Estimating market power in the Chinese pork-packing industry: a structural approach

Abstract

PurposeThe purpose of this paper is to investigate market power in the Chinese pork supply chain. The authors aim to explain why a steady rise in prices is observed in the sector, apart from existing evidence on incomplete/asymmetric cost pass-through and concerns of growing concentration and consolidation in the sector.Design/methodology/approachThis study uses a new empirical industrial organization model for both oligopoly and oligopsony power to measure the degree of market power exerted on consumers and hog farmers simultaneously.FindingsBy examining annual panel data across provinces in China, the authors find that both oligopoly and oligopsony powers exist in the pork supply chain. In particular, the authors determine that a higher degree of market power is found to influence prices paid to hog farmers than prices paid by pork consumers. Estimates of key elasticities in the Chinese pork supply chain are also updated based on the structural model estimation and the latest data.Research limitations/implicationsDue to the lack of data at a more granular level of geography, the authors are only able to estimate market power by three major economic regions.Practical implicationsThe findings provide useful information for future policy analyses of Chinese food markets. First, the pork-packing industry should be of great concern in terms of market power and its influence on consumers’ and farmers’ welfare. It is essential to take into consideration market power in the pork supply chain before making any public policy regarding the pork market. Furthermore, following economic theory and experience from developed countries, large meat packers will eventually vertically control hog farmers given their stronger oligopsony power over the upstream. Vertical integration may be the next important issue in terms of food market competition. Finally, the results may also draw the government’s attention to investigating market competition in all major food markets.Originality/valueThe empirical evidence draws attention to the issue of food market competition in one of the largest and most important meat-packing markets in China. The authors hope to encourage further discussions on pork and hog market regulations and related public policies.