Recent hearings before both the U.S. Senate and House Agricultural Committees focused on cattle markets and concentration in beef processing sectors. Repeatedly during testimony and the question and answer periods it was pointed out the four largest firms—Tyson; JBS; Cargill; and National—account for 85 percent of the slaughter of steers and heifers. Several times the concentration level was the basis of accusations of the use of illegal market power by packers to the detriment of cattle producers and beef consumers. While concentration levels in an industry make for good political and media fodder, in terms of evidence of market manipulation, it isn’t quite so simple.
The beef processing industry has been highly concentrated for several decades. In their paper, “How We Got Here: A Brief History of Cattle and Beef Markets,” Derrell Peel and John Anderson, agricultural economists at Oklahoma State University and the University of Arkansas respectively, said cost efficiencies associated with larger operations resulted in the rapid concentration of the sector during the 1980s. By the early 1990s, the four-firm concentration ratio topped 80 percent, slowly rising to 85 percent since. Concentration in an industry is one factor economists and regulators look at when examining market power. Determining whether market power is being used nefariously or illegally, though, involves a much closer examination. Markets where market power is exerted are highly concentrated. Not all highly concentrated markets exhibit signs of abuse—the examination of other factors are necessary.
Economists look for several factors in markets when examining market power. These factors include the responsiveness of buyers/sellers to price changes (the less responsive or inelastic, the more likely market power can be exerted), the ease of entry into the market (the easier market entry, the less likely market power can be exerted), and the availability of substitute goods or services (more substitutes, the less market power). Other factors concern the interaction and behavior of firms in the market. Do they behave as competitors? Cooperate? Seek to work together to manipulate the market? And finally, economists look at whether market performance suggests market power. Are prices materially different from what they would be if the sector were less concentrated? Can prices be explained by underlying supply and demand conditions? Do firms’ profit levels over time suggest market power?
This isn’t to suggest agriculture shouldn’t be concerned with the level of concentration in the beef packing sector. It is only to suggest that finding evidence and proving illegal abuse of market power is difficult. It isn’t as simple as noting a sector is highly concentrated. If it were, questions regarding the illegal abuse of market power in the beef packing sector would have been definitively answered many years ago.