Measuring Market Power in the Integrated Malaysian Poultry Industry: New Empirical Industrial Organization Approach

ABSTRACT

This article examines the level of competition that prevails in the Malaysian poultry markets by using the new empirical industrial organization methodology. We follow the Bresnahan (1982) and Lau (1982) oligopoly model, which allows the identification of market power using aggregated time-series data. The methodology involves the estimation of demand and supply equations for the identification of the parameters measuring the degree of market power. This study uses annual data from 1980–2010 to estimate the demand and supply equations of the poultry market in Malaysia. The estimation results show that the demand for chicken meat is inelastic (−0.124), indicating that consumers are not sensitive to price change. On the other hand, income is elastic at 3.636, implying that poultry meat is a luxury. The cross-price elasticity with respect to beef is −2.405, rejecting beef as a substitute to chicken meat in Malaysia. The coefficient of conduct parameters for the three subperiods of 1980–1990, 1991–2004, and 2005–2010 measuring market power are 0.6740, 0.5540, and 0.5790, respectively. The results indicate imperfect competitive market in the poultry industry as more farmers opt to join poultry integrators.

KEYWORDS:

• Market power
• NEIO
• conduct parameter
• Malaysia
• poultry
• integrators

Funding

The authors wish to acknowledge and thank the financial contribution of the Long Term Research Grant Scheme (LRGS-2012-2017: UPM/700-13/LRGS) funded by the Ministry of Education Malaysia (MOEM) and Research University Grants initiatives 6 (RUGS-2012-2013: RUGS/06-02-12-2004RU) funded by UPM under Research University Grant Scheme.

Notes

1 In order to find the exact value of h(·), one can solve the profit maximization problem: Max_Q π = Q.D⁻¹(Q)-C(Q). The first order condition is D⁻¹(Q).. Since the firm receives a fraction of λ of the profit depending on the intensity of competition in the market, the general representation is P = MC(·) - λ·Q, so h(·)equals Q .

Additional information

Funding

The authors wish to acknowledge and thank the financial contribution of the Long Term Research Grant Scheme (LRGS-2012-2017: UPM/700-13/LRGS) funded by the Ministry of Education Malaysia (MOEM) and Research University Grants initiatives 6 (RUGS-2012-2013: RUGS/06-02-12-2004RU) funded by UPM under Research University Grant Scheme.