Effects of Concentration on Cattle Prices
Growth of firm and plant size in recent years generally is believed to have led to increased efficiency and lower per-unit processing costs. There also is concern that increased firm size and concentration have enabled packers to exercise market power. The researchers who worked on this project tested for the effects of market power on prices paid for cattle using a combination of weekly and monthly plant-level data on inputs, outputs, costs, and revenue.
The research method required estimation of slaughter-processing cost functions that express the relation between output and unit costs. The underlying assumptions of the test for exercise of market power also required that plants attempt to maximize profits. While the researchers were able to estimate cost relationships, they found this was possible only if the assumption about profit maximization was relaxed. That is, relationships within the monthly and weekly data did not support a basic assumption required for use of their methodology; that plants maximized profits within the time period (i.e., weekly) being modeled. Thus, the analysis was unable to determine definitively whether market power is used at a national level to influence prices. The results indicated that different models and methods, different data, or a combination of the two, are necessary to test for the exercise of market power.