Regime switching and oligopsony power: the case of U.S. beef processing

In this article, we estimate a model of oligopsony behavior under imperfect monitoring of rival actions to analyze weekly marketing margin data for the U.S. beef packing industry. Oligopsonists are hypothesized to follow a discontinuous pricing strategy in equilibrium, and we focus on shocks in the normal throughput of supply as a potential catalyst for regime switching between cooperative and noncooperative phases. We adopt an algorithm developed by Bellone (2005) that relies on Hamilton’s (1989) multivariate first‐order Markov process to test for the cooperative/noncooperative switching behavior. We find strong evidence that links switching conduct by packers to disruptions in coordinating the derived demands for processed beef with the supply of live cattle. Once switched, cooperative regimes lasted an average of 21 weeks, while noncooperative regimes averaged 33 weeks. The average marketing margin for processed beef was 68% lower in the noncooperative regimes compared to the cooperative regimes. This led to an annual average increase in profits of 408 million dollars to the beef packing industry and about an 8–9% reduction in live cattle prices.