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Bhuyan, Sanjib, and Lopez Oligopoly power in the food and tobacco industries

Bhuyan, Sanjib, and Lopez Oligopoly power in the food and tobacco industries. Method: Theoretical Model Specify a general profit function Derive several parameters related to MARKET POWER. Empirical Model Specify a specific profit function, demand function Collect data

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Bhuyan, Sanjib, and Lopez Oligopoly power in the food and tobacco industries

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  1. Bhuyan, Sanjib, and Lopez Oligopoly power in the food and tobacco industries Method: Theoretical Model Specify a general profit function Derive several parameters related to MARKET POWER Empirical Model Specify a specific profit function, demand function Collect data Estimation of parameters - statistical methods

  2. Method: Theoretical Model -Profit function Differentiate profit with respect to output

  3. Method: Theoretical Model: Parameters Output elasticity of cost - reciprocal of “economies of size” eg. for a 1% increase in output, is there more or less percent change in cost?

  4. Method: Theoretical Model: Lerner Index (L) Measures degree of the exercise of oligopoly power

  5. Specify a Translog Cost function (Transcendental-logarithmic)Ln(C) = f(W,Y,T) C = industry total cost Y = industry output T = time trend W = vector of input prices (wi) Method: Empirical Model Logarithmic differentiation (Shephard’s Lemma) factor (input) share equations

  6. Specify a Cobb-Douglas output demand function (derived demand facing industry) Method: Empirical Model

  7. Statistical methods - estimate the parameters of a system of equations Method: Estimation 4 input share equations (KLEM) (derived from C=C (W,Y,T) 1 demand function (Cobb-Douglas) 1 equation representing profit max criterion Annual data 1972 – 1987 40 food and tobacco processing industries: SIC 4 digit level L - Lerner index  - elasticity of returns to scale  - conjectural variation elasticity for the industry ( = 0 => no strategic activity e.g. price taking)  - output demand elasticity

  8. Testing the Lerner index • H0: L = 0 • Reject => evidence of oligopoly power (price distortion) Results: Rejected - 37 of 40 industries (average L = 0.33) "degree of oligopoly power is significant"

  9. Other Parameters •  - conjectural variation elasticity • - mostly greater than zero and significant • - evidence of strategic behaviour •  - output demand elasticity – inelastic in all cases •  - elasticity of scale ..... mostly increasing returns e.g.  > 1 Results: Constant returns to scale - CRS rejected for 33 industries Ho:  = 0 20 industries – increasing returns  > 1 13 industries – decreasing returns  > 1

  10. Statistical Significance – high in most cases

  11. Aggregate Industries SIC 2: - Food Industries - Tobacco Industries - Food & Tobacco

  12. Comparisons with Previous Research

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