Research

Working Papers

Markups and Markdowns in the French Dairy Market (Latest WP version)

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.

Production Quotas Reforms and the Cream-Skimming of the French Milk Market (Available upon request)

with Etienne Guigue

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.

Published Paper

Purchasing alliances and Product Variety (CREST WP version)

with Marie-Laure Allain and Claire Chambolle. International Journal of Industrial Organization(2020).

Abstract: We analyze the impact of purchasing alliances on product variety and profit-sharing in a setting, in which capacity-constrained retailers operate in separated markets and select their assortment in a set of differentiated products offered by heterogeneous suppliers (multinationals vs. local SMEs). Retailers may either have independent listing strategies or build a buying group, thereby committing to a joint listing strategy. This alliance may cover the whole product line (full buying group) or only the products of large suppliers (partial buying group). We show that a buying group may enhance the retailers' buyer power and reduce the overall product variety to the detriment of consumers. Our most striking result is that partial buying groups do not protect the small suppliers from being excluded or from bearing profit losses; they may even be more profitable for retailers than full buying groups.

Other Publication

Les centrales d’achat : quels enjeux de concurrence ?

with Marie-Laure Allain and Claire Chambolle and Hugo Molina. Notes de l'Institut des Politiques Publiques, Note IPP n°79 Février 2022.