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What Explains an Increase in the Processor-Retailer Margin? New Insights from the U.S. Fresh Beef Market

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Document pages: 47 pages

Abstract: The real-dollar processor-retailer margin of fresh beef in the United States increased by more than 30 from 2011 to 2016, a substantial and rare increase for a major agricultural product. In the meantime, the processor-retailer markup ratio increased from 35-39 to 43-47 . We investigate the increase in industry markup ratio by constructing structural models of demand and supply and employing product-level data. Estimation results suggest that the increase is not driven by price collusion of retailers; instead, it is because the industry switches from processor-led pricing in 2011-14 to retailer-led pricing in 2015-16. The switch of supply conduct positively correlates with the growth of private beef brands during the period. The correlation has implications regarding antitrust policies, echoing growing empirical evidence showing that vertical integration may result in a net anticompetitive effect and harm consumers. Counterfactual simulations show that the annual consumer surplus of fresh beef would be 14.0 or over $370 million larger had processor-led pricing remained the supply conduct of the U.S. beef industry in 2015-16.

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