IDENTIFYING IMPLICIT COLLUSION UNDER DECLINING OUTPUT DEMAND

Abstract

The trigger oligopoly model is used to develop a test for oligopolistic as well as oligopsonistic conduct by observing how an industry responds to unexpected declines in output demand. The hypothesis that U.S. beef packers maintain cooper- ative pricing strategies is rejected. Baker's empirical trigger oligopoly model is used to develop a test of oligopo- listic as well as oligopsonistic conduct by observing industry's response to unexpected declines in output demand. The basic idea behind the model, introduced earlier by Green and Porter, is that an industry behaving as a cartel will be more competitive after a large unexpected decline in output demand. This behavior is interpreted as a punishment mech- anism practiced by members of a cartel who cannot distinguish between negative demand shocks and rival cheating. This article makes inference about cartel conduct in the U.S. beef packing industry by testing whether the industry's oligopoly markup and oligopsony markdown decrease following large unexpected declines in beef demand. Concern about oligopoly/oligopsony in the beef packing industry has prompted several empirical studies. The change in the structure of the industry, however, occurred in concert with declining demand for red meat, beef in particular. The link between industry oligopoly/oligopsony conduct and beef demand, however, has yet to be explored. Live- cattle supply effects on packer conduct have been the focus of two past studies (Koontz, Garcia, and Hudson; Stiegert, Azzam, and Brorsen). Other studies estimated the size of the oligopsony distortions (Azzam; Azzam and Park; Schroeter; Schroeter and Azzam). Koontz, Garcia, and Hudson's study, which also uses the trigger model, infers the degree of oligopsony power using day-to-day movement in regional beef margins. Packers were assumed to be price takers in the beef market. Koontz, Garcia, and Hudson found beef-packer oligopsony alternated between periods of cooperative and noncoop- erative pricing conduct. Stiegert, Azzam, and Brorsen used national data to study the effect on packer conduct of inadequate cattle supply. Shortfalls in cattle supply induced