Monopsony Power and Coordination in the Broiler Industry

• DOI: http://doi.org/10.1177/0003603X221149332
• Published date: 01 March 2023
• Date: 01 March 2023
• Subject Matter: Articles

https://doi.org/10.1177/0003603X221149332

The Antitrust Bulletin

2023, Vol. 68(1) 24 –46

© The Author(s) 2023

Article reuse guidelines:

sagepub.com/journals-permissions

DOI: 10.1177/0003603X221149332

journals.sagepub.com/home/abx

Article

Monopsony Power and Coordination

in the Broiler Industry

Eduardo Pontual Ribeiro*

Abstract

The production of broilers is a well-known example of integration of food processors with growers.

Tournament contracts are the norm in the industry, where processors provide chicks, feed, and

veterinary supplies to the growers. The industry has come under antitrust scrutiny on several cases

where processors have allegedly colluded to exercise market power both in the input and in the output

markets and unilaterally exercised monopsony power. This article discusses the possible role that the

integration model of contracting with growers may have on the monopsony power and collusion in

the input market. In the case of confirmed collusion at the input market, damage compensation may

be due. We present formulae that may be used to calculate damages in a buyer cartel.

Keywords

broilers, monopsony power, tournaments, cartel, damages

Introduction

The last half of the twentieth century witnessed chicken consumption take the lead in meat consump-

tion in the United States.1 This may be seen as laurels from a production system that started in the late

1950s, with vertical integration and the extensive use of contracts to farm out broiler production to

growers since the 1970s. More than 95 percent of broilers sold are under contract, a much higher figure

than other meat industries, such as pork, cattle, turkey, and fish. No significant spot market for broiler

purchases by the so-called processors (that control the vertical chain either by integration or by con-

tracts) exists.2

The tournament system used to calculate the remuneration of growers by processors is a recom-

mended practice from the economic theory of principal–agent models. The system is recommended to

elicit effort from growers and align incentives between processors and growers, given that the contracts

*Professor of Economics, Institute of Economics, Federal University of Rio de Janeiro, Rio de Janeiro, Brazil.

Corresponding Author:

Eduardo Pontual Ribeiro, Professor of Economics, Institute of Economics, Federal University of Rio de Janeiro, Av. Pasteur

250, rm 112, Rio de Janeiro 22290-902, Brazil.

Email: eribeiro@ie.ufrj.br

1149332ABXXXX10.1177/0003603X221149332The Antitrust BulletinRibeiro

research-article2023

1. J. M. MacDonald, Financial Risks and Incomes in Contract Broiler Production, 4, Amber WAves (Aug. 2014).

2. C. Dimitri et al., Why Did Contracts Supplant the Cash Market in the Broiler Industry? An Economic Analysis Featuring

Technological Innovation and Institutional Response, 7(1) J. Agric. Food ind. orgAn. 9 (2009).

Ribeiro 25

guarantee an expected (average) price for broilers delivered at slaughterhouses and avoid moral hazard.3

The efficiency prescription does not impede discontent from growers about the system, nor that the

system may generate welfare-reducing monopsony market power, hold-up problems, alleged manipu-

lation, and unfair treatment of the measurement of the tournament formula figures by processors4 and,

as we discuss here, a contribution to unlawful coordination.

The broiler processors, as in other meat markets, have been accused of conspiracy to raise prices in

the product market (see, for example, the other papers in this special issue). In addition, the so-called Big

Five Integrators (Tyson, Pilgrim’s Pride, Perdue, Koch, Sanderson) are defendants in the Broiler Chicken

Grower Antitrust Litigation.5 They are accused of conspiring to drive down the prices paid to growers.

The tools for such agreement supposedly included information sharing and no-poach agreements

between them to chill competition for growers, according to the plaintiffs. As of December, 2022, Tyson,

Perdue, and Koch have settled their cases, agreeing to pay more than $50 million in damages.

Interestingly, this would be a case with a simultaneous cartel in the input and output markets, with

respect to processors in the broiler production chain. This simultaneous occurrence of a cartel is not

unexpected, given the relationship between input and output markets. Hamilton and Sunding6 demon-

strate that greater market power in the input market when tournaments are used to pay for inputs, as in

the specific case of broiler production, leverages market power in the output market. The type of con-

tracts used in the industry aligns incentives for exploiting market power along the vertical chain, making

the context of a simultaneous cartel in the input and output market for broilers logical and profitable.

If the accusations of conspiracy to drive down prices paid for broiler grow-out services stand in courts

and the defendants are liable to pay damages to those with a standing in the case, the difference between

observed, cartel input prices and counterfactual, competitive prices must be calculated. Blair and

Angerhofer7 discuss such standings in the case of a simultaneous cartel in the input and output market of

conspirators, as is the alleged case for broilers. This article provides actual formulas to calculate these

price gaps under two polar assumptions on the shape of the demand and supply functions, namely, linear

and constant elasticity. The formulae assume a fixed proportion technology that may be reasonable for the

broiler industry (the conversion of live birds into meat cuts). In addition, we present additional formulae

when there is a decreasing input productivity of the input or non-constant proportion technology.

The article complements Li and Weisman.8 Their paper studies the broiler chicken cartel, the alleged

coordination of integrators on the sale of chicken meat to retailers and food service firms. They also

calculate the possible welfare losses from the cartel, given case document information on the overprice,

as argued by the plaintiffs, imposed by the defendants. This article studies the broiler chicken grower

antitrust case, where the processors are accused of compressing compensation to suppliers of broilers.

This article also estimates possible input price differences for damages from a cartel calculation. The

price differences can be later used to calculate welfare losses.

This article is organized as follows. The first section after the introduction describes the broiler indus-

try on their main characteristics and the role of tournaments for remuneration, bridging the economic

3. C. Knoeber & W. Thurman, Testing the Theory of Tournaments: An Empirical Analysis of Broiler Production, 12(2) J.

LAbor econ. 155–79 (1994).

4. S. F. Hamilton & D. L. Sunding, Joint Oligopsony-Oligopoly Power in Food Processing Industries: Application to the

US Broiler Industry, 103 Am. J. Agric. econ. 1398–413 (2021); T. Vukina & P. Leegomonchai, Oligopsony Power, Asset

Specificity and Hold-up: Evidence from the Broiler Industry, 88(3), Am. J. Agric. econ. 589–605(2006); Farmers’ Legal

Action Group, Assessing the impAct oF integrAtor prActices on contrAct pouLtry groWers (2001).

5. E. D. Okla, broiLer chicken groWer Antitrust LitigAtion, 20-md-2977, U.S. District Court for the Eastern District of

Oklahoma.

6. Hamilton & Sunding, Joint Oligopsony-Oligopoly Power in Food Processing Industries, supra note 4.

7. R. Blair & T. Angerhofer, Monopoly and Monopsony: Antitrust Standing, Injury and Damages, 89 univ. cincinnAti LAW

rev. 256 (2021).

8. D. Li & D. Weisman, ruFFLed FeAthers: the chicken cArteL in the united stAtes, The Antitrust Bulletin, this issue (2022).