Estimating Market Power Exertion in the U.S. Beef Packing Industry: An Illustration of Data Aggregation Bias Using Simulated Data

Abstract

This study investigates data aggregation bias in estimating market power in the U.S. beef packing industry using New Empirical Industrial Organization (NEIO) models and shows empirical procedures that can alleviate the bias. Unlike many earlier studies in estimating market power exertion, our study examines the data aggregation bias when market-level data are used in place of firm-level data and show how the bias could be reduced. We first derive data aggregation bias analytically, then empirically investigate the aggregation bias by estimating both firm and aggregate industry models. Because the firm-level data are not available, we use simulated data generated from the Monte Carlo simulation method. Hybrid models, combining limited firm-level data with aggregate data, are also estimated to illustrate how the aggregation bias could be reduced. Our results show that aggregate models with industry-level data tend to underestimate market power exertion in the U.S. beef packing industry, and the aggregation bias is statistically significant at the 1% level. Comparing results from hybrid models with firm-level estimates, we find that hybrid models reduce the bias but do not remove the aggregation bias significantly. The sensitivity analysis shows that market power estimate and aggregation bias are sensitive to functional forms.