Oligopoly power and allocative efficiency in food and tobacco industries

Date of Completion

January 1995


Economics, Agricultural




This study estimates and tests for the degree of oligopoly power and systematically examines the allocative efficiency losses of oligopoly power in 39 U.S. food and tobacco manufacturing industries using 1972-87 data. A log-linear rendition of the "new empirical industrial organization" (NEIO) approach was used for testing and estimating the degree of oligopoly power, while the allocative efficiency losses were estimated using a formal model of oligopoly. The unique features of this study include estimation of allocative efficiency losses using the NEIO approach and estimation of social cost due to industry level rent-seeking activities.^ Empirical findings verify that most of the U.S. food and tobacco manufacturing industries have significant oligopoly power and that all industries exhibit nonconstant (increasing or decreasing) returns to scale. The estimated allocative efficiency losses in terms of Harberger losses in these industries stand at 2.66% of sales in 1987 or approximately $9 billion. When rent-seeking expenditures were taken into account, the total social cost of oligopoly power slightly increased to 2.73\% of sales in 1987 or \$9.18 billion, indicating that a low rate of rent dissipation due to lobbying activities. ^