Information Pooling and Collusion: Implications for The Livestock Mandatory Reporting Act

Abstract

This paper develops a conceptual model that analyzes the impact of increasing market transparency under the Livestock Mandatory Reporting Act of 1999 on the incentives for collusion in the U.S. meatpacking industry. More than likely, meatpackers will have asymmetric priors regarding the distribution of livestock prices. Moreover, they lack the incentives to voluntarily reveal their real priors. Thus, the enforcer of the Act faces a problem of asymmetric information regarding the informativeness of publicly disclosed market reports relative to that of packers' priors. Analytical results predict that divergent priors of Bayesian packers can be updated by more informative market reports, so that the resultant posteriors converge, enabling packers to identify a more efficient, unanimous trigger price. This enhances observability of deviations from collusive behavior, and increases the internal policing efficiency by a cartel that employs trigger price strategies to monitor deviations by its members. Contrary to the Act's well-intended objectives, this is consistent with promoting collusion and decreasing market efficiency.

Livestock Mandatory Price Reporting: A Literature Review and Synthesis of Related Market Information Research

“…They concluded prices were twice as volatile under the mandatory system, which was unexpected by the research team. These findings conflict with the expectations by Njoroge (2003) that mandatory price reporting would reduce volatility of slaughter livestock prices. A key to this disparity is 9 Rebuilding requires reducing the number of animals in the meat system to increase the number in the breeding herd.…”

“…Albaek, Møllgaard, and Overgaard (1997) investigated the impact of published firm-specific transactions prices for ready-mixed concrete in three regions of Denmark. Wachenheim and DeVuyst (2001), Azzam (2003), Njoroge (2003), and Njoroge et al (2007) represent similar thinking but without the empirical application. Albaek, Møllgaard, and Overgaard concluded that publication of these prices had the unintended consequences of allowing firms to reduce the intensity of oligopoly price competition, and this led to increased consumer prices for concrete rather than reduced prices as was intended by the regulatory agency.…”

“…This appears to be the largest concern found in the literature (e.g., Wachenheim and DeVuyst 2001, Azzam 2003, and Njoroge 2003. A variety of empirical assessments of this concern are needed to see if this is indeed an unintended consequence of the policy.…”

Information disclosure and peer effects in the use of antibiotics

“…(see, e.g., Albaek et al 1997, Njoroge 2003 3 However, these studies do not explain why firms often oppose mandatory information disclosure. 4 Consequently, when the effect of mandatory information disclosure is insignificant, studies often blame consumers' mistrust, disinterest, or lack of understanding (see, e.g., Hibbard andJewett 1997, Marshall et al 2000).…”

Information pooling and collusion: an empirical analysis

“…What we learned is that transparency in livestock markets may either promote collusion (Njoroge, 2003), or foster more competitive conduct (Azzam, 2003). 4 As in Jin, firms in the two studies are risk-averse, and accuracy of information lowers risk.…”