Research

Abstract: Separately measuring firm buyer and seller power is important for policy-making, but challenging. In this paper, we suggest a new methodology to do so and apply it to French dairy processors. These firms exert buyer power when purchasing raw milk, and seller power when marketing dairy products. The analysis is based on plant-level data on dairy firms, with observations on prices and quantities of raw-milk input by origin and output by product from 2003 to 2018. We rely on a production function approach to estimate total margins. The existence of a commodity, (i) substitutable as an input or as an output, and (ii) exchanged on global markets where firms are price-takers, allows us to separately estimate firm-origin markdowns and firm-product markups. We show this methodology can also be useful in other contexts, with more limited data. Markdown estimates imply that dairy firms on average purchase raw milk at a price 16% below its marginal contribution to their profits, while markup estimates indicate that firms sell dairy products at a price exceeding their marginal costs by 41%. Our results show substantial variations in buyer and seller power exploitation across firms, products, and time. We analyze how shocks to local farmer costs and international commodity prices pass through the supply chain. Processors partially absorb such shocks by adjusting markups and markdowns, thus smoothing variations in farmer revenues. It further implies that 65% of subsidies are currently diverted from farmers due to processor buyer power. A price floor on raw milk could be an alternative welfare-improving policy.

Abstract: This article bridges monopoly, monopsony, and countervailing power theories to analyze their welfare implications in a vertical supply chain. We develop a bilateral monopoly model with bargaining that accommodates upstream monopsony and downstream monopoly power. In equilibrium, the ‘‘short-side rule'' applies: the quantity exchanged is determined by the firm willing to trade less. Welfare is maximized when each firm's bargaining power exactly countervails the other's market power. Otherwise, double marginalization arises in the form of double markdownization under excessive downstream bargaining power, or double markupization under excessive upstream bargaining power. We offer novel insights for price regulation (e.g., price floors) and competition policy.

Abstract: How do input market fragmentation and liberalization affect production allocation? This paper analyzes the impact of production quotas and their progressive removal on the French milk market. We show that production quotas generated two types of distortions. First, by mechanically fixing production shares across French départements at their pre-quota (1984) level, quotas stopped a natural spatial concentration for about 25 years, a process that restarted right after the beginning of the quota removal process in 2008. Second, the design of the quota system spurred the growth of small farms while constraining the expansion possibilities of larger farms. This redistributive scheme thus successfully refrained inequalities among farms growing until then, yet at the cost of distorting the competition-led cream-skimming of farms. We finally document how the catching-up process in farm selection following the quota removal intervened more or less early across départements, depending on the stringency implied by quota constraints at the local level. We rationalize these observations with a simple model of perfect competition between heterogeneous farms. At the farm level, the effect of the liberalization ultimately depends on (i) the efficiency gains the farm can achieve with the liberalization and (ii) its location in a département sheltered from competition or constrained by quotas. In subsequent analysis, we plan to build a structural model to assess better the (re)allocative effects of such input market liberalization.

Abstract: The idea of introducing price floors in agricultural sectors has recently resurfaced in the public debate. A flagship measure of the Common Agricultural Policy (CAP) in the 1970s and 1980s, price floors proved to be a source of inefficiency and left bad memories behind. This note, however, shows that a price floor on raw materials can be efficient in sectors where farmers face buyers with monopsony power —namely when buyers can negatively influence prices. In the cow milk sector, on average over the period 2003-2018, processors buy milk at a price 16% below the marginal profits they make from it. A price floor indexed to international agricultural commodity prices could lead to better remuneration for farmers without necessarily harming consumers, by reducing the margins obtained by processors when buying raw materials. A price floor can also improve the efficiency of agricultural supply support policies (subsidies, trade policy, subsidised insurance). An in-depth examination of the situation in other sectors is needed to determine whether price floors should be introduced more widely.