Investigating Food and Beverage Industry Market Structure and Market Power Based on Leo and Bresnahan’s Approach

مجله اقتصاد و توسعه کشاورزی

Article 10, Volume 29, Issue 2, July 2015, Pages 204-215   

Document Type: Research Article

DOI: 10.22067/jead2.v0i0.44819

Authors

M.N. Shahikitash; E. Gholipoorbolasi; A. Mohammadzadeh^*

Department of Agricultural Economics, University of Sistan and Baluchestan, Zahedan

Abstract

Introduction: Food processing industries are one of the major industrial groups in developing countries which play an important role in the economic development of these countries. With the Developed and Developing Food Industry on the other hand, food security and providing food are very important in each country.
In an overview, markets are divided into two groups: The first group is a market with perfect competition. And second group is markets with monopoly structure.One of the important features of markets that determine its type is the ability of the firms in the pricing and determiningof the amount of production. If the firms do not have any effect on these two factors, themarket has perfect competition.If the firms have the ability to influence price of productions, this market is non-competitive and a concept called market power emerges.In general, not only market power is the ability of firm in determination of price above the competitive situation, but also it does not let its share of sale to decrease. The existence of collusion in markets can makethem distantfrom perfect competition and make them incomplete. In economics and particularly in industrial organization, market power is the ability of a firm to profitably raise the market price of a good or service over marginal cost. In perfect competitive markets, market participants have no market power. A firm with total market power can raise prices without losing any customers to competitors. Firms that have power to set price are referred to as "price makers" or "price setters", while those without itare sometimes called "price-takers". Significant market power occurs when prices exceed marginal cost and the long run average cost, so the firm makes economic profits. A firm with market power has the ability to individually affect either the total quantity or the prevailing price in the market. Price makers face a downward slopingdemand curve, such that increases in price leads to a lower quantity of demand. The decrease in supply as a result of the exercise of market power creates an economic deadweight loss which is often viewed as socially undesirable. As a result, many countries have anti-trustor other legislation to limit the ability of firms to create market power. Such legislation often regulates mergers and sometimes introduces a judicial power to compel divestiture. A firm usually has market power by virtue of controlling a large portion of the market. In extreme cases—monopoly and monopsony—the firm controls the entire market. However, market size alone is not the only indicator of market power. Highly concentrated markets may be contestable if there are no barriers to entry or exit, limiting the incumbent firm's ability to raise its price above competitive levels.
Market power gives firms the ability to engage in unilateral anti-competitive behavior.[1] Some of the behaviors that firms with market power are accused of engaging in include predatory pricing, product tying, and creation of overcapacity or other barriers to entry. If no individual participant in the market has significant market power, then anti-competitive behavior can take place only through collusion, or the exercise of a group of participants' collective market power. The Lerner index and Herfindahl index may be used to measure market power.
Examination of market power of different industries provides possibility that policymakers design and deliver model for processing food and beverage producers to guide them to the product that has the most social benefits.
Materials and Methods: The main purpose of this study is to assess and identify market structure and market power and estimate coefficient of collusion in the food and beverage industry. Estimates of market power in the food and beverage industry in Iran are few when compared with similar studies overseas. For local studies we can cite papers such as Alijani&Sabuhi (4), Sheikh zeinodin&Bakhshude (3), Safdarhoseiniet all (2), Mazhari&Yazdani. Yet,foreign studies conducted in this area are varied in different sectors. For example, the studies Angelini&cetorell (15) andRezitis (24) in the banking system can be mentioned.Of the other foreign studies Leo (21), Bresnahan (12), Abayasiri (8), Boyle & Hall (14), Saitone& etal. (25), Koontz (20), Duravall (17), Steen (29), Salhofer and etAl. (28), Allender (10), Siton and et al. (25), Rigoberto et all (22), Lopez & etal. (22), Oustapassidis& etal. (23) can be cited. The model in this paper to estimate market power used for the food and beverage industries has been developed by Bresnahan& Leo. In this model,by considering demand and supply market powercan be investigated. In the next step, marginal cost (cost function is Translog cost) and marginal revenue will be obtained. In the final step,by estimatingthe final equation market power can be calculated. The type of industrial classification used in this study is the International Standard Industrial Classification (ISIC). This kind of classification is widely used for empirical studies because of lack of industrial data on the basis of other classifications. We use firm level data aggregated to the4- digit ISIC code of industries. The purpose of this study is to estimate the market structure and market power of the food and drink industry in Iran.For estimating market power, conjectural variation is used. Results and DiscussionIn oligopoly theory, conjectural variation is the belief that one firm has about the way its competitors may react if it varies its output or price. The firm forms a conjecture about the variation in the other firm's output that will accompany any change in its own output. For example, in the classic Cournot model of oligopoly, it is assumed that each firm treats the output of the other firms as given when it chooses its output. This is sometimes called the "Nash conjecture" as it underlies the standard Nash equilibrium concept. However, alternative assumptions can be made. Suppose you have two firms producing the same good, so that the industry price is determined by the combined output of the two firms (think of the water duopoly in Cournot's original 1838 account). Now suppose that each firm has what is called the "Bertrand Conjecture" of −1. This means that if firm A increases its output, it conjectures that firm B will reduce its output to exactly offset firm A's increase, so that the total output and hence price remain unchanged. With the Bertrand Conjecture, the firms act as if they believe that the market price is unaffected by their own output, because each firm believes that the other firm will adjust its output so that total output will be constant. At the other extreme is the Joint-Profit maximizing conjecture of +1. In this case each firm believes that the other firm will imitate exactly any change it makes in output, which leads (with constant marginal cost) to the firms behaving like a single monopoly supplier. The results show that it is significant uncompetitive pattern for 18 of the 19 industries. Existence of oligopoly industry for 12 shows the non-competitiveness of this industry. The flour and cereals production industry has 2.24 degrees of collusion and the tea industry has 2.14 degrees of collusion. Degree of conjectural variation is between 0.43 and 2.24. These numbers are related to carbonated soft drinks industry and production of flour and cereals.
Conclusion: This paper discusses the Market Structure and the Degree of Market Power and Collusion Index of Food and Beverage industry on the basis of Modern Industrial Organization (NEIO) with Bresnahan- Leo (1982) Approach. For this Purpose, data of ISIC Four- Digit Code is used to investigate the 19 industries for the years 2005-2011. The result showsthat competitive conditions for 18 Industriesaresignificant. The degree of Market Power is between 0.43 and 2.24.12.The industry has Oligopolistic Market and Production of Oil and Fat Industry has a Monopoly Market close to perfect. Conjectural Variation for the Industry of Flour and Tea isvery high, with 2.42 and 2.14, respectively. Except malt and alcohol-free beer industry, uncompetitive model is significant for other industries. In summary, industries with a high degree of collusion will include: processing and preserving of fruit, sugar production, bakery, livestock slaughtering and poultry. Industries with a low degree of collusion will include: production of animal and vegetable oils and fats, tea making, producing Malt and alcohol free beer. Industries that follow Cournot Model will include tea making. Industries with coefficient of collusion between 2 and 5 will include: processing and preserving of fish, dairy products, animal feed production and the production of sugar, bakery, bread, pastries, biscuitsand soft drinks. Industries with a competitive model will include date palm sorting.

Keywords

Conjectural elasticity; Industry; Market Power; Oligopoly

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