Emilio Pagoulatos

What determines the elasticity of industry demand

This paper develops estimates of price elasticity of demand for a sample of U.S. food and tobacco manufacturing industries and tests a model explaining differences in interindustry elasticity. The empirical results are consistent with the hypothesis that demand elasticity is in part determined by the competitive behavior of firms in an industry. In particular, high advertising expenditures result in lower elasticities of demand. Other important variables influencing demand elasticity are industry concentration, the stage of production, the existence of protection from domestic and foreign entry, and the extent of new-product introduction in a particular market.

Rent seeking and the welfare cost of trade barriers

This paper estimates the potential social cost of trade barriers using the Harberger and the Tullock/Posner approaches for a sample of U.S. food and tobacco manufacturing industries. In addition, it tests the relationship between the computed welfare losses and special-interest political activity (PAC contributions). If all rents were dissipated through rent seeking, the social cost of trade barriers would be about 12.5 percent of domestic consumption and would be particularly large for sugar and milk products where quotas are the main instrument of protection. Furthermore, the results indicate that welfare losses are positively associated with industry lobbying but the strength of such association is strongly dependent on industry concentration.

The Cyclical Behavior of Price Elasticity of Demand

The mark-up of price above marginal cost can vary either procyclically or countercyclically across the business cycle depending upon competitive variations among industries, the nature of aggregate demand growth, international trade, market elasticities, and other factors. The influence of the business cycle and changes in industry growth on market elasticities can, in turn, impact market performance via the inverse relationship of market elasticity of demand to price-cost margin. This paper provides evidence on the cyclical behavior of domestic price elasticity of demand for a panel of 38, four-digit U.S. food manufacturing industries from 1972 to 1987. This is a sector that has been found in earlier studies to exhibit countercyclical price-cost margins over this period. Recent theoretical work on business cycles under imperfect competition suggests that one reason for countercyclical profit margins is that elasticities of demand may become less elastic during recessions. Estimates of price elasticities of demand are used as the dependent variable in a regression model examining the influence of the business cycle and other variables on demand elasticity.

A Model of Weekly Price Discovery for Florida Celery

Considerable attention has recently been paid (Rhodes, Tomek and Robinson) to the various alternative mechanisms for discovering prices of agricultural products. Alternative mechanisms include organized markets and auctions, individual price negotiations, group bargaining, supply-demand estimation pricing, and formula pricing. One such price discovery mechanism is currently employed by the Florida Celery Exchange, a voluntary marketing cooperative which represents all major Florida celery producers in setting prices. The role and performance of the Exchange in influencing weekly Florida celery harvesting and pricing decisions are of particular interest because the Exchanges price-fixing activities represent, at least a priori, a departure from the traditional competitive price determination process. (This abstract was borrowed from another version of this item.)

Estimates and Determinants of Armington Elasticities for the U.S. Food Industry

This paper provides estimates of elasticities of substitution between domestic and imported goods for 40 4-digit S.I.C. food manufacturing industries and explains the inter-industry differences among these coefficients in terms of industry sectoral characteristics. The results show that there is a wide range of variation among such elasticities and that the intensity of each industry’s percentage of output sold to final consumers, foreign direct investment, expenditures on advertising and the existence of import quotas affect the degree of substitutability between domestic and foreign goods in the face of a relative price change.

Vertical Relationships: Economic Theory and Empirical Evidence

The purpose of this paper is to provide a brief summary of recent developments in the theory, empirical evidence, and policy implications of vertical relationships, including both vertical integration and vertical restraints2. Vertical relationships are basically the business arrangements between buyers and sellers. These relationships are often said to be between “upstream” parties, such as the original producer of a good, and “downstream” final users or distributors.

Multinational Structures and Strategies of U.S. Food Firms: Policy Implications

The paper by Handy and MacDonald presents evidence on the internationalization of the U.S. food-processing industry. It also makes references to the recent trend toward global multinational food firms in Europe, Canada, Japan, and the United States, all competing via direct investment, licensing arrangements, or brand differentiation in one anothers markets. Handy and MacDonalds information on U.S. food manufacturing indicates the following points. (a) Foreign direct investment (and licensing in the case of breweries and soft drink firms) has been the preferred mode of international expansion rather than exploring export opportunities. These straegies are attributed by Handy and MacDonald to the roles of research and development and advertising as proxies of technological progressiveness and product differentiation respectively. (b) A substantial portion of trade by these firms represents intrafirm trade with their foreign affiliates. (c) Foreign direct investment in food processing has now become two-way, with not only U.S. firms investing abroad but increasingly, foreign firms investing in the U.S. market. While the Handy and MacDonald paper provides a useful addition to the scant literature on the global food-processing industry, our knowledge to date is too limited to derive any policy recommendations. I will therefore concentrate my remarks on some recent developments in trade theory that may shed some light on policy and provide a guidance to future research in this area.

The Latin American Debt Burden: Consequences for International Adjustment and Agricultural Trade

This paper attributes the origins of the Latin American external debt problem to the oil price and real interest rate increases and debtor country and international bank policies. Next, it briefly examines the implications of economic adjustments to service the debt. Finally, in order to facilitate research on the linkages between debt and agricultural trade, the paper suggests some factors to consider in modeling import behavior and international borrowing.

Public Policy, the Exchange Rate, and Agricultural Exports: Discussion

During the past twelve years, the volatile behavior of exchange rates has occupied the attention of economic policy makers because exchange rates directly influence such important economic phenomena as inflation, interest rates, and international competitiveness. In todays highly integrated world economic system, exchange rates are particularly important to export-oriented sectors like U.S. agriculture. In spite of the potential significance of exchange rate changes to U.S. agricultural trade, the agricultural economics profession has begun rather slowly to investigate and empirically test some basic hypotheses relating to flexible exchange rates and agricultural trade. The three papers presented in this session discuss several aspects of the exchange rateagricultural trade relationship. The Batten and Belongia paper is an empirical study of the role real exchange rates play in affecting agricultural exports and of the factors that explain real exchange rates. Their empirical analysis consists of an estimated U.S. agricultural export equation where foreign real income, U.S. real agricultural prices, and the real trade-weighted exchange rate are the explanatory variables. Next, the authors present an equation that utilizes the real interest rate differential and the cumulative current account balance as the basic determinants of the real exchange rate of the dollar.

Internationalization and Competition in the Food Industry

This paper examines the relationship between price-cost margins, foreign trade, domestic market structure, and the business cycle for a panel of 43 U.S. food manufacturing industries from 1972 to 1987. Our empirical findings support the negative influence of price elasticity of domestic demand and the positive influence of seller concentration on price-cost margins in the industry. International trade significantly influenced margins; a positive relationship between import share and margins and a negative effect of exports suggests that expanding exports rather than increasing import penetration results in competitive pressure from abroad. Finally, regarding the business cycle, price-cost margins exhibited counter cyclical behavior at the national level while behaving procyclically at the industry level.