Review of Industrial Organization 20: 115–126, 2002.
© 2002 Kluwer Academic Publishers. Printed in the Netherlands.
Market Power and/or Efﬁciency: A Structural
RIGOBERTO A. LOPEZ
, AZZEDDINE M. AZZAM and CARMEN
Department of Agricultural and Resource Economics, University of Connecticut, Storrs, CT
Abstract. This article separates oligopoly-power and cost-efﬁciency effects of changes in industrial
concentration and assesses their impact on output prices in 32 food-processing industries. Empirical
results indicate that although concentration induces cost efﬁciency in one-third of the industries,
oligopoly-power effects either dominate cost efﬁciency or reinforce inefﬁciency, resulting in higher
output prices in most industries. The article also provides fresh econometric estimates of oligopoly
power and economies of size for the industries in question.
Key words: Economies of scale, food processing, industrial concentration, industrial organization,
JEL Classiﬁcations: L00, L11, L13, L66.
In his review of the new empirical industrial organization (NEIO) literature, Bres-
nahan (1989) concludes that although NEIO models are useful in measuring market
power, they are not as useful in guiding policy when market structure rather than
conduct is the policy target. First, he argues that the narrow focus of NEIO studies
on single and often heavily concentrated industries is too limited to be useful
in mapping structure into conduct and performance. Cross-industry studies, on
the other hand, provide information over a wider range of industries and, despite
their well-known problems, continue to inﬂuence policy (Salinger, 1990). Second,
Bresnahan also argues that since market power is imputed rather than observed in
NEIO models, its relationship to observable structural and behavioral variables in
often unclear to policy makers. Thus, to make NEIO ﬁndings more policy-relevant,
studies should consider a wider range of industries and incorporate observable
structural measures of interest to policy makers, such as industrial concentration.
The authors are grateful to two anonymous referees as well as seminar participants at the Eco-
nomics Research Service (USDA), Universit
e Laval and University of Basel. Financial support was
provided by the USDA CRREES special grant No. 00-34178-9036, the University of Connecticut
and the University of Nebraska. This is Scientiﬁc Contribution No. 1951 of the Storrs Agricultural