Effects of horizontal consolidation under bilateral imperfect competition between processors and retailers

Abstract

This article considers bilateral imperfect competition between processors and retailers to estimate the trade off between market power and cost efficiency. The model is based on pricing rules from a firm's profit maximization and nests both oligopoly and oligopsony models. An empirical analysis for US beef processors and retailers suggests that processors tend to exercise oligopsony market power in procuring cattle, but they are unlikely to exercise market power on retailers. When retailers and processors are considered as one integrated sector, efficiency effects from the increased concentration in the US beef packing industry are slightly larger than market power effects. When processors’ market power is considered separately from retailers’ market power, the difference between cost saving and market power effects becomes greater. The cost elasticity estimate, 0.99, indicates that a further merger would result in little economies of scale in the future. Therefore, although we find that efficiency effects are currently larger than market power effects, a further increase in concentration in the US beef processing industry could narrow the gap between the two effects.