Market power: Modeling issues and identification problems. An investigation of selected Hungarian food chains

In recent years increasing number of contractual arrangements in food chains are observed. There are several reasons for this phenomenon. Improving food quality often requires significant specific investments. Given high asset specificity, investors find it difficult to appropriate the returns on investment and thus have incentives to integrate. However, besides this transaction costs related argument, the ongoing vertical integration can result from structural developments in food chains which at different stages of the value chains, might hamper the proper functioning of markets. Using a unique, firm level dataset, in this paper we will focus on the latter issue. Due to its importance among various Hungarian value chains, we have selected the milk market. The objective is to conduct an analysis of market structure and pricing behaviour, with the main research question being the existence and significance of market power, its impact of factor allocation and the induced incentives for forward and backward integration. Several theoretical and empirical approaches including structural model estimation are applied in order to investigate whether market power is exploited or not. The empirical results are discussed against the background of several issues associated with the functioning of markets and a better understanding of institutional choice. Moreover, policy recommendation will be discussed.