A Slaughterhouse Oligopsony: An Empirical Assessment of Market Power

This paper analyzes the beef supply chain in Brazil with the purpose of identifying the existence of market power between farmers and slaughterhouses. The study is divided in two parts. First, we characterize the beef sector in Brazil, and conclude that the industry structure is close to a oligopsony. Following the tradition of the New Empirical Industrial Organization (NEIO), we then proceed to apply an econometric test to detect market power. This new method tries to overcome the usual limitations in which the results obtained are sensitive to assumptions about production technology. Using profit maximization conditions for slaughterhouses, and a time series of monthly data over a period of 14 years from the state of Sao Paulo, we found evidence of weak to moderate market power in the relationship between slaughterhouses and producers. Robustness checks through alternative models only confirmed these results. Also, we did not find evidence that market power has increased any in recent years, during which the industry concentration ratio has increased substantially.