The Price Effects of Rising Concentration in US Food Manufacturing

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Since the 1960's concentration in the U.S. food processing industries has increased dramatically in comparison to the rest of manufacturing. This paper investigates the price and cost consequences of these large changes in concentration for 35 food processing industries for the period 1963 to 1992. A two equation model is estimated, where the first equation is a price equation that relates changes in prices to changes in CR4, to changes in average variable cost, and to other control variables, while the second equation is an average cost equation that relates changes in average variable cost to initial concentration levels, to changes in concentration, to changes in input prices and other control variables. The first equation identifies a market power effect by focussing on the effects of concentration on price, holding cost constant, while the second equation identifies an efficiency effect by focussing on how concentration influences unit costs. These equations are estimated for differences in prices and average costs that cover intervals of five, ten and twenty years. The results indicate that there is both a market power and an efficiency effect from changing concentration, but that on balance the efficiency effect is stronger so that increases in concentration have produced lower prices.