Analysis of a supply-control program under uncertainty and imperfect competition: Chinese cabbage in Taiwan

Researchers have often attributed the farm–wholesale price spread, after adjusting for marketing costs, as compensation for marketing firms' risk bearing. However, price spreads in excess of marketing costs can also be due to marketing firms' exercise of market power. In settings where both imperfect competition and marketer risk aversion are plausible, a modeling framework must be sufficiently general to accommodate both types of behavior. This article develops and estimates such a model in the context of fresh produce marketing and develops the implications for analysis of supply‐control programs. The model is applied to the production and marketing of Chinese cabbage in Taiwan and specifically to the analysis of supply‐control programs implemented in this industry by the Taiwanese government. The empirical results provide little support for the hypothesis that marketing firms exhibit risk averse behavior, but they do show that marketing firms exercise oligopsony power in procurement of the product from farmers, and that this power is positively related to the quantity supplied in each market period. This provides a heretofore unexplored impetus for supply controls intended to raise producer incomes. However, such controls are also rendered less effective by imperfect competition because marketing firms capture part of the benefits from supply reduction.     

Distinguishing the Source of Market Power

Structural models used to measure market power, though widely employed, continue to be criticized. We compare alternative market power tests, including nonparametric and Solow residual-based (SRB) tests. We develop SRB methods that permit nested testing for both monopolistic and monopsonistic market power by the same firm. These tests and a set of nonparametric tests are implemented to examine market power exertion by U.S. cigarette manufacturers from 1977 to 1993. All tests indicate that cigarette manufacturers exerted monopsonistic power in the upstream tobacco market. They are mixed on whether monopolistic power exertion was exerted in the downstream market.     

Time‐varying Hedge Ratios: A Principal‐agent Approach

We use the classic agency model to derive a time‐varying optimal hedge ratio for low‐frequency time‐series data: the type of data used by crop farmers when deciding about production and about their hedging strategy. Rooted in the classic agency framework, the proposed hedge ratio reflects the context of both the crop farmer's decision and the crop farmer's contractual relationships in the marketing channel. An empirical illustration of the Dutch ware potato sector and its futures market in Amsterdam over the period 1971–2003 reveals that the time‐varying optimal hedge ratio decreased from 0.34 in 1971 to 0.24 in 2003. The hedging effectiveness, according to this ratio, is 39%. These estimates conform better with farmers’ interest in using futures contracts for hedging purposes than the much higher estimates obtained when price risk minimisation is the only objective considered.     

Farmers’ Willingness to Pay for a Tuberculosis Cattle Vaccine

We use contingent valuation (CV) and choice experiment (CE) methods to assess cattle farmers’ attitudes to and willingness to pay (WTP) for a bovine tuberculosis (bTB) cattle vaccine, to help inform vaccine development and policy. A survey questionnaire was administered by means of telephone interviews to a stratified sample of 300 cattle farmers in annually bTB‐tested areas in England and Wales. Farmers felt that bTB was a major risk for the cattle industry and that there was a high risk of their cattle getting the disease. The CE estimate produced a mean WTP of £35 per animal per single dose for a vaccine that is 90% effective at reducing the risk of a bTB breakdown and an estimated £55 for such a vaccine backed by 100% insurance of loss if a breakdown should occur. The CV estimate produced a mean WTP of nearly £17 per dose/per animal/per year for a vaccine (including 100% insurance) which, given the average lifespan of cattle, is comparable to the CE estimate. These WTP estimates are substantially higher than the expected cost of a vaccine which suggests that farmers in high risk bTB ‘hotspot’ areas perceive a substantial net benefit from buying the vaccine.     

The role of health,experience, and educational attainment in agricultural production: Evidence from smallholders in Burkina Faso

We apply parametric and nonparametric methods to data from smallholders in Burkina Faso and assess the role that human capital characteristics play in the agricultural production process. Our results point to the technology‐changing nature of health, education, and experience. However, effects are rather heterogeneous. The productivity elasticity of health is much larger for households in the lowest landholding quintiles, while returns to experience are larger for households in the upper quintile. In terms of policy implications, our results suggest that productivity can be stimulated through the allocation of expenditure to social services that enhance certain types of human capital. Interventions aimed at improving the health status of households with smaller landholdings could have particularly strong welfare effects.     

Raising offtake from cattle grazed on natural rangelands in sub-Saharan Africa: a transaction cost economics approach

Farmers in sub‐Saharan Africa are constrained by large transaction costs associated with marketing of their livestock. However, transaction costs are often not taken into account in the analysis of factors hampering the development of livestock marketing in this region. This article empirically measures the influence of transaction costs on the offtake from cattle grazed on natural rangelands in Uganda. The study is based on the monitoring of 696 cattle transactions in three districts of Uganda from August 2004 to August 2005. The estimated models suggest that proportional transaction costs represented by the state of roads, distance to markets, and time taken to reach the market are important variables constraining market participation. In order to raise offtake from the national herd, it is essential to explicitly address these costs. One potential solution is collective action in marketing of livestock in which proportional and fixed transaction costs are reduced and shared among the group members.     

An equilibrium displacement approach to oligopoly market analysis: an application to trade in the Korean infant formula market

This article uses an equilibrium displacement model (EDM) to assess the impact of a change in trade policy in the Korean infant formula market that is assumed to be oligopolistic. Domestic oligopolists compete in a market for a homogenous good with importing firms who enjoy the same level of market power as the domestic producers. Within an EDM framework, we investigate how the market adjusts to a new equilibrium in response to an external policy shock that improves access to foreign goods. Our empirical work consists of two steps. We first econometrically estimate the market demand elasticity and market power parameter. Then, using these estimates, we simulate our EDM model to assess the distributional effects of tariff cuts and other changes in marginal cost. Simulation results show that, with a lower market price and increased consumption, the change in consumer surplus resulting from tariff reduction is unambiguously positive, but that the change in social welfare can be in either direction, depending on who receives market rents associated with imports. When importing firms are domestic, the domestic welfare change is definitely positive. However, in the case of foreign importing firms, the direction of the welfare change crucially depends on the demand elasticity.     

Technical efficiency of Kansas arable crop farms: a local maximum likelihood approach

This study uses local maximum likelihood (LML) methods recently proposed by Kumbhakar et al. (2007) to assess the technical efficiency of arable crop Kansas farms. LML techniques overcome the most relevant limitations associated to mainstream parametric stochastic and nonparametric frontier models. LML allows deriving farm‐level frontier parameter estimates. The relevance of using localized estimates is evidenced by the observed heterogeneity in production technologies. Technical efficiency scores derived from the LML approach [0.905] are higher than those of the DEA model under CRS [0.808] and SFA [0.804] and close to DEA‐VRS [0.917] ratings. Deriving reliable information about farm efficiency performance is relevant to identify inefficient farms and define adequate policy and management strategies. The use of refined methods has thus important implications.     

Estimating product‐specific and multiproduct economies of scale with data envelopment analysis

Nonparametric cost frontier estimation and subsequent analysis of the relative efficiency of firms has historically been conducted without critically examining the shape of the cost frontier. The shape of the cost frontier has been examined using additional parametric estimation methods to recover potential cost savings from multiproduct and product‐specific economies of scale. This paper presents and tests an approach to estimate multiproduct and product‐specific economies of scale using data envelopment analysis. Data for the study are simulated assuming an underlying production technology. Nonparametric estimates of efficiency, multiproduct scale, product specific scale, and scope economies are compared to those of the assumed production technology. Results show that the nonparametric approach accurately estimates multiproduct economies of scale and product‐specific economies of scale under alternative inefficiency distributional assumptions.     

Testing for Processor Market Power in the Markets for Cattle and Hogs in Canada

Deviations of livestock input prices from processor marginal value product are usually interpreted as an indication of the application of market power by the meat packing industry. However, market power depends on economic conditions that can influence the behavior of meat packers in the market for cattle and hogs. An industry-level translog profit function is applied to data on the Canadian finished cattle and hog markets and industry-wide oligopsony market power functions are estimated. The estimates suggest beef packers exercised a small but sustained amount of market power in the Canadian finished cattle market from 1978 to 1997. This is not the case in the market for hogs, which was competitive from 1960 to 1997. Application of market power in packers'purchases of farm animals decreased with increases in the utilization of domestic supply of slaughter animals and with increased levels of livestock exports. Livestock productivity increases appear to have significantly enhanced oligopsony power in packers'purchases of farm animals. The analysis suggests that beef processors may exert market power when cattle prices are relatively higher.     

Managing economic risk in value-based marketing of fed cattle

This research investigates optimal price risk management strategies for fed cattle producers engaged in grid pricing. Stochastic simulation is used to determine optimal hedge ratios for fed cattle priced on a live weight basis or on a series of grids that vary in terms of premium/discount structure as well as base price. Results indicate that the optimal hedging strategy is greatly affected by the base price used in a particular grid. This has significant implications for pricing efficiency in the cattle market. Base prices that are linked more closely with downstream markets offer the potential to improve pricing efficiency; however, the risk associated with these prices is difficult to manage effectively with existing futures instruments.     

Estimating Market Power by Retailers in a Dynamic Framework: the Italian PDO Cheese Market

In this article, we evaluate the role of market power by retailers within the supply chain of Parmigiano Reggiano (PR) and Grana Padano (GP), the two most famous Italian quality cheeses. Market power is analysed in the context of a dynamic imperfect competition model of the supply chain, in which retailers are allowed to exert market power both downstream and upstream. We jointly estimate market‐power parameters together with supply and demand elasticities, by means of a structural system of demand, supply and price‐transmission equations, estimated using the generalised method of moments. We find evidence of downstream market power by retailers (toward final consumers) for PR and GP, but no evidence of upstream market power (toward processors/ripeners). These results may be explained by the structure of the supply chain and by the peculiar characteristics of the two cheeses.     

Revisiting the determinants of futures contracts success: the role of market participants

The Chicago Mercantile Exchange introduced a futures contract for distillers’ dried grains (DDGs) in early 2010, but the market became inactive only four months after its inception. While many new futures contracts do not develop into high‐volume traders, interest from DDG cash market participants indicated that this contract could be successful. Prompted by the unexpected lack of trading activity in this new futures market, we empirically revisit the question of what factors contribute to a futures contract's success and extend the literature by investigating the roles of market participants and the significance of supporting futures markets. Estimation results indicate that the market participant type—hedger or speculator—affects futures contract trade volume. More importantly, we find that the viability of new futures contracts for commodities that are jointly produced with other commodities is impacted by hedgers’ trade volume of the related futures contract. These results provide important additions into the portfolio of indicators used by commodity exchanges to more cost‐effectively evaluate new futures contract products.     

Economic Loss Due to Reputation Damage: A New Model and Its Application to Fukushima Peaches

Consumers have responded negatively to agricultural products originating from the Fukushima prefecture after the 2011 Fukushima Daiichi nuclear power plant incident. These consumers’ behavioural changes have caused substantial economic losses for the producers located in contaminated regions through reductions in market prices, consumption quantities and market shares. Remarkably, these losses are observed also for uncontaminated products, posing an opportunity for research in reputation damage. However, existing literature is very rare on empirical modeling of such losses. We utilise the Dixit–Stiglitz demand framework to derive a simple but efficient empirical model that uses market data to quantify reputation damage. This model estimates changes in the perceived quality of a product originating in contaminated regions in relation to those products originating from other competing regions. The model also measures subsequent loss in market share for those products grown in contaminated regions. In our application to Fukushima, results suggest that consumers’ valuation of peaches from Fukushima decreased dramatically (between 22.5% and 23.6%) in the year the nuclear accident occurred, but rapidly recovered in the following years. The results also show that the degree of impact varies across wholesale markets. Fukushima farmers lost about 13.1–18.9% of sales due to reputation damage. Estimates from our proposed models deliver meaningful information in the context of policy interventions such as transfer programmes financed by gainers to compensate reputation losses.     

Estimating returns to soil conservation adoption in the northern Ethiopian highlands

Land degradation in the form of soil erosion and nutrient depletion presents a threat to food security and sustainability of agricultural production in many developing countries. Governments and development agencies have invested substantial resources to promote soil conservation practices as part of an effort to improve environmental conditions and reduce poverty. However, limited rigorous empirical work has been done on the economics of soil conservation technology adoption. This article investigates the impact of stone bunds on value of crop production per hectare in low and high rainfall areas of the Ethiopian highlands using cross-sectional data from more than 900 households, with multiple plots per household. We have used modified random effects models, stochastic dominance analysis (SDA), and matching methods to ensure robustness. The parametric regression and SDA estimates are based on matched observations obtained from the nearest neighbor matching using propensity score estimates. This is important, because conventional regression and SDA estimates are obtained without ensuring that there actually exist comparable conserved and nonconserved plots on the distribution of covariates. We use matching methods, random effects, and Mundlak's approach to control selection and endogeneity bias that may arise due to correlation of unobserved heterogeneity and observed explanatory variables.
We find that the three methods tell a consistent story. Plots with stone bunds are more productive than those without such technologies in semi-arid areas but not in higher rainfall areas, apparently because the moisture conserving benefits of this technology are more beneficial in drier areas. This implies that the performance of stone bunds varies by agro-ecology type, suggesting the need for designing and implementing appropriate site-specific technologies.     

Market Power in Canadian Beef Packing

Concentration levels in Canadian beef packing have increased dramatically over the last two decades, raising concerns about the possible use of market power in cattle procurement markets. This paper uses establishment‐level data to test the hypothesis that Canadian beef packers use oligopsony power to pay lower prices for cattle than those which would prevail in a competitive market. A four‐equation econometric system is estimated using generalized method of moments. No evidence is found that beef packers behaved in an anticompetitive manner on a national basis when procuring cattle during the period examined. This reinforces conclusions reached by previous studies using different data sets and estimation methods. However, given the lack of assurances that the U.S. slaughter market will remain open to Canadian cattle exporters, regulators must remain vigilant in monitoring the procurement practices of beef packers. There is also a need for greater levels of data disaggregation to allow fed and cull cattle procurement markets to be studied separately, perhaps even on a regional basis. Les niveaux de concentration dans l’industrie de l’abattage du b?uf au Canada ont augmenté considérablement au cours des deux dernières décennies, ce qui laisse craindre l’exercice possible de pouvoir de marché sur les marchés d’approvisionnement de bovins. Dans le présent article, nous avons utilisé des données d’entreprises pour vérifier l’hypothèse selon laquelle les entreprises de transformation du b?uf au Canada exerceraient un pouvoir d’oligopsone pour se procurer des bovins à des prix moins élevés que ceux qui prévaudraient dans un marché concurrentiel. Nous avons estimé un système économétrique de quatre équations à l’aide de la méthode des moments généralisés (GMM). Nous n’avons trouvé aucune preuve permettant de croire que les transformateurs de viande de b?uf au Canada se sont comportés de façon anticoncurrentielle lorsqu’ils se sont approvisionnés en bovins durant la période couverte par l’étude. Nos conclusions renforcent celles d’études antérieures réalisées à partir de données et de méthodes d’estimation différentes. Toutefois, compte tenu de l’incertitude quant à l’ouverture de l’industrie étatsunienne de l’abattage aux exportateurs de bovins canadiens, les organismes de réglementation doivent surveiller avec vigilance les pratiques d’achats des transformateurs de b?uf. Il faudrait également effectuer une désagrégation des données plus poussée pour étudier séparément les marchés d’approvisionnement de bovins engraissés et de bovins de réforme, et ce, peut‐être même à l’échelle régionale.     

Market and Cost Structure in the U.S. Beef Packing Industry: A Plant-Level Analysis

A resurgence of consolidation in the U.S. meat packing industry in the past few decades has stimulated academic and policy debate. Issues raised include the role of cost economies in driving these patterns, and the effects on the agricultural sector (cattle producers) from market power. Here, plant level cost and revenue data for U.S. beef packing plants are used to estimate a cost-based model incorporating cattle- and output-market pricing behavior. The robust results indicate little market power exploitation in either the cattle input or beef output markets, and that any apparent evidence is counteracted by cost efficiencies such as utilization and scope economies.     

Technology Adoption and Pest Control Strategies Among UK Cereal Farmers: Evidence from Parametric and Nonparametric Count Data Models

This paper examines the intensity of technology adoption and integrated pest management strategies employed by UK farmers, using both parametric and nonparametric methods. We employ a unique survey dataset collected from UK cereal farmers to assess the determinants of technology adoption in relation to pest management. Our preferred model specification is nonparametric, with models estimated yielding broadly similar results, with some important qualitative differences. All models indicate that total area farmed is positively related to the number of technologies adopted, whereas the number of years of experience of the farmer is negatively related. We also find evidence with our nonparametric specification of significant statistical differences for number of adoptions by region across the UK.     

Determinants of Food Industry Performance: Survey Data and Regressions for Denmark

This paper investigates empirically the determinants of firms’ performance in the agri‐food sector by using recent survey data for Denmark. Treating sales per employee as a proxy for value added, we estimate several bootstrapped regression models to draw conclusions on the marginal effects of potential performance determinants such as the form and nature of ownership, stage of the food chain and commodity sector, new product development, staff quality, firms’ competitive stance, and elements of firms’ strategy. To draw robust inferences we apply, besides the ordinary heteroscedasticity‐corrected Tobit maximum likelihood estimator, a non‐parametric least absolute deviations estimator (LAD/CLAD) based on a quantile regression procedure. The results indicate that we cannot reject the hypothesis of no influence of dominant orientation on value added. Rather, firms’ focus on human capital, stage and commodity sector better explains their value addition. We reject the hypothesis that regional networks have no influence on value added. Location in Århus, emphasis on human capital and the negative influence of outsourcing on value added all provide supporting evidence. We reject the hypothesis of no influence of foreign direct investment (FDI), and moreover propose that FDI has targeted the Danish domestic market as a source of value added.     

Do subsidies cause a less competitive milk market in China?

After 2008, China dairy industry has experienced a consolidation supported by the government mainly for the reason of food safety. Subsidies are one of the tools to shape a concentrated market with goals of reducing regulation cost and accomplishing quality control. This gives a serious concern that subsidies would generate a less competitive dairy industry. We construct a parametric model and use the firm‐level panel data, specifically the top eight dairy firms, to test if government subsidies strengthen the market power in the dairy industry. Our empirical results indicate government subsidies have a negative impact on the Lerner index for the top privately owned 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.