Market power in the United States red meatpacking industry

The basic question asked in the beginning of this article was whether the evidence from research is persuasive enough to conclude that competition in the meatpacking industry is deficient. The literature review led to the conclusion that the answer is no. Research varies widely in terms of data and methodologic approaches. The research, however, clearly finds evidence of market power. Many SCP studies indicated the existence and exercise of market power, but the failure of the paradigm makes definitive conclusions dangerous. The NEIO studies showed a persistent gap between the price of livestock and marginal costs but the studies did not incorporate sufficient detail to prove specific behavior. Azzam and Anderson [4] conducted an extensive review of competition in meatpacking. In their summary, they offered criticisms of the SCP approach and the conduct parameter approach. These investigators concluded that the body of empiric evidence was insufficient to persuasively argue that the meatpacking industry was not competitive. Sexton [69] discussed more recent critiques of the conduct parameter appraoch. Despite its weaknesses, he concluded that market power estimates in meatpacking are modest but that structural changes on balance are beneficial, from an efficiency viewpoint. Examining the evidence either by data aggregation, methodology, or time period results in little difference in the qualitative interpretation. The research community has done what Nicholls [2] said was needed. The need remains relevant. The research leaves us with a clear picture and nagging questions. Azzam and Anderson [4] recommended that further research focus on the process of competition or the rivalrous interaction between competitors, and on competitors' strategies for responding to technologic and market forces, as the business history of the industry suggests. Specifically, they recommended two approaches. First, to develop empiric pricing models for short-term monitoring. Such models infer conduct from spatial price linkages rather than from concentration as do SCP studies or estimation of conduct parameters as do NEIO studies. Second, to study the dynamics of the competitive process, making use of data describing changes at the firm and plant level, to better understand the effect of market and technologic forces on the evolution of firm behavior and industry structure. After discussing existing research quality and future research needs, two practical things remain to do. The first centers on the following question: How important are the relatively small measures of market power? Most believable price distortions are found to be 3% or less. These distortions are below the 5% regulatory standards related to mergers used by the US Department of Justice and US Federal Trade Commission [70]. These standards, however, are guidelines and not law. Antitrust laws state that the exercise of market power is illegal. Courts and regulatory agencies also have not defined how much market power is significant and for how long a firm or firms must maintain significant market power [71]. From the viewpoint of public welfare, small impacts on price make a substantial difference to livestock producers and rival meatpacking firms. In relatively low-profit commodity businesses, small degrees of market power have significant profit implications. Small price or percentage impacts represent large total dollar amounts, especially over long time periods. To some, the evidence of market power provides clear reasons for antitrust lawsuits, conclusive evidence of weak and disinterested antitrust enforcement, and undeniable grounds for corrective legislation. If we conclude that action is needed, then the second issue emerges: What should be done and will our actions result in a net improvement? The research reviewed in the article by MacDonald elsewhere in this issue clearly shows the economic benefits of large meat processing firms. Likewise, some of the research reviewed here shows that increased concentration benefits producers and consumers. Some of the benefits of lower costs are passed on to producers through improved prices. The clear problems seen in the 1910s and 1920s--the pools and trusts--are not present in the 1990s and 2000s. Legislative action requiring the restructuring of the meatpacking industry or limiting behavior (similar to the Packer Consent Decree of 1920) will come at a large cost to the industry and society. So what should be done? Some people want to do nothing and allow the market to function unencumbered by political action. This approach ignores the problems seen in research. Some people want to go back in time, forgetting the economic incentives for change. They would legislate change in the market structure where they perceive problems, break up large meatpacking firms, restrict supposed problematic conduct, and eliminate contracting and vertical integration. Some people want to treat agriculture as a unique sector of society and create laws and regulations applicable to agriculture alone, regardless of whether the issues driving these actions apply to other sectors of the economy. Little, if any, thought is given to public and private costs or public and private benefits. Structural changes are clear. Research findings on the impacts and consequences are robust. What should be done, however, is not clear or robust. We are in the realm of second-best choices. The fact that we are in a realm of second-best choices is not satisfying to me nor will it likely be to agricultural producers and policy makers. What to do from here is not an economic decision (i.e., economics cannot provide a clear best answer). Rather, it is a political and public choice question that has economic implications: What do we want our livestock and meat industry to look like?