Quantitative Article- Market Diversion and Market Power: California Eggs

    

The journal article Market Diversification and Market Power: California Eggs investigates accusations of price fixing of United States egg producers and the potential effects that is has on competition in the United States by exporting excess capacity abroad to keep prices high domestically and increase market power of the egg producers. This article was written in response to numerous anti trust lawsuits were filed in 2008 claiming market power and competition were being corrupted by the exportation of excess egg production that increased egg prices (Allender 2010). The hypothesis was tested in the Visalia, California that had an Albertson’s, Food Co and Von’s and a Wal-Mart that did not sell grocery items eliminating them from the study(Allender 2010).

            This article is important because it examines how exporting goods can affect the competitiveness among retailers and producers of products, which has the potential to harm consumer interests. This anti competitive strategy can transfer to many different industries of perishable and non-perishable items. The article explains that eggs are a great case study for a violation of the Capper-Volstead Act which is an act allowing producers to form associations for agricultural products¹. To give some background of the egg industry it is a recently consolidated market that is vertically integrated with only a small portion of the eggs exported because of the perishability of the product (Allender 2010). United Egg Producers Association (UEP) in which 90% of the egg market is a part of and is protected by the Capper-Colstead Act (Allender 2010). The (UEP) cooperates to have handling and quality control standards but the UEP also supervises the output and if output is too high they are able to take measures to decrease the supply of eggs in the market (Allender 2010).

            The article is a hypothesis-testing article that tests if egg producers export excess supply of eggs to decrease the domestic supply which increase the price for retailers and consumers. A model of the California egg industry was used to account for the choices a consumer concerning the store the consumer purchases the eggs, the selection of eggs at the store and the brand the consumer purchases, the promotional activities affecting the sale of eggs. The supply of eggs is measures market power by using the Bertrand Nash model and standard deviation were a signal of increased market power due to the exportation of eggs. Retail prices were measured as well as the producers’ size and cartons, marginal costs, and differentiation among the eggs and input prices. The results found that producer margins are positively correlated to egg exports but this power is declining over time. The losses amounted to $399,111 a year in Visalia where the hypothesis was tested but in terms of the welfare in United States it could amount to $1.19 billion a year(Allender 2010). This huge loss in the United States would warrant a Department of Justice or Federal Trade Commission investigations because of the large impacts the exportation of the excess supply of eggs has on the country and consumer welfare (Allender 2010)..

            Practicing managers selling goods or commodities should be made aware of this article because the concept can apply to many industries that produce goods that have an ability to be exported. Retailing managers should understand the value chain relationship in their industry and what is done with excess capacity.  The excess capacity in this case circumvented the laws of supply and demand and used exportation to keep prices high for the retailers creating low profit margins.

Allender, W., & Richards, T. (2010). Market Diversion and Market Power:

California Eggs. Review Of Industrial Organization, 36(1), 37-58.

doi:10.1007/s11151-009-9235-y

¹http://www.uwcc.wisc.edu/info/capper.html

http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=48111335&si

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