduksi bertingkat dengan menggunakan model “equilibrium displacement' (EDM).Manfaat/keuntungan diukur dari Perubahan surplus ekonomi pada peternak, rumah potonghewan dan pengecer

DECOMPOSING THE VARIANCE OF GROSS REVENUE INTO DEMAND AND SUPPLY COMPONENTS

Some recent analyses relating to gross revenue instability have used a procedure for decomposing the variance of gross revenue into components attributable to price variability, quantity variability and interaction between these. This paper offers some criticisms of the procedure and outlines an alternative procedure which divides the variance of gross revenue into components due to demand variability, supply variability and interaction between these. The procedure is used to investigate the causes of instability in quarterly beef revenues in the Australian beef industry. Since demand and supply variability are both important contributors to beef revenue instability, direct market intervention to stabilise beef industry revenues would be a complex and risky task

SOME OLD TRUTHS REVISITED

The primary objective in this paper is to 'promote' the use of equilibrium displacement modeling, or comparative static analysis of general function models, as a research tool in agricultural price and policy analyses. This is by no means a new tool, but it does seem to be used much less in Australia than it is in the US where it has been the basis of several important journal papers in recent times, The paper includes applications to: (a) reproduce important results obtained by Euse (1958) regarding total elasticities; and (b) examine the price premium argument that has been advanced in favour of single-desk selling arrangements. The latter is the secondary objective in the paper. Whilst equilibrium displacement modelling has its shortcomings, it is a research tool that can provide useful results with few assumptions. It can be a substitute for econometric modelling when resource and time constraints are binding. The application to the price-premium argument re-confirms the doubts that many analysts have expressed about single-desk selling

A LINEAR PROGRAMMING SOLUTION TO SOME MARKET ALLOCATION PROBLEMS

Certain market allocation problems involving linear average net revenue functions can be solved by linear programming. The technique can be applied to an objective function derived from linear marginal net revenue functions, the objective being to force each marginal net revenue as near to zero as possible given the constraint set. If a particular problem is suited to a linear programming solution, researchers may prefer to use this technique rather than more sophisticated optimization methods

ELASTICITY OF SUPPLY AND THE INCENTIVE FOR COLLUSIVE BUYING

A model is developed to show how changes in the elasticity of the supply function at the farm level offset increased levels of buyer (processor) concentration such that given percentage increases in demand by large buyers result in the same, or smaller, percentage price changes than do increases in demand on the part of small buyers. Since the incentive for collusive buying is a function of the potential price increases which follow demand increases, there may be little incentive for buyers to collude even if they are highly concentrated