Industrial Policy, Market Structure, and Market Power in Agribusinesses of China

Abstract

The Chinese agri-food industry is evolving into an imperfectly competitive market in our observation. The issue deserves more attention from the policymakers since any negligible departure from the perfectly competitive market in agriculture would generate enormous extra profits for firms and welfare loss for the society. This consequence is determined by the agricultural industry’s natures of small price elasticity of demand and frequent consumption behaviors. Therefore, ignoring imperfect competition in the marketing sector may result in erroneous government implements and policy recommendations. The objective of this dissertation is to better understand the roles of industrial policies on market structure and market power in the agribusiness of China. To measure the impact of policy intervening on the competitiveness of the agricultural industry, we choose to estimate two important policy tools: (1) centralized slaughtering policy and (2) subsidies. These two policies are typical representatives of government regulations and industrial support policies, respectively. The sampled industries involved in my dissertation are the (1) hog slaughtering industry and (2) fluid milk industry. They share some similar characteristics, such as sheer-size production and consumption, concentrated market structure, and daily-essential livestock products. But the difference should be noted as well between which the hog slaughtering industry mainly produces homogenous products, while the fluid market industry is strong product differentiated. Our results indicate that (1) the centralized slaughtering policy cause sizable and significant market power (about 0.5% price margin) for the slaughtering industry in the pork supply chain, mainly due to high barriers of entry and stringent license regulations which reduce competition in the market. The total markup profits for the slaughtering industry reaches 1.85 billion yuan just in 2016. (2) Government dairy subsidies have a negative impact on the Lerner Index for the top privately-controlled firms, but no significant effect on state-controlled ones after controlling for advertising, time trend, and proprietorship. It is possible that the subsidies give more room for private firms to increase the scale or suppress the price, which eventually reduces the market power and benefits dairy customers in the downstream. (3) The imported fluid milk owns a significant Lerner index (0.79), but its markup value is much smaller than that of the Chinese domestic competitors. It is possible that the brand loyalty of the consumers promotes the market power of the quality-guaranteed imported products from overseas. However, limited access to imported fluid milk and marginal sales reduce the imported’s extra profits. The originality of our thesis is to build up the bridge between the policy implements with the reality of the imperfectly competitive agricultural market in China. Our work indicates that industrial policy should be prudent and well-advised since it might promote a less competitive market with higher markup profits, which eventually would lead to more welfare loss.