Spatial price competition and buyer power in the U.S. beef packing industry

Abstract

We develop a spatially-explicit model of the U.S. beef packing industry to study key questions related to competition in an oligopsony setting. Cattle supplies are modeled at the county level, and packing plants' location, capacity, and ownership are taken as given. Packers procure negotiated cattle by competing in prices in each local (county) market, while accounting for transportation costs and pre-existing contracted supplies (alternative marketing arrangements). The model, calibrated to match observed 2022 data, is solved for the Bertrand–Nash equilibrium prices. The computed markdown in the price packers pay for fed cattle is decomposed into three components: the portion due to the inherent spatial oligopsony power; the amount due to an aspect of market concentration (firms owning multiple plants); and the component due to contracting. We find that markdowns are moderate, about $3.69/cwt or 2.6% of the fed cattle price, on average. About 54% of this markdown is due to the spatial configuration of plants, 40% is due to pre-contracted supplies, and only 6% of the markdown is attributed to multi-plant ownership by firms. Separately from markdowns, capacity constraints are found to lower fed cattle prices by 0.8% on average. Beyond the baseline, simulated counterfactual scenarios highlight specific policy-relevant questions. Markdowns are reasonably robust across counterfactuals, decreasing only modestly when plants operate independently or the use of contracting is limited. Across all counterfactual scenarios, cattle prices per se are most affected by tightening capacity constraints (as arising from a major plant closure or an upward swing in the cattle cycle).