Strategic Trade Policies in the U.S. Orange Juice Market: Competition between Florida and São Paulo

Abstract

The U.S. frozen concentrated orange juice (FCOJ) market is dominated by a small number of processors in Florida and Sao Paulo (Brazil), while the European FCOJ market is dominated by Sao Paulo FCOJ processors. Both the U.S. and European governments impose a tariff on FCOJ imports. We develop a strategic trade model to analyze the oligopolistic competition between Florida and Sao Paulo processors in the U.S. FCOJ market and Sao Paulo processors in the European FCOJ market. We analyze the effect of a change in the U.S. and European tariff on FCOJ sales and welfare. The analytical results show that a reduction in the U.S. tariff increases Sao Paulo's exports to the United States while decreasing their exports to Europe, which causes a decrease in Florida's sales in the United States. The results of a reduction in the European tariff indicate that Sao Paulo diverts its exports from the United Sates to Europe, which augments Florida's sales in the United States. Based on the strategic trade model, the structural empirical model is derived and the New Empirical Industrial Organization literature is implemented to estimate the econometric model and compute the market power of Florida and Sao Paulo producers. The Lerner Index calculation suggests that both Florida and Sao Paulo processors exert market power, but Sao Paulo have a higher markup over their marginal costs because of lower input costs. The parameterized model is used to simulate a 25% reduction in both the U.S. and European tariffs. A 25% reduction in the U.S. tariff results in an 8% decrease in Florida's market share and a 27% increase in Sao Paulo's market share in the U.S. FCOJ market. While a 25% reduction in the European tariff causes Florida's U.S. market share to increase by 2% and Sao Paulo's U.S. market share to reduce by 6%. The simulation results are consistent with the analytical results.