Saturday, August 28, 2010

Perfect competition in agriculture?!

Textbooks trying their best to make a case for the relevance of perfect competition -- the type of market structure described by the ubiquitous supply and demand framework -- sometimes claim that "Agriculture also fits fairly well in most ways since individual farmers are clearly price takers" (the Ragan and Lipsey text, as quoted in The Economics Anti-Textbook, p.56). As we then pointed out, "many farmers ... are increasingly squeezed by the market power of the few firms that supply their inputs and the few buyers of their outputs". So yes, individual farmers may be price takers, but that doesn't mean that the markets are competitive. Individual farmers are price takers in a monopsony, where one buyer dictates the price in the same way that one seller dictates the price in monopoly.
  Here's a link to a new study on "Buyer Power in U.S. Hog Markets", a working paper put out by the Global Development and Environment Institute at Tufts University. It describes a market that can be called oligopsonistic: one where a few buyers in the market have significant market power.