Nonparametric Tests of Profit Maximization in Oligopsony with Application to the Beef Packing Industry

In this paper, we develop new, nonparametric methods of testing for static profit maximization given noncompetitive behavior. Repeated application of the test yields "maximum likelihood " estimates of the degree of noncompetitive behavior. Using plant-level data, these newly developed nonparametric methods are employed to test the hypothesis that beef packers are profit maximizers and to measure the extent to which packers influence prices in fed-cattle markets. Key words: beef packers, noncompetitive behavior, nonparametric tests. Over the past fifteen years, the number of firms participating in the beef-packing industry has dwindled and now four firms slaughter as much as 80 % of all fed cattle in the United States. Accompanying the concentration in this indus-try have been allegations that the remaining large firms engage in noncompetitive behavior and, in particular, manipulate cattle markets to the detriment of cow-calf producers and feedlot operators. In this paper, nonparametric mea-sures and tests of market power are proposed to investigate this issue. Econometric models designed to test hypoth-eses of noncompetitive conduct have been pro-posed by Iwata, by Appelbaum (1979, 1982), and by Gollop and Roberts. Appelbaum (1982) proposes a model seeking evidence of oli-gopoly pricing. A profit-maximizing oligop-olistic firm chooses output so that marginal rev-enue equals marginal cost of production. The firm's conjectural variation, the extent to which management believes its output decisions affect industry output, influences the calculation of marginal revenue since marginal industry out-put may not equal marginal firm output. Paul Driscoll, now deceased, was associate professor in the De