Investigation of Vertical and Horizontal Competition in Market Structure Measurement: A Case Study of the Dairy Industry in Iran

مجله اقتصاد و توسعه کشاورزی

Article 4, Volume 32, Issue 3 - Serial Number 41, October 2018, Pages 237-246   

Document Type: Research Article

DOI: 10.22067/jead2.v32i3.71718

Authors

Z. Shokoohi^{* 1}; A.H. Chizari²; M. Amiri³

¹Shiraz University

²agriculture economics university of Tehran

³Hormozgan university

Abstract

Introduction: Economic theories and empirical results show that the economic performance and the resulting social welfare are influenced by the market mechanism, and the gap of the market structure from the competitive market implies the failure of the market and in this situation allocation of resources will be inefficient. In other words, there is a causal relationship between the existence of market power and the lost prosperity of the economy. Thus, the market structure affects market incentives and decision making process on market outcomes. Also, the analysis of the situation of market competition can affect the process of adopting supportive policies and its results. In market structure studies, economists have traditionally defined industry horizontally i.e. by including firms that make similar products. While non-competitive behavior in the market is not necessarily related to horizontal behavior and the horizontal structure only represents just a part of the market power. In fact what is known as market power is the result of combination of the vertical and horizontal competition in different levels of the markets.
Milk is one of the agricultural products that more than 70 percent of it goes into the processing industry. The average per capita consumption of milk in Iran is about 90 kg, while the average global consumption is 156 kg and in the European countries is 300 kg. Also, the statistics of dairy factories collected by the Statistical Center of Iran show that between 2004 and 2011 more than 65% of the total amount of raw milk was absorbed by less than 10% of dairy factories. This is a sign of the high concentration of this industry. Meanwhile, the industry is facing a large number of dairy consumers to sell its products with their average per capita consumption in the country much lower than that recommended by the World Health Organization. However, increasing concentration in this industry can affect the bargaining power of the processors and the formation of the price of dairy products. Therefore, the purpose of this study is evaluation of the horizontal and vertical market structure in dairy products market including pasteurized milk, yogurt and cheese.
Materials and Methods: In order to investigate the vertical structure of the market, based on the formation of the price of dairy products, a bilateral monopoly bargaining pattern with axiomatic approach was used. In estimation of the bargaining model we applied EM algorithm to overcome the hidden supply reservation price. The horizontal structure of the market was also evaluated using the Lerner index. Its needed to be explained that the statistics and information required for this study including the production of dairy products, pasteurized milk, yogurt and cheese, the amount and value of consumable inputs including labor, raw milk, milk powder, inventory of capital goods, cost of depreciation, The cost of maintenance and packaging costs for a number of dairy enterprises were collected from the Iranian Statistics Center during the period 1990-2012.
Results and Discussion: the results of this study showed that the horizontal structure of the market for these three products was far from competitive and Producers are able to raise the price of these products above the marginal cost. However, the value of Lerner index in the study period has been decreasing with many fluctuations and this meant improving the competition in the studied years. Also, the results of the bargaining model demonstrated that the bargaining power of processors in pricing these products are more than consumers. Somehow, in average about 70% of dairy trade gains owned by processors and 30% of that is the consumers' share. In all three products, in addition to the price of raw milk, the price of capital input and packaging play a significant role in the agreed price change of dairy products, especially pasteurized milk. So one percent reduction in the price of capital input with current conditions, leads to a decrease in prices of milk, cheese and yoghurt by 0.33, 0.13 and 0.15 percent, respectively.
Conclusions: The results indicate that 70 percent of the welfare loss of the manufacturer is passed on to the consumer as a result of higher costs while only 30 percent increase in welfare as a result of cost reduction Will be given to consumers. As a result, the negotiations on the price formation of these products have been in a way that the government has diverted from its basic goal. The reason for this would be the coincidence of the duties of the government organization responsible for pricing law, consumer protection and producer protection. Therefore, it is necessary to examine the formation of independent governmental or non-governmental organizations in support of consumers and to study the appropriate ways to operate existing laws in order to support consumers.

Keywords

vertical and horizontal market structure; dairy products; bargaining model; Lerner index

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