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 areseveral reasons for this phenomenon. Improving food quality often requires significant specific investments. Givenhigh asset specificity, investors find it difficult to appropriate the returns on investment and thus have incentives tointegrate. However, besides this transaction costs related argument, the ongoing vertical integration can result fromstructural developments in food chains which at different stages of the value chains, might hamper the properfunctioning of markets. Using a unique, firm level dataset, in this paper we will focus on the latter issue. Due to itsimportance among various Hungarian value chains, we have selected the milk market. The objective is to conduct ananalysis of market structure and pricing behaviour, with the main research question being the existence andsignificance of market power, its impact of factor allocation and the induced incentives for forward and backwardintegration. Several theoretical and empirical approaches including structural model estimation are applied in order toinvestigate whether market power is exploited or not. The empirical results are discussed against the background ofseveral issues associated with the functioning of markets and a better understanding of institutional choice. Moreover,policy recommendation will be discussed.