Agricultural & Applied Economics Association

Oligopoly Power in the Food and Tobacco Industries

Author(s): Sanjib Bhuyan and Rigoberto A. Lopez
Source: American Journal of Agricultural Economics, Vol. 79, No. 3 (Aug., 1997), pp. 1035-
1043
Published by: Oxford University Press on behalf of the Agricultural & Applied Economics
Association
Stable URL: https://www.jstor.org/stable/1244442
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 Oligopoly Power in the Food and
Tobacco Industries

Sanjib Bhuyan and Rigoberto A. Lopez

In this article we estimate and test for the degree of oligopoly power and economies
of scale in forty food and tobacco industries using the New Empirical Industrial
Organization (NEIO) framework and four-digit SIC data. Lerner indices and
elasticities of scale are compared throughout the entire food and tobacco industries.
T-tests verify that all but three of these industries exert statistically significant
degrees of oligopoly power and that over 82% of these industries exhibit nonconstant
returns to scale. The empirical results also provide estimates of the price elasticities
of demand for each industry.

Seindustries,
Key words: economies of scale, elasticity of demand, food and tobacco aplicado en las industrias productoras
market power, NEIO, oligopoly power, returns to scale. de cemento como CEMEX y ARGOS que
controlan el mercado de cemento en colombia
There has been a recent increase in the number gopoly power tests and measures which are
of new empirical industrial organization well defined theoretically and are less subject
(NEIO) studies that measure and test for degree to the specificity of a particular year chosen for
of oligopoly power in food and tobacco manu- analysis as in SCP studies.
facturing as well as in other industries. In con-The NEIO approach has been applied to se-
trast to traditional structure-conduct-perfor- lected U.S. food and tobacco sectors, in par-
mance (SCP) models, NEIO models do not rely ticular, in the meat-packing and tobacco indus-
on accounting definitions of oligopoly power tries (Appelbaum; Schroeter; Schroeter and
Azzam; Azzam and Pagoulatos; Wann and Sex-
(such as profitability rates). Rather, they explic-
itly parameterize industry conduct.' According ton; Barnett, Keeler, and Hu). However, the pau-
to Bresnahan, a typical NEIO model is first and city of NEIO studies, compounded by differences
foremost an econometric model of how firms in in time-series spans and econometric models
an industry set price and quantity in order to in-used, has yielded few comparisons of findings
fer the underlying conduct of the industry. Al-across industries and has made comparisons
though the approach is data intensive and often cumbersome even for the same industry.
requires highly structured models, it yields oli- Most NEIO (and virtually all SCP) studies in-
herently assume constant returns to scale (CRS)
(e.g., Appelbaum, Hazilla). Although such an
Sanjib Bhuyan is assistant professor in the Department of Agricul-
tural Economics and Marketing at Rutgers University, and
assumption is based on tractability rather than
Rigoberto Lopez is professor in the Department of Agricultural andempirical validity, it is partially supported by
Resource Economics at the University of Connecticut. the possibility of multiplants and the ability to
The authors would like to thank Emilio Pagoulatos, Aaron
Brinkman, and two anonymous referees for helpful comments on
enter certain industries (Cotterill, Martin) and
an earlier draft, and Richard Caves and Catherine Morrison for by analysis of minimum efficient scale (MES)
helpful discussions on economies of scale. The authors can also be of the food and tobacco sectors (Connor et al.).
contacted at bhuyan@aesop.rutgers.edu or rlopez@canrl.cag.uconn.edu.
This material is based upon work supported by the Cooperative Besides the problem of rather dated MES esti-
Research Service, U.S. Department of Agriculture, under Agree-mates and the lack of cardinal measures of
ment No. 94-37402-0968. This is scientific contribution No. 1622
of the Storrs Agricultural Experiment Station.
economies of scale, there is ample empirical
The problem of using accounting definitions of marketevidence
power that the CRS assumption leads to un-
derestimation
has been outlined by Fisher and McGowan, among others. The SCP of industry markups (or price
models are devoid of conduct and, hence, are often called "struc-
ture-performance" models. Typically, they test for a relationship over marginal cost) by as much as 50% in U.S.
between performance (e.g., profitability) and market structure manufacturing when increasing returns to scale
(e.g., a sales concentration ratio or market share). A major draw- do exist (Morrison 1992).
back is that the same market structure can sustain alternative
modes of conduct with quite distinct performance outcomes. See
In this article we make three contributions to
Schmalensee for a review of SCP studies. the existing literature. First, we estimate and

Amer. J. Agr. Econ. 79 (August 1997): 1035-1043

Copyright 1997 American Agricultural Economics Association

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 1036 August 1997 Amer. J. Agr. Econ.

test for the degree of oligopoly

Appelbaum, power
Schroeter).4 in forty
Let the objective of
food and tobacco industries atitsthe
firm j be to maximize four-dig
total profit,
SIC level with 1972-87 annual data, using th
same NEIO model and
(1) ni =time-series
[P(Y)Yi - C'(W, Yi)] span fo
each industry. Second, we measure the elastic
ties of scale and test the
where Yi isCRS
firm j's hypothesis
output, Y(= 1Yi; j = 1, 2,sep
...
rately for each industry.
k) is totalFinally,
industry outputwe provide
with k firms, P is thees
timates of the price elasticity of demand at
product price, C(W, Yi) is the firm's cost the
func-
industry level, which update the only set o
such elasticities available.2 tion,and
tor, W P(Y)
= (w,, w2, output
is the .... w,) demand
Thus, is an input price vec-
empiric
function.
analysis provides cardinal and ordinal measur
Differentiating equation (1) with respect to Yi
of oligopoly power as well as elasticities of yields
scale and demand across the U.S. food and to-
bacco industries.3
The next section contains the analytical
framework, including the theoretical basis and (2) s= 1i - - = nY
_ D ln CJ
the empirical system of equations for cost, in-
put demands, output demands, and pricing be-
havior, which are used to identify oligopoly ratio,
where9i sy
= D(=PYj/C')
In Y/l In is
Yi the firm's
is the revenue-to-cost
conjectural varia-
power along with scale and demand elasticities. tion elasticity of the jth firm, and 11 = -[D In
Next, parameter estimation issues are dis-
P(Y)f/ In P] is the absolute value of the price
cussed, followed by the empirical results and elasticity of output demand. Note that the right
their research implications. Plausible, fruitful side of equation (2) denotes the output elastic-
avenues for future research are also provided. ity of cost or the reciprocal of economies of
Utilizando las ecuaciones de demanda incorporamos
parametros de costo marginal en obras civiles
size (Jorgensen). Following Cowling and
Waterson, equation (2) is used to derive the
Analytical Framework industry's Lerner index (L) to ascertain the de-
The dual cost function-based approach of ana- gree of oligopoly power as follows. Expanding
equation (2), we obtain
lyzing oligopoly power is used to endogenize
pricing behavior in the output market. Follow-
ing Berndt, the econometric model for each in-
dustry consists of (i) input demand equations
that embody marginal cost (MC) parameters,
(3) 1- = MCj Cj
(ii) an output demand equation that embodies
marginal revenue (MR), and (iii) a pricing which, after rearrangement, yields
equation based on the profit-maximizing MR =
MC condition that embodies a parameter of in- P - MCj OJ
dustry conduct. (4) =
The oligopoly power model presented by P 71
Appelbaum is adopted as an analytical frame-
work based on an indirect dual cost function. Using market shares (Sj = Y'/Y) a
However, in order to allow for the possibilityequation
of (4) can be expressed as
nonconstant returns to scale, a translog cost
function is adopted instead of the Generalized SJMCj O
(5) Si - = SJ
Leontief form used in most NEIO studies (e.g.,
P ii

2 Although there are many estimates of own-price

demand at the consumer level,
4 While the necessity for most
to allow nonconstant returnsofto scale the
was com
studied here, to our knowledge critical in the decision to the only
assume a translog estimates
cost function, the ne- o
demand elasticities available are
cessity to obtain constant those
elasticities of specifica-
drove the log-linear Pagoulat
for the 1952-75 period, tion ofwhich
output demand. The have empirical advantages
been of using
used a ex
pirical analyses (e.g., Peterson andby Connor,
translog function are discussed Willner
Green and by Morrison (1993).
3 This article neither Use of the translog functionthe
addresses is fairly standard
economic in analyzing cost imp
gopoly behavior nor advocates functions in the food andany type industries,
tobacco manufacturing of governm(e.g.,
potential net social benefits Ball and Chambers; of Tremblay; such intervention
Barnett, Keeler, and Hu). As in
dressed by Bhuyan and Lopez,
Appelbaum Peterson
and studies of this and
type (e.g., Schroeter, Schroeter and Conn
Peterson, and Parker and Connor. Azzam), a log-linear demand is assumed.

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 Debemos saber que para hacer que la maximizacion de beneficios en
una industria como CEMEX y las obras donde es usado su producto
se emplea la siguiente ecuacion.

Bhuyan and Lopez Oligopoly in Food and Tobacco Industries 1037

Summation of equation (5) over

where jd and rearrang-
is a price deflator, q is income, Z is the
ing yields the industry aggregate Lerner
price of substitute index
products from related indus-
of oligopoly power (,): tries, T is a time variable to capture trends in
taste and preferences, and u, is an error term.6
P - MC QD Using equation (7), the empirical equation for
(6) -= industry-level profit-maximizing behavior
P r1 [equation (2)] is expressed as
where MC and (D are the industry-level
(weighted) marginal cost and conjectural varia-
tion elasticity.
Under appropriate aggregation conditions,(10) S(1- - = a,+ Py In Y+ ,yiPln wi
equation (2), along with input and output de- + rtyT + ur
mand functions, provides the framework for
where S, is the ratio of aggregate revenue to to-
empirical testing and measuring for oligopoly
tal cost for a product, and Ur denotes random
power at the industry level. Following the ag-
disturbances.
gregate cost models used by Ball and Chambers
Following Ball and Chambers, the elasticity
and Seldon and Bullard, a translog cost func-
tion is adopted.5 Thus, let the industry-level returns to scale (Es) is expressed as the recip-
of
rocal of the elasticity of cost with respect to
cost function be given by
output. Using equation (7), this is obtained by

(7) In C, = -o + alnY, i In Wi,t (11) Es =( In C/ In Y)-1

+ 0.5P,(ln Y,)2 + 0.5 iIjpij In wi, In wj,, = (a, + , In Y + lCyi In wi + rtyT)-.
+ iPyi In Y,In w i, + r,T + 0.5r,,T2
Accordingly, E, < 1 corresponds to a production
+ r,,T In Y, + Jr,~T In wi,~ function that exhibits decreasing returns to
scale (DRS), E, = 1 implies constant returns to
scale (CRS), and Es > 1 implies increasing re-
where t is a time subscript, C, is the industry total
turns to scale (IRS).7 Thus, values of expression
cost, w,, or w1j, is an input price, and T is a time
variable. Other notation is as defined above. (11) are used to test for CRS in each industry.
Applying Shephard's lemma to equation (7)
yields the industry demand for inputs repre-
sented by the factor share equations given by Estimation Procedures

The full model of industry equilibrium consists

SIn C wxi of the four share equations given by equation
(8) subject to linear homogeneity in input
(8) In C - Si = ai + CJ ij In wprices, as well as equations (9) and (10). Note
+ ,yi In Y + rtiT + ui that it was also necessary to omit one cost share
equation (energy) from the system to avoid sin-
where xi is the quantity of the ith input and ui gularity
is of the estimated covariance matrix. The
a random error which includes errors in optimi- endogenous variables of the resulting system of
zation.
equations are Y, Sy, and Si. The exogenous vari-
For convenience and tractability, the derived de-
mand function facing the industry is assumed to
take the Cobb-Douglas form (as in Appelbaum),
6 Wohlgenant found that changing meat consumption patterns
have affected beef and poultry demand elasticities. Modeling these
and other possible structural changes in demand for specific indus-
(9) In Y= a + _n In (P/d)+ _qln (q/d) tries is beyond the scope of this article.
7 Economies of scale (how output changes from a proportional
+ zln(Z/d)+ STln T+ uy increase in all inputs) and economies of size (how cost changes
from an increase in output) are often inappropriately used inter-
changeably (see Larue, Dissou, and West; Beattie and Taylor; and
Chambers). Hanoch demonstrated that it is more relevant to mea-
5 A well-behaved cost function must be (a) homogeneous of sure economies of scale from the relation between total cost and
de-
gree 1 in input prices, and (b) homothetic, i.e., separable in output
output along the expansion path. Specifically, we use the elasticity
and prices. The cost function in equation (7) satisfies theseof condi-
scale defined by the reciprocal of the elasticity of cost with re-
tions. Following Ball and Chambers, and Berndt, these conditionsspect to output along the expansion path as defined by Ball and
were tested separately using the Wald chi-square statistics. Chambers, and Chambers.

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 1038 August 1997 Amer. J. Agr. Econ.

tural variation
ables consist of input elasticity (0) a
prices, and time
market de- vari
come, the price ofmand
substitutes, and
elasticity (11) on the oligopoly a pri
power in-
tor. Equations (8)dexand
are taken into
(9) consideration.
contain Of course, D som
eters also found in equal to zero is a necessary condition
equation (10). for price-
To im
the equilibrium conditions taking behavior. However, inempiricall
the presence of
tems approach is rather used inelasticas
product demands, a statistical
there are cro
tion parameter restrictions test of the ratio of D to 71 might among
be more appro- eq
(8), (9), and (10). Following a suggestion by priate in certain situations if one is interested in
Berndt, and given that equation (10) is intrinsi- testing for the degree of oligopoly power per se
cally nonlinear in its estimatable form, a non- rather than testing for price-taking behavior.
linear 3SLS regression technique was employed The null hypothesis of no oligopoly power is
to estimate the model parameters. rejected at the 1% level in thirty-seven out of
The sample consisted of annual data for the forty U.S. food and tobacco manufacturing in-
1972-87 period for forty food and tobacco dustries. Overall, these results indicate that the
manufacturing industries at the four-digit SIC degree of oligopoly power exercised in the
level.8 The inputs were divided into four cat- thirty-seven U.S. food and tobacco manufactur-
egories: capital, labor, materials, and energy. A ing industries is significant. The average degree of
detailed description of the data sources and oligopoly power for the sample was estimated at
management is available from the authors upon 0.334, while the Lerner indices for the food and
request. All estimations were carried out using the tobacco industries were 0.330 and 0.369, re-
the SHAZAM software program. spectively. In terms of their ranking, the cereal
En este caso podemos ver que los resultados fueron preparation industry (SIC 2043) ranked at the top
plausibles para las industrias de frabricacion de with the highest degree of oligopoly power, while
Empirical Results alimentos y tabaco. the dried fruit and vegetables industries (SIC
2034) showed the lowest degree of oligopoly
Table 1 presents the estimated oligopoly Lerner power. Other food industries with notably high
indices (9), conjectural variation elasticities degrees of oligopoly power are flour and grain
(0), absolute values of output demand elastici- mills (SIC 2041), soft drinks (SIC 2086), con-
ties (rl), and average elasticities of scale (9,) densed and evaporated milk (SIC 2023), dis-
for forty U.S. food and tobacco manufacturing tilled liquor (SIC 2085), and pickled sauces
industries for the 1972-87 period. In general, (SIC 2035). Without exception, all four tobacco
the results were plausible and consistent with industries show substantial departure from the
theory in terms of the expected signs and mag- competitive norm. Both cigarette (SIC 2111)
nitudes of the coefficients. and cigar (SIC 2121) industries are ranked
Statistical tests to determine the presence or among the top half of the industries with the
absence of oligopoly behavior consist of the highest degrees of oligopoly power. Perhaps not
following hypothesis test: HO: = 0 versus H,: surprisingly, several of these industries with
,?> 0. Fieler's theorem is used to compute as- high oligopoly power, such as the cereal indus-
ymptotic t-tests for the Lerner index.9 Unlike try, have recently been the target of public scru-
previous studies which tested the hypothesis tiny for their alleged anticompetitive behavior.
H0: 4D = 0 for price-taking behavior (e.g., no The results in table 1 are consistent with
strategic interaction) without considering the those of earlier studies summarized in table 2.
effect of demand elasticity in the oligopoly Most of these earlier studies are confined to a
power index (e.g., Azzam and Pagoulatos), this few individual industries or are based on two-
study uses a direct test for measuring oligopoly digit SIC level data. Appelbaum rejected price-
power in which the influence of both conjec- taking behavior and estimated an oligopoly
Lerner index for the U.S. tobacco industry at
0.676, which is substantially higher than the
0.369
8 The model either did not satisfy regularity conditions of estimate
cost presented in table 1. Schroeter
and/or demand functions or was unable to explain observed data
rejected
for four industries: frozen fruit and vegetables, and juice (SIC
price-taking behavior in the U.S. beef
packing
2037), wet corn milling (SIC 2046), canned and cured sea foods industry and estimated its oligopoly
(SIC 2091), and miscellaneous foods (SIC 2099). These Lerner index
results are at 0.049 while Azzam and
not reported.
Pagoulatos estimated the Lerner index in th
9 Fieler's theorem (Finney) is concerned with the ratio of two
parameters. Following Finney, the t-test is given by beef and
t = &/SE, pork industries to be 0.46. The corr
where SE, approach
= [var(D)was- 2 used,
.-cov(4,
sponding Lerner index of this study for th
estimation the TI) + -2 var(Tl)]05.
number As a(N)
of observations system
was
equal to the number of equations in the system (5) times meat packing industry lies between these tw
the num-
ber of years (16), i.e., N = 5 x 16 = 80. estimates. The estimated conjectural variati

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Table 1. Oligopoly Power and Scale Economies in the U.S. Food and Tobacco Manufacturing Industries,

SIC Industry Rank t? t, 711

2011 Meat Packing 14 0.415 6.245*** 0.219 9.090*** 0.528 10.371**
2013 Saus. & Prep. Meat 30 0.210 9.355*** 0.146 4.746*** 0.694 13.952
2016 Poul. & Egg Prod. 15 0.392 12.608*** 0.289 15.521*** 0.738 24.581
2021 Creamery Butter 9 0.500 6.630*** 0.382 9.454*** 0.764 14.70
2022 Cheese 24 0.254 1.271 0.128 7.119*** 0.503 22.783***
2023 Cond. & Evp. Milk 4 0.593 11.090*** 0.192 4.928*** 0.324 7.503
2024 Ice Cream 18 0.332 17.663*** 0.112 5.011*** 0.337 6.506*
2026 Fluid Milk 26 0.236 8.899*** 0.182 10.305*** 0.770 10.810*
2032 Canned Special. 36 0.116 15.940*** 0.063 1.202 0.543 38.204**
2033 Canned Fr. & Veg. 25 0.242 5.730*** 0.176 6.351*** 0.728 23.974
2034 Dried Fr. & Veg. 40 0.081 1.117 0.035 2.455** 0.430 3.915**
2035 Pickled Sauces 6 0.530 9.034*** 0.348 11.007*** 0.656 13.518*
2041 Flour & Grain Mills 2 0.679 8.463*** 0.482 6.252*** 0.710 6.401*
2043 Cereal Preparation 1 0.717 12.254*** 0.550 22.307*** 0.767 25.597
2044 Rice Milling 38 0.109 3.167*** 0.032 1.271 0.294 10.664**
2047 Pet Food 37 0.115 2.854*** 0.014 1.130 0.122 9.534***
2048 Prepared Feeds 11 0.448 5.552*** 0.173 11.521*** 0.386 21.298*
2051 Bread & Bakery 28 0.219 6.746*** 0.145 2.377** 0.661 13.915*
2061 Refined Sugar 19 0.330 9.418*** 0.146 3.213*** 0.443 10.255*
2065 Candy & Confection. 33 0.160 10.683*** 0.078 4.869*** 0.489 36.052
2066 Chocolate & Cocoa 29 0.211 8.383*** 0.110 3.689*** 0.521 10.271
2067 Chewing Gum 34 0.147 0.936 0.024 0.599 0.163 51.250***
2074 Cottonseed Oil Mill 35 0.147 15.782*** 0.063 8.675*** 0.430 14.7
2075 Soybean Oil Mill 7 0.516 8.371*** 0.484 19.790*** 0.938 8.465*
2076 Vegetable Oil Mill 23 0.278 6.705*** 0.131 4.667*** 0.471 8.470
2077 Anim. & Marine Fat 22 0.296 8.215*** 0.139 5.833*** 0.469 17.5
2079 Lard & Cooking Oil 16 0.388 10.384*** 0.167 9.163*** 0.430 19.366
2082 Malt Beverages 10 0.489 6.196*** 0.252 9.289*** 0.515 9.649*
2084 Wine & Brandy Spec. 27 0.228 9.116*** 0.065 5.670*** 0.285 9.22
2085 Distilled Liquor 5 0.571 13.916*** 0.225 13.186*** 0.394 14.131
2086 Soft Drinks 3 0.595 10.198*** 0.327 12.206*** 0.550 11.645*

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 1040 August 1997 Amer. J. Agr. Econ.
4-4

elasticity for
dustry (0.176
Wann and Sexton for the California fruit cock-
tail and pear packing industries (0.482 and
ootNrC 0it 0.076, respectively). Although Morrison (1990)
did not test for oligopoly power or price-taking
-oo oo0e o0 e
behavior in the U.S. food industries (SIC 20),
o to
her estimated Lerner index (0.298) is very close
to the corresponding average Lerner index in
the current study (0.330).
Table 1 also presents the average scale elas-
I -C
CNcooroCoNNoooW)ON nC)oen ticities for each of the forty industries in the
sample. The constant-returns-to-scale assump-
tion was tested via a t-statistic constructed to as-
N -0o0 0NW
certain whether the estimated mean scale elastici-
. .
*** ** ** d ties at four-digit SIC levels were significantly
different from one. The resultant t-ratios are
presented in table 1. The CRS hypothesis was
rejected for thirty-three (82% of the sample) in-
dustries at the 5% level of significance (twenty-
six industries at the 1% level). That is, the CRS
ON r- m N 0 r--\O 0 0 0

N 0 aN -- assumption could not be rejected for only seven

cqU
out of forty industries at the 5% level of signifi-
cance. Among the industries where the CRS hy-
pothesis was rejected, twenty industries were
characterized by increasing returns to scale, and
thirteen exhibited decreasing returns to scale.
Finally, it should be noted that what the IRS
found in the meat packing industry is consistent
666 66oooo 666
Para tratar de mantener las empresas en funcionamiento, with the findings of Ball and Chambers.
se utiliza el oligopolio donde esta da Finding decreasing returns to scale in ap-
.co
proximately one-third of industries may seem
una respuesta satisfactoria.
counterintuitive considering the significant
number of firm-level mergers and consolida-
%0 N eo W 100 N
tions that have occurred in the 1980s, particu-
larly in industries such as poultry processing
oo N a c
(SIC 2017) or bread and bakery (SICs 2051 and
4-4 2052). However, earlier studies show that de-
66 66 6646 creasing returns to scale may exist even after sig-
e 0 Se 0r 0-0 4 nificant mergers. For instance, Tremblay's results
>,0ei~ -~ -r ~ show that, on average, the U.S. brewing indus-
CA
try exhibited decreasing returns to scale for al-
most all size classes of breweries from 1950 to
1983, a period during which significant struc-
tural changes took place (for example, the four-
firm sales concentration ratio increased from
23.4 to 83.5). In addition to mergers, other fac-
tors such as capital intensity (as a proxy for the
PC importance of sunk investments in capacity
Q
which increase fixed costs), asset specificity
0 E

*E
(Kessides), and demand uncertainty (Mills and
Schumann) might influence scale economies.'0

"' The effect of mergers and consolidations at the firm level may
Q)
have been masked by industry-level data or by reporting average esti-
75 mates. For an analysis of the structural changes in factor demand
relationships in U.S. food industries, see Goodwin and Brester.

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Bhuyan and Lopez Oligopoly in Food and Tobacco Industries 1041

Table 2. Earlier Results of Production Theory-Based Oligopol

Food and Tobacco Manufacturing Industries

Bhuyan and Lopez

SIC Industry Authors Period Q D Q(

20 Food Industry Morrison (1990) 1960-86 - 0.298 0.180 0.330

Hazilla 1958-74 0.123 0.104 0.180 0.330
21 Tobacco Industry Appelbaum 1947-71 0.402 0.676 0.211 0.369
Hazilla 1958-74 0.143 0.279 0.211 0.369
2011 Meat Packing 0.219 0.415
Beef Schroeter 1951-83 0.022 0.049 - -
Beef & pork Schroeter and Azzam 1981-86 0.047 0.143
Beef & pork Azzam and Pagoulatos 1959-82 0.223 0.460 - -
2033 Canned Fruits 0.176 0.242
& Vegetables
Fruit cocktails Wann and 1950-86 0.482 - - -
Pears Sexton 0.076 - - -
2095 Roasted Coffee Roberts 1972 - 0.061 0.267 0.507
2111 Cigarettes Barnett, Keeler, and Hu 1955-90 0.264 0.372 0.426 0.336

Notes: (i) Roberts's results pertain to the largest firms only; (ii) "-" indicates that such results were not
Barnett, Keeler, and Hu are averaged for the 1955-90 period; (iv) the results in the last two columns are from

Pooled time-series data across industries rank correlation coefficient between these two
were used for the two-digit level t-test setsratios."
of estimates was 0.85 with a t-ratio of 9.85,
At the two-digit level, i.e., for food industries indicating congruity in their ranking across in-
(SIC 20), tobacco industries (SIC 21), and the
dustries.
food and tobacco industries (SIC 20-21), the
constant-returns-to-scale assumption could not
be rejected. Based on this finding, the empirical Concluding Remarks
validity of the constant marginal cost assump-
tions that pervade earlier NEIO-based studies This article is the first to present a systematic
of oligopoly power in the individual food and estimate and test for the degree of oligopoly
tobacco industries (i.e., at the four-digit SIC power and returns to scale across the U.S. food
level) remain questionable. However, at the and tobacco manufacturing industries. The em-
more aggregated two-digit level the constant pirical framework involved estimating a system
marginal cost assumption seems more appropri- of equations depicting input and output de-
ate. Finally, Morrison (1990) estimated returns mands along with output pricing behavior. To
to scale in the U.S. food industries (SIC 20) at ensure consistency and to allow for systematic
1.256 which is similar to the corresponding av- comparisons, the same model as well as time
erage returns to scale in table 1 (1.199). span were used for each industry. In general,
Researchers who have explored the relation- the empirical findings are consistent with those
ship between markups and scale economies in of previous studies analyzing oligopoly power
the U.S. manufacturing sector, such as Hall, in single industries, particularly the meat pack-
and Morrison (1990), argue that excess capacity ing and cigarette industries.
and economies of scale are significant factors The empirical findings show that thirty-seven
behind higher markups. In fact, the partial cor- out of forty industries in the sample exercised
relation coefficient between the degrees of statistically significant oligopoly power in set-
economies of scale and the Lerner indices re- ting output prices. These findings are consistent
ported in table 1 is 0.86 and highly significant with the estimated conjectural variation elas-
with a t-ratio of 10.31. Likewise, the Spearmanand the price inelastic demands faced by
ticities
virtually all industries in the sample. The esti-
mated Lerner index, or price-marginal cost
" The total number of observations at the four-digit level was mark-up as a percentage of price, ranged from
sixteen while the total number at the two-digit level, i.e., SIC 20
0.081% for the dried fruit and vegetables indus-
and SIC 21, was 16 x 36 = 576 and 16 x 4 = 64, respectively. Simi-
larly, for the entire sector, i.e., SIC 20-21, the total number of ob- try to 0.717% for the cereal preparation indus-
servations was 16 x 40 = 640.
try, with an average index of 0.334% for the en-

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 1042 August 1997 Amer. J. Agr. Econ.

tire sample. Some other industries

tion to the U.S. Meat-Packing Industry." J. Agr. tha
ranked relatively Econ. 41(September
high among 1990):362-70.
the sample
tries, e.g., roasted coffee
Ball, (SIC
V.E., and R.G. Chambers. "An2095),
Economic cig
(SIC 2111), and meat packing
Analysis of Technology in (SIC 2011
the Meat Products
been under scrutiny recently
Industry." for
Amer. J. Agr. Econ. their
64(November
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behavior.
The constant-returns-to-scale hypothe
Barnett, P.G., T.E. Keeler, and T. Hu. "Oligopoly
rejected thirty-three for
Structure and theout of
Incidence forty
of Cigarette Excise ind
or for over
82% ofTaxes."
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Bhuyan, S.,tobacco industries
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21) as well as for the Alternative entire
Oligopoly Regimes: Thesample
U.S. Food (
21). Estimates of returns to scale
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Agr.
0.582 for the chewing gum
and Appl. Econ. industry
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for the flour and grain
Bresnahan, T.F. mills
"Empirical Studies
industry.
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lute values of price elasticities
with Market of de
Power." Handbook of Industrial
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Chambers, CRS
R.G. Applied hypothesi
Production Analysis: A
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Cambridge
used CRS assumption in1988.
University Press, four-digit S
studies of oligopoly
Connor, power in
J.M., and E.B. Peterson. U.S.
"New Estimates offood
bacco industries. However,
Welfare and Consumerat Losses the
in U.S. Foodmore
gated two-digit level, the constant-retu
Manufacturing." NE-165 Working paper, Dep
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Resour. Econ., University of Con
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Connor, J.M., R.T.tests
Rogers, B.W. forMarion,olig
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The Food demand elas
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Erratum
Renan U. Goetz's article, "Land Development
page 228. Five lines below equation (1), the
and Pigouvian Taxes: The Case of Peatland,"
character j should have been 9, the same as ap-
which appeared in the February 1997 issue of in equation (1).
pears
the Journal, contained a typesetting error on

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