DEGREE OF COMPETITION IN THE U.S. PEANUT BUTTER INDUSTRY: A DYNAMIC ERROR CORRECTION APPROACH

Reforms in the U.S. peanut program entail a reduction in support price of peanuts. The degree to which price reduction is passed on to final consumers of peanut butter is directly related to the degree of competition in the peanut butter market. To assess the impact of changes in the peanut program on final consumers, it is necessary to know the degree of competition in the peanut butter industry. A dynamic error correction model (ECM) developed by Steen and Salvanes is estimated using nonlinear-three-stage-least-squares procedure to measure the degree of competition. Results indicate that the market is characterized by perfect competition in the short-run. The hypothesis of perfect competition is rejected in the long-run, although the long-run solution is close to a perfectly competitive behavior. This result has important implications for the peanut butter industry. Reductions in the support price of peanut may not be fully passed on to peanut butter consumer, but the consumers' welfare gain will certainly be much higher than what it would have been if the market was collusive in structure.