INCREASING CONCENTRATION IN THE U.S. HARD WHEAT MILLING INDUSTRY

This research shows that increased concentration in the U.S. wheat milling industry has not led to noncompetive pricing in upstream or downstream markets. Increased concentration has helped to reduce the marketing margin by $0.65 for every 100 pounds of flour produced. This is about 7% of the average marketing margin.Crop Production/Industries, Industrial Organization,

Optimal Timing of Cartel Formation Under Uncertainty

Understanding how business cartels form and expand is foundational for developing sound deterrence strategies. Past work (i.e. Connor, 2005) has relied on net present value (NPV) methods to evaluate the streams of costs and benefits of forming or joining a cartel. While NPV adequately measure the expected value of future streams of benefits and costs, higher moments of the distribution are also important in understanding agent behavior. Thus, in the presence of uncertainty about future streams and litigation costs, NPV may miss important dimensions that shape the issue. The decision to form or join a cartel is, at least, partially irreversible, because it exposes the firm or its involved managers to litigation on all previous returns and even after the cartel is dissolved. In this study, we rely on the aforementioned irreversible and uncertain nature of cartel participation and returns to develop a real-options framework that examines the optimal decision rules regarding the timing of cartel formation. This leads to suggestions for improved policy tools for antitrust agencies. In our model, all firms outside of a cartel essentially hold the option to form or join a cartel at some point in the future. The option is exercised the day the cartel is formed and has no cash value before that. The payoffs that firms give up by not immediately forming a cartel are weighed against uncertain and partially irreversible forming decision nature. Under the assumption of stochastic market demand, we find a threshold level of demand beyond which the cartel is formed. This threshold is analytically calculated as a function of a number of parameters. We then illustrate the conditions that determine the optimal timing decision of cartel formation by conducting comparative dynamics analysis. The timing of cartel formation is analyzed in both domestic and international settings. The qualitative results are obtained by comparative dynamics analysis and the quantitative results by numerical analysis. The results obtained in this study will assist in the development and improvement of guidelines to deter the formation of cartels by antitrust agencies in both developed and developing nations. In the first scenario of domestic cartel formation, at the beginning of each period, firms will choose to compete when the sunk costs related to a cartel operation are too high, current period demand is too low, and/or the expected duration of collusion is too short. Obviously, the possibilities of cartel formation increase when sunk costs go down, demand increases, or relationships with firms improve the prospects for a longer cartel arrangement. The value of waiting increases with a) increased uncertainty of market demand, b) increase irreversibility, and c) increased number of firms and d) a higher discount rate. We study the effect of demand uncertainty on the expected social welfare of cartel formation. The simulation results suggest that the expected social welfare under uncertainty could be higher than that under certainty. In a second scenario, we study the formation of international cartels. The model considers two markets with demand uncertainty that is either correlated or uncorrelated. The demand shocks in each market are assumed to follow geometric Brownian motion. We calculate the threshold value of demand faced by the cartel and obtain the rules guiding a firm's decision to form an international cartel. The comparative dynamics results obtained in the previous domestic scenario still apply. The simulation results suggest that cartel formation is most likely to occur between firms that come from countries with highly correlated markets and similar expected demand growth.Cartel Joining Behavior, Real Options Theory, International Cartels, Industrial Organization, K21, L00, L12,

Imperfect Competition between Milk Manufacturers and Retailers in a Midwestern State in the U.S.

This manuscript studies the market conduct of the milk manufacturers and retail chains in a Midwestern state in the U.S. Following the menu approach we employ a random coefficient logit demand model to investigate several possible scenarios on the supply side. Demand estimates are obtained using both cross-sectional and time series variation in data. We also allow annual variation in consumer demographics which helps identify the coefficients of interaction between consumer demographics and product characteristics. To further enhance identification power we allow choice set of milk to vary across markets. The results are most supportive of the conjecture that manufacturers behave competitively letting the retailers be the residual claimants. Later they may collect a part or full rents from the retailers through two-part tariffs.Market conduct, random coefficient logit, vertical chain, imperfect competition, Agribusiness, Agricultural and Food Policy, Demand and Price Analysis, Industrial Organization, D43, L13,

Vertical Channel Analysis of the U.S. Milk Market

The objective of the research in this study is to evaluate the pricing and market conduct of milk manufacturers and retailers. Using data from a U.S. Midwestern state, we estimate a random coefficient logit demand model (RCL) to empirically investigate a range of possible scenarios in the milk supply chain. These include vertical leader-follower model with underlying Bertrand-Nash pricing, models allowing for nonlinear pricing contracts, and collusion scenarios at various levels in the supply chain. This study contributes to the literature in the following ways. First, it generalizes the RCL demand model via Box-Cox power transformation. While previous studies rely on ad hoc specified linear indirect utility, this procedure allows data to determine the functional form of utility. Power transformation parameters cannot be obtained analytically with product-level data, given that consumer choices are unobserved. We propose an algorithm to estimate the transformation and consumer heterogeneous taste parameters sequentially. The model is identified using annual variation in consumer demographics along with cross-sectional and time series variation in milk consumption. Finally, the milk choice set is allowed to vary across markets. It should be mentioned that jointly estimating the manufacturing sector, the vertical channel, and the retail sector will more likely yield reliable estimates of structural parameters vis-à-vis studies investigating food supply chain sectors in isolation. Several key results are obtained from the research. First, the estimate of demand “superelasticity”suggests that retailers have incentives to adjust retail markups to enhance their market power. Next, supply selection bias associated with imposing restriction on the demand-side framework is shown to have formidable policy implications. Namely, empirical results from the general demand show that retailers are more powerful than they would appear otherwise. In the face of high concentration and a small presence of Wall-Mart in these markets this seems a plausible scenario.Market conduct, random coefficient logit, vertical chain, Box-Cox power transformation, Agricultural and Food Policy, Demand and Price Analysis, Industrial Organization, D43, L13,

JAPANESE DEMAND FOR WHEAT PROTEIN QUANTITY AND QUALITY

Ladd and Martin's hedonic pricing model is extended to include the interactive effect of noncontracted characteristics on the value of contracted characteristics. Marginal values of wheat protein in the Japanese import market are estimated using the interactive effects of noncontracted dough/flour characteristics typically proxied by protein. Protein value is linked positively to farinograph stability, a prime factor in blending different flours. Three high protein wheats maintained about the same marginal value of protein. The marginal value for the two low protein wheats appear more end-use dependant. They varied in a $2.00/ton range depending on protein absorption, stability, and extensibility.Demand and Price Analysis,

BACKWARD IMPLICIT CONTRACTS, PRE-COMMITMENT AND MARKET POWER IN THE INTERNATIONAL DURUM WHEAT MARKET

We devise a formal test of market power that is applied to the international durum market. The model captures the asymmetric cost structure brought about the initial payment system of the Canadian Wheat Board. The model generates testable hypotheses about market conduct and optimal strategic positioning.Crop Production/Industries, Industrial Organization,

The Duopolistic Firm with Endogenous Risk Control: Case of Persuasive Advertising and Product Differentiation

In this paper, a two-period game is constructed, where duopoly firms choose advertising strategies in the first period and compete in price or quantity in the second period by maximizing the value of firm equity. Using certainty equivalence, we demonstrate the impacts of uncertainty and modes of competition on duopoly firms' optimal pricing, production, and advertising strategies. Equilibrium price and quantity outcomes emerge as significantly different from the standard industrial organization model of profit maximization. It turns out that the common measurement of market power, the Lerner index, is generally mis-stated. In contrast to the literature, we also find that firms will optimally switch from quantity to price competition either when advertising costs are low, demand is high, or if idiosyncratic risk is reduced. A series of simulations confirm these findings.

FACTORS AFFECTING WHEAT PROTEIN PREMIUMS

This study used Rosen's methodology of deriving a marginal implicit price series from traditional hedonic modeling and then using this series to estimate a demand model. This procedure was applied to Kansas Hard Red Winter wheat protein. Results were mixed. Own-district protein level was not economically significant; however, an increase in other Kansas district's protein level and the North Dakota Hard Red Spring protein level may have a slight economic impact on own-district protein premium. The results of this study indicate that new varieties of wheat developed that increase protein content without loss of yield and that are regional specific can impact the price or wheat in other areas.Wheat, Characteristic Demand Model, Protein, Crop Production/Industries, Research Methods/ Statistical Methods,

THE WELFARE EFFECTS OF STATE TRADING ENTERPRISES: THE CASE OF US-CANADA MALTING BARLEY TRADE

The Canadian wheat Board is a single-desk state trading agency responsible for the marketing of all barley sold for human domestic consumption and for export. The U.S is the biggest importer of Canadian six-row malting barley. This study aims to analyze the welfare effects of State Trading Enterprises (STEs) as it applies to the US-Canada malting barley trade. A policy simulation was developed to determine the redistributive efficiency of single STE, a competitive structure, and a structure with oligopolistic processors.International Relations/Trade,

IMPERFECT COMPETITION AND STRATEGIC TRADE THEORY: WHAT HAVE WE LEARNED

International Relations/Trade,