Richard J. Sexton

Market Integration, Efficiency of Arbitrage, and Imperfect Competition: Methodology and Application to U.S. Celery

This paper develops and applies a methodology to test for efficiency of interregional commodity arbitrage. Application of the methodology requires only time-series data on prices for alternative cities, regions, countries, or product forms. Yet, the approach is capable of generating evidence on a number of market parameters including market integration, arbitrage efficiency, the magnitude of marketing margins, product substitutability, and competitiveness of markets. Estimation is based on a switching regression model with three regimes: efficient arbitrage, relative shortage, and relative glut. Results from application of the model to U.S. celery marketing indicated significant departures from efficient arbitrage for both California and Florida celery.

Imperfect Competition in Agricultural Markets and the Role of Cooperatives: A Spatial Analysis

Important characteristics of many agricultural markets are costly to transport raw products and relatively few processors, one or more of which is often a cooperative. This paper analyzes pricing behavior in these oligopsonistic, spatial markets and focuses specifically upon the conjecture that cooperatives may have a procompetitive effect on the behavior of rival non-co-op processors. The existence and magnitude of a procompetitive effect is shown to depend upon a number of structural and strategic factors including competitive relations among the non-co-op processors and a cooperatives membership and pricing policies.

Industrialization and Consolidation in the U.S. Food Sector: Implications for Competition and Welfare

Good sources for information on recent developments in food-market structure include Barkema, Drabenstott, and Welch; U.S. Department of Agriculture (1996b), and Rogers. My objective is not to add to this literature, but, rather, to consider what we have learned as a profession about the rapid consolidation in food processing and distribution. What are its implications for market power, economic efficiency, and the distribution of economic welfare among producers, consumers, and marketers?

The Effects of Imperfect Competition on the Size and Distribution of Research Benefits

Studies of agricultural research benefits usually assume perfectly competitive markets. Studies that have allowed for market power of agribusiness firms have generally assumed unrealistic pure monopsony or monopoly behavior. This paper allows for processing firms to exhibit a range of degrees of oligopsony power in buying raw farm products and oligopoly power in selling processed farm products. The results indicate that different types of research-induced technical change can exacerbate or ameliorate distortions from the exercise of market power by agribusiness firms, which affects the size and especially the distribution of research benefits. Copyright 1997, Oxford University Press.

Cooperatives as Entrants

A potential shortcoming of game-theoretic models in industrial organization is their failure to consider consumers as players. We introduce a customer coalition --- a cooperative -- as a potential entrant and compare the cooperative entry threat with that posed by the usual for-profit entrant. We identify four fundamental distinctions between cooperative and for-profit entrants and demonstrate that the strategic interplay between a cooperative and an incumbent firm may differ markedly from that between the incumbent and a for-profit entrant. The results impart a prospectively powerful role to potential cooperatives in beneficially regulating free-market performance.

Bootstrapping in Applied Welfare Analysis

Bootstrapping procedures are used to estimate the statistical properties of common empirical welfare measures. Results from a Monte Carlo experiment indicate that welfare estimates such as Marshallian consumer surplus often exhibit significant bias. Standard errors of welfare estimates are found to often exceed the magnitude of the point estimate for typical cross-section data sets and are generally larger than the difference between comparable Hicksian and Marshallian measures. Precision of welfare estimates can be markedly enhanced through generating larger data sets, obtaining better model fits, and through imposition of innocuous inequality restrictions on the demand function parameters.

A Model of Price Determination for Fresh Produce with Application to California Iceberg Lettuce

Most fresh produce commodities are highly perishable. Thus, supply at any time is fixed at prices above marginal harvest costs. In this paper we develop a model of short-run farm price determination for produce commodities that incorporates this key structural feature and also allows for imperfect competition in price determination. The model is empirically manifest in a switching regression framework and applied to California iceberg lettuce. Results support the general model relative to a model restricted to competitive behavior and suggest that retailer/buyers capture most of the rents from lettuce production and sale. Copyright 1996, Oxford University Press.

Confidence Intervals for Elasticities and Flexibilities: Reevaluating the Ratios of Normals Case

Many important hypotheses in applied economics depend upon the magnitude of estimated elasticities or flexibilities. However, their statistical properties are unknown for many popular models, making standard statistical inference impossible. This problem is addressed in the present paper which analyzes and evaluates alternative methods of constructing confidence intervals for elasticities and flexibilities. The methods studied include three bootstrap-based approaches, an approximation based on a Taylors series expansion, and approaches proposed by Fieller and Scheffe. Results show that all methods except Scheffes worked reasonably well, but the simpler Fieller and Taylors series methods modestly outperformed the various bootstrapped-generated intervals.

An assessment of the impact of food industry market power on U.S. consumers

Rapidly increasing concentration in food manufacturing and retailing has heightened concern about the exercise of market power by food manufacturers and retailers to the detriment of farm producers and consumers. Although market power in the food industry has been studied rather extensively, prior analyses have focused on the exercise of selling power, either by manufacturers or retailers. This study develops a simple but flexible model of a food market channel to study both buyer (oligopsony) and seller (oligopoly) power, and the potential impacts of successive market power at multiple stages of the market channel on the magnitude and distribution of economic welfare. Simulation results show that even modest market power can enable the food marketing sector to capture large shares of the market surplus. Efficiency (deadweight) losses, however, tend to be rather small unless the level of market power is high or if market power is exercised at multiple stages of the channel. lEcon-Lit citations: L13, Q13r

Customer coalitions, monopoly price discrimination and generic entry deterrence

Abstract This paper analyzes the interplay between a profit-maximizing monopolist and a set of consumers who are able to form coalitions that bargain with the monopolist and/or integrate into production. We show that the monopolist will deter the formation of these ‘countervailing’ coalitions through strategic selection of ‘generic’ limit price offers to each consumer. These limit prices are derived as subgame perfect equilibria in two alternative models of customer- monopoly interplay. In both models, price discrimination emerges in environments wherein it has previously been considered unprofitable. Welfare analysis of the equilibria demonstrates the procompetitive effects of potential customer coalitions and generally provides an efficiency-based motivation for a government ban on price discrimination.