Estimating Oligopsony Power in the United States Market for Slaughter Hogs: An Error Correction Approach

Agricultural industrialization, the application of modern production methods to agriculture, has fundamentally altered the structure of the U.S. pork industry. While consumers have benefitted, more extensive vertical integration and higher industry concentration raise questions about the competitiveness of first-handler markets for slaughter hogs. In this study we estimate the market power of pork processing firms by adapting to the oligopsony case the New Empirical Industrial Organization (NEIO) model of Steen and Salvanes (1999). They estimate oligopoly power by reformulating within an error correction framework the model developed by Just and Chern (1980), Bresnahan (1982), and Lau (1982). This approach, by accounting for short-run deviations from long-run equilibrium, makes more complete use of the information in the data to yield short- and long-run estimates of market power. The results of our model provide no statistically or economically significant evidence that pork processing firms engaged in anticompetitive conduct during the period from 1988 to 2000.