The traditional economic definition of monopoly power is a firm’s ability to set or otherwise influence selling price to be above marginal cost; similarly, monopsony power is a firm’s ability to set buying price to be below marginal revenue. The Lerner Index (LI), which dates back to 1934, measures these differences and is the benchmark for measuring market power.

The HHI and the CR4 are typically used as indicators of market power because they can be computed from publicly available market share data. Both the HHI and CR4 have been
theoretically linked to the LI under simplifying assumptions; nevertheless the Lerner Index is generally accepted as a better indicator of market power than the other measures. Numerical values for the Lerner Index are rarely available, however, because the kind of profit and cost data needed to compute the index are not publicly available for most firms and industries.

Competition drives pure profit to zero, after accounting for a fair, competitive return on labor, capital, risk and other factors. Thus, a competitive firm or competitive industry would be expected to have a Lerner Index of zero. With monopoly or monopsony power, the LI is expected to be positive; the more market power the firm or industry exerts, the larger the index value.

The historic cattle case, Pickett v. Tyson/IBP, made public highly detailed weekly profit & loss data for Tyson/IBP’s slaughter and processing divisions. LI values for these divisions are shown in Table 1 along with the LI values for cow/calf operations and cattle feeding operations for the same time period, February 1994 through October 2002.

LI values for cow/calf operations and for cattle feeding are close to zero (Table 1) and not significantly different from zero, indicating highly competitive markets. The LI for Tyson’s processing division is 9%, but not statistically different from zero. The LI for Tyson’s slaughter division is 33%, and significantly different from zero. A LI value of 33% means that profits are one-third of the difference in value between what goes out the slaughterhouse door and the animal that comes in. Profits accruing to meat retailers are not known, but the increasing wholesale-to-retail beef price spread suggests that profits to meat retailers have been increasing for the past few years.

Although critical values of the LI have not been established in general, results in Table 1 suggest that cow/calf, fed beef and Tyson’s processing division are competitive sectors, but that the slaughter sector is not.

Extensive statistical analysis of the weekly profit and loss data shows that: (a) the Lerner Index for the slaughter Division goes up with captive supply, (b) cash price for slaughter cattle went down with captive supply, and (c) the wholesale price of beef was not affected by captive supply. Statistical analysis also showed that there was no significant relationship between average weekly slaughter costs and captive supply. Conclusion: monopsony (buyer) power is being exerted in the cash market for slaughter cattle. This is just what independent cattlemen have been saying, and with which a Jury of your Peers agreed. RT