Market power is defined in terms of a firm's ability to affect directly other participants in the market or such market variables as prices and promotion practices. The article distinguishes between short‐run and long‐run power and between offensive and defensive power. More than a dozen sources of power are identified in the food industry. Some of the things commonly regarded as manifestations of market power are unreliable indicators of it. In particular, higher‐than‐average profits and market power do not necessarily go together.
N 'ERLOVE has proposed an ingenŸ method of estimating the response of acreage of a crop to the anticipated price for the crop. 1 Anticipated prices are not observable, but he hypothesizes that they change from year t --1 to year t by some fraction of the difference between the actual and anticipated price in year t -1:(1) Pt* -P't-1 = 5(Pt-1 -P't-l) 0 < ~ < 1 Pt* and P*t-a are anticipated prices, Pt-1 Ÿ an actual market price, and is a "coefl~cient of expectation."Nerlove shows that (1) implies (2): (2)
Pi* = 5Pt-~ q-(I -5)SPt-2 + (1 -5)=SPt-8 q-" ""Acreage, xt, is assumed to be a linear function of expected price and an error term, ut (together with trend where appropriate):(3) xi = a0 + alPt* -+-uf A supply elasticity coefficient can be computed from al. Equations (1) and (3) lead to (4) xt = r0 + r~Pt-~ + r~xt_l + vt ~2 equals 1 --~, ~1 equals al~ and T0 equals ao~. All variables of (4) are observable. ~~ and ~1 can be statistically estimated, and they lead to an estimate of al. Using this approach, Nerlove computed supply elasticities for cotton, wheat and corn over the period 1909-32.The approach assumes that acreage in any year represents the influence of 15ast market prices, a smooth trend, and random factors. Intuitively, one 1Marc Nerlove, "
895F ARM policy and related problems have directed increasing attention to economic questions about farming or some branch of it as an industry, as distinguished from questions about individual farms as firms.Much of the analysis of industry questions has drawn upon the theory of the firm under perfect competition, implicitly if not explicitly. Two difficulties arise in moving from relations that control firm behavior to relations that control industry behavior. The first is aggregation of functions for dissimilar firms into a single function for the industry. The second is that some values fixed for a single firm (e.g., prices of inputs and outputs) are not fixed for the industry as a whole. This Note little more than acknowledges the first difficulty and concentrates upon the second.Let us assume that the production function for the ith firm operating under perfect competition has the Cobb-Douglas form where Yi is the quantity of output and Xli and X 2i are the quantities of two inputs comprising total input. A convenient device, however unrealistic, by which to get over the aggregation problem is to assume that all firms have identical homogeneous production functions. Thenwhere Y is total output of the industry, X, and X 2 are total inputs, and a, b-; and b« equal ai, b u, and b2i, respectively.' Or the parameters of (1) could be taken to be weighted means of or approximations to corresponding values of somewhat dissimilar firms making up the industry. The more heterogeneous the industry, the more difficult the aggregation problem is.The key decision relation in allocating resources and determining out-
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