A stochastic production frontier estimator of the degree of oligopsony power in the U.S. cattle industry

The objective of this study is to estimate the degree of oligopsony power in the U.S. cattle industry with the use of the recently developed stochastic frontier estimator of market power. Unlike the seminal paper where estimation of the mark-up in an output market at firm level was the main objective, this work proposes a stochastic production frontier estimator in order to estimate the mark-down in an input market at aggregate level. Furthermore, with the help of the new estimator we derive and estimate the Lerner index of oligospony power for the U.S. cattle market. For the empirical part of the study we employed annual time series data from the U.S. cattle/beef industry for the time period 1970-2009. Our results suggest that beef packers exert market power when purchasing live cattle for slaughter.