Research »   Market Power

Market Power

Market power is the ability of a buyer or seller to influence the price of their purchases by exercising control over its demand, supply, or both.  For example, the exercise of market power includes actions where a packer is able to raise its own profitability while reducing feedlots’ profitability.


A ’monopsony’ (single buyer in a market) can maximize profits by controlling or influencing the purchase price.  They are able to increase the price to get another animal without paying more for previous purchases or raising market expectations for future purchases.

Sections

How can market power (even imperfect market power) be exercised

  • Withhold demand to reduce prices
  • Price discrimination - pay higher price for extra supply, but not elevate prices market-wide
  • Hold up – the ex-post exercise of market power where, for example, a buyer is able to renegotiate the terms of deal because of the high cost of switching to another buyer, inelastic supply, time sensitive delivery of product, or because a delay or threat of delay in delivery would be very costly

Why is market power a concern for the beef industry?

The Canadian red meat packing capacity, which expanded between 2003 and 2006, has since seen substantial consolidation and reductions in capacity.  The resultant high level of concentration in the packing sector has led to industry concerns, particularly in times of temporary plant or border closures and regulatory barriers (i.e. mCOOL) that have limited trade and reduced the number of bidders on fed cattle.  In addition, there has been some quantitative and anecdotal information showing increases in packer ownership and contracting of cattle in Canada, which raises further questions around market power and captive supplies.  How these activities relate and interact with market power is an important and complex issue.

Concerns in the red meat packing sector

      • Discriminatory Conduct
        • When packers are able to segment the market by creating different groups of sellers and treating sellers differently depending on their group. For example, where larger feedlots appear to get better terms or prices than smaller feedlots.
      • Renegotiation
        • When packers renegotiate by changing the terms of the sale or impose additional costs after the close of the sale without compensation.
        • This may occur regularly, seasonally, rarely or under unique circumstances only.
      • Asymmetries or Uncertainty of Information
        • When sellers are disadvantaged by uncertainty or lack of knowledge regarding the price or terms of contracts between the packers and other feedlots.
        • When there is confidentiality or contractual restrictions on information disclosure.  However, it should be noted that secret price arrangements can be an indication of competition in the market.  As buyers are aware that if a higher bid was known, prices for the entire market would increase.  Therefore they are not able to increase the price for one lot of cattle without influencing the price they pay on future cattle.

Research

Research plays an important role to

      1. comprehensively understand the issue, and
      2. evaluate the extent (if any) and impact of market power.

This helps ensure that policies developed do not result in significant negative impacts to any sector within the industry, while at the same time identifies potential approaches to minimize the impact of market power if it is an issue.

 In 2006 Dr. Jeffrey Church and Dr. Daniel Gordon completed a study for the Canadian Cattlemen’s Association measuring market power in the red meat packing sector of western Canada. 

Objectives of the 2006 study:

      • To assess the extent to which the closure of the border to live animals increased the market power of Alberta packing plants for animal’s under-30-months of age from September 2003 to May 2005.
      • To determine if the extent of market power was consistent with oligopolistic behaviour or with coordinated behavior.  Coordination would result in lower prices for fed cattle than if packers acted independently.  Oligopolistic competition is when packers recognize how their actions impact profits but not on other packer profits.  Evidence of coordinated behavior is prohibited under the Competition Act.

Key findings of the 2006 study:

      • Market power is estimated on a scale between 0 (a competitive market) and 1 (indicating perfect monopsony power). 
      • The results in the pre-BSE period were consistent with a competitive market for fed cattle produced in Alberta, with a market power parameter ranging between 0.0003, which was not statistically different from zero, and 0.06, which was statistically different from zero.
      • In the BSE period (September 2003 to May 2005) market power estimates ranged between 0.152 and 0.447.
      • While the estimates during the BSE period increased and were consistent with the exercise of market power, they were not consistent with the coordination of market power.

2010 update of the 2006 study:

As live exports resumed in 2005 for youthful cattle and in 2007 for all cattle the ability of Alberta packers to exercise market power would have changed.  In addition, as packing plants closed and the number of bidders in the market declined the ability of packers to exercise market power is also expected to have changed.  As such, in 2010, Dr.  Church and Dr. Gordon were commissioned to update that study as well as measure the transfer of income throughout the supply chain if market power was found, and examine various monitoring options for the Canadian industry. A complete outline of the 2010 study can be found at http://www.cattle.ca/media/file/original/672_market_power_study_overview.pdf

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Acknowledgments

Thanks to Brenna Grant and Andrea Brocklebank of Canfax Research Services for contributing their time and expertise to writing this page.

This topic was last revised on February 29, 2016 at 09:02 AM.

Fact Sheets

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