MODELING PRICE IMPACTS OF BACKWARD VERTICAL INTEGRATION IN THE US PORK INDUSTRY

The U.S. pork sector is evolving from an industry of small, independent firms vertically linked by spot markets to one of substantially larger firms vertically connected through contractual agreements and integration. Potential benefits to this tighter vertical arrangement include lower consumer pork prices, although the true nature of this benefit is still under debate. At the same time, there is concern of market foreclosure because highly vertically integrated industry may prevent independent hog producers from having access to open markets in which to sell their output. The objective of this paper is to develop an econometric model to estimate the extent of backward integration by pork processing firms into the upstream hog production stage, taking into account the oligopsonistic nature of the processors, and to simulate the effect of vertical integration on consumer and producer prices and welfare.