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Testing the Monopsony-Inefficiency Incentive for Backward Integration

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  • Azzeddine Azzam

Abstract

In theory, monopsony at one stage in a vertically related market provides an incentive for backward integration into the adjacent competitive stages. By integrating backward, a monopsonist internalizes the monopsony inefficiency due to underemployment of the factor produced upstream. However, little is known about the importance of such incentive in practice. In this paper I provide an empirically implementable model to test the monopsony-inefficiency incentive for vertical integration. For illustration, the model is applied to the U.S. beef slaughter industry. Findings seem to support the monopsony-inefficiency incentive for backward integration by the industry into the live cattle market. Copyright 1996, Oxford University Press.

Suggested Citation

  • Azzeddine Azzam, 1996. "Testing the Monopsony-Inefficiency Incentive for Backward Integration," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(3), pages 585-590.
    • Handle: RePEc:oup:ajagec:v:78:y:1996:i:3:p:585-590
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    Cited by:

    1. Azzam, Azzeddine M., 1998. "Competition in the US meatpacking industry: is it history?," Agricultural Economics, Blackwell, vol. 18(2), pages 107-126, March.
    2. Pace Guerrero, Ignacio, 2010. "Producción de atributos de calidad: efectos sobre la estructura de oferta y del mercado. Un análisis aplicado al mercado argentino de leche fluida," Nülan. Deposited Documents 1334, Universidad Nacional de Mar del Plata, Facultad de Ciencias Económicas y Sociales, Centro de Documentación.
    3. Martinez, Steve & Zering, Kelly, 1997. "Vertical Coordination and Consumer Welfare: The Case of the Pork Industry," Agricultural Economic Reports 262048, United States Department of Agriculture, Economic Research Service.
    4. Love, H. Alan & Capps, Oral, Jr. & Williams, Gary W., 2010. "Concentration In Beef Packing and Slaughter Cattle Pricing," Journal of Food Distribution Research, Food Distribution Research Society, vol. 41(3), pages 1-17, November.
    5. Jinho Jung & Juan Sesmero & Ralph Siebert, 2022. "A structural estimation of spatial differentiation and market power in input procurement," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(2), pages 613-644, March.
    6. Ward, Clement E., 2002. "A Review of Causes for and Consequences of Economic Concentration in the U.S. Meatpacking Industry," CAFRI: Current Agriculture, Food and Resource Issues, Canadian Agricultural Economics Society, issue 3, pages 1-28, January.
    7. Hudson, Darren, 2000. "Contracting In Agriculture: A Primer For Farm Lenders," Research Reports 15789, Mississippi State University, Department of Agricultural Economics.
    8. Martinez, Steve W. & Smith, Kevin E. & Zering, Kelly D., 1998. "Analysis of Changing Methods of Vertical Coordination in the Pork Industry," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 30(2), pages 301-311, December.
    9. Sesmero Juan, 2018. "Spatial Pricing in Uncontested Procurement Markets: Regulatory Implications," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 16(1), pages 1-14, January.
    10. Sanjib Bhuyan, 2002. "Impact of Vertical Mergers on Industry Profitability: An Empirical Evaluation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 20(1), pages 61-79, February.
    11. Bhuyan, Sanjib, 2001. "Impact Of Vertical Mergers On Food Industry Profitability: An Empirical Evaluation," 2001 Annual meeting, August 5-8, Chicago, IL 20469, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    12. Jinho Jung & Juan Sesmero & Ralph Siebert, 2020. "Spatial Differentiation and Market Power in Input Procurement: Evidence from a Structural Model of the Corn Market," CESifo Working Paper Series 8088, CESifo.
    13. Bhuyan, Sanjib, 2003. "What Determines Vertical Mergers in U.S. Food Manufacturing Industries?," 2003 Annual meeting, July 27-30, Montreal, Canada 22146, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    14. Pritchett, James G. & Liu, Donald J., 1998. "Estimating Backward Integration In A Primary Input Market: The Case Of U.S. Hog Industry," Conference Papers 14480, University of Minnesota, Center for International Food and Agricultural Policy.
    15. Love, H. Alan & Burton, Diana M., 1999. "A Strategic Rationale For Captive Supplies," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 24(1), pages 1-18, July.
    16. Holloway, Garth J. & Hertel, Thomas W. & Han, Frank M., 1997. "Does Market Power Matter?," Working Papers 225884, University of California, Davis, Department of Agricultural and Resource Economics.
    17. Stephen R. Koontz & John D. Lawrence, 2010. "Impacts of alternative marketing agreement cattle procurement on packer costs, gross margins, and profits: evidence from plant-level profit and loss data," Agribusiness, John Wiley & Sons, Ltd., vol. 26(1), pages 1-24.
    18. Pritchett, James G. & Liu, Donald J., 1999. "Modeling Price Impacts Of Backward Vertical Integration In The Us Pork Industry," 1999 Annual meeting, August 8-11, Nashville, TN 21594, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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