Estimation of the U.S. Import Demand Elasticity for Beef: The Importance of Disaggregation

Abstract

Given that the United States is the largest beef importer, accurate estimates of U.S. own-price import demand elasticities for beef are critical for evaluating the effects of trade liberalization on both beef producers and consumers. This article presents estimates of short-run and long-run own-price import demand elasticities for an aggregate beef commodity and compares them to estimates for two disaggregated beef products: ground beef and table-cut beef. In addition, an elasticity of price transmission is estimated as a measure of the degree of price insulation offered by current U.S. trade barriers. Finally, the sensitivity of own-price import demand elasticity estimates to potential changes in import market shares is evaluated. Import demand elasticity estimates are derived from an excess demand model that explicitly considers the underlying structure of the U.S. demand for and supply of beef. Domestic own-price elasticities of demand for beef, ground beef, and table-cut beef are estimated using Rotterdam models with annual data from 1962 to 1993. Own-price elasticities of supply are estimated from partial adjustment models using annual data for the same period. Estimates of short-run (-18.89) and long run (-47.75) U.S. own-price import demand elasticities for an aggregate beef commodity are quite elastic. Short-run and long-run own-price import demand elasticity estimates for ground beef are -10.52 and -14.72, respectively. Short-run and long-run own-price import demand elasticity estimates for table-cut beef are -40.80 and -54.50, respectively. The magnitudes of the elasticity estimates are consistent with near price-taking behavior of an importer whose actions only marginally affect world prices. Thus, small reductions in U.S. beef prices would cause relatively large increases in the quantity of beef imported in the absence of trade restrictions