Effects of packers’ inventory and market power on price adjustments in the U.S. beef industry

ABSTRACT

This study examines effects of packers’ inventory and market power on their price adjustment behaviour in the U.S. beef industry. Econometric model used in the study allows inventory and market power variables to influence the speed-of-adjustment parameters in a three-regime threshold error-correction model. Results show that the two variables have a statistically significant impact on packers’ price adjustment behaviour when price decreases but not when price increases. When price decreases, inventory tends to accelerate the adjustment process whereas packers’ market power slows down the adjustment process. The hypothesis of symmetric adjustment towards long-run equilibrium during increasing and decreasing phases of price is not rejected when the effects of inventory and market power are considered in explaining packers’ price adjustment behaviour. However, when these two effects are ignored in the model specification, the hypothesis of symmetry is rejected such that the speed of adjustment in the increasing phase of price is faster than the adjustment speed in the decreasing phase of price, i.e. ‘rockets and feathers’ effect.

KEYWORDS:

• Price transmission
• inventory
• market power
• beef industry
• error correction model (ECM)
• threshold
• autoregressive (AR) model

JEL CLASSIFICATION:

• C32
• Q13
• M31

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Blinder et al. (1998) provide a detailed discussion about price stickiness and its managerial implications. Bakucs, Falkowski, and Ferto (2014) provide a literature review on asymmetric price adjustment and conduct a meta-analysis of agricultural economics studies to determine the impact of market structure on adjustment characteristics.

² A fixed regressor bootstrap procedure derives the asymptotic distribution of the test statistic to obtain average and supremum statistics for the null hypothesis of linearity against two thresholds. In this procedure, dependent variable is the residual from equation under $H_0$ as drawn from the normal distribution, while regressors are held fixed rather than being generated recursively.

³ Conjectural elasticities have been estimated in many studies to measure packers’ oligopoly and/or oligopsony power exertion for the U.S. beef industry (Azzam and Schroeter 1995; Azzam 1997; Morrison-Paul 2001; Chung and Tostão, 2012).

⁴ Appendix summarizes the structural model used for estimating the conjectural elasticities. In the structural model, the time-varying conjectural elasticity, ${\theta }_t$, is specified as a function of factor costs and time trend. By incorporating the time trend variable in the specification, we expect that the model accounts for changes in government policy and market structure occurred in the U.S. beef industry over time. Some of these changes include technological changes, mergers and acquisitions, and an antitrust policy change such as the Livestock Mandatory Price Reporting Act implemented in 2001.

⁵ Colling, Irwin, and Zulauf (1997) note that even though responding to the survey was voluntary, the response rate was high. Non-responding warehouses were contacted by telephone. If there was no response, stock levels were imputed. Surveyed facilities included poultry and meat packing plants but excluded wholesalers, chain stores, and distributors. Surveyed storage units were those that were artificially cooled to temperatures of 50°F or lower, and whose food products were normally stored for 30 days or more.

⁶ Previous studies have also estimated the effect of information in the report on nearby futures prices (Colling, Irwin, and Zulauf 1997; Mann and Dowen 1998).

⁷ The structural model estimated in this study uses a dual/cost function approach with the assumption of fixed proportion technology. Therefore, the estimated conjectural elasticites for input and output markets are the same due to the assumption of technology.

⁸ Our expectations are consistent with the theory of storage, which indicates a negative relationship between inventory and spot market price, i.e. when all else remains the same, low inventory is associated with backwardation (higher spot price than futures price), while high inventory is associated with contango, i.e. lower spot price than futures price (e.g. Kaldor 1939; Telser 1958; Symeonidis et al. 2012).

Additional information

Funding

This research was supported by the USDA National Institute of Food and Agriculture, Hatch Project OKL 02941, and the Division of Agricultural Sciences and Natural Resources at Oklahoma State University.