May 24, 1999

Industrialization and structural change sometimes limit competition, but the broader effects more often reflect competition, says a USDA economist. Traditional methods of production, environmental control and public service delivery, however, may be undermined. Policy makers should identify the effects that need restraint and design methods to reach that goal.

Writing in the May issue of USDA's Agricultural Outlook, James MacDonald notes many food and agricultural industries are making broad structural changes, and the general trend is toward fewer but larger producers.

In some markets, structural changes have led to high concentration and significant market power, he adds, and in some of those cases, federal competition policies can counteract market power without losing the economic advantages that industrialization brings.

"Industrialization also raises issues that have little to do with market power or competition. Industrialization may overwhelm existing environmental controls, create intense new stresses on local public services, undermine the incomes of producers using more traditional production methods and change rural communities," MacDonald writes. Competition policies "are not designed to deal with those issues; indeed, competition may even intensify those stresses."

For example, he adds, if large confinement feeding operations produce animals at lower costs than traditional operations, then the more competitive the industry and the more rapidly production shifts to large operations. If large operations generate greater localized volumes of wastes, greater competition also will lead to earlier and more intense environmental problems.

Industrialization may lead to concentration which may limit competition, because concentrated sellers may be able to raise prices charged to buyers and concentrated buyers may be able to reduce prices they pay to sellers.

"Reduced competition may in turn limit opportunities for society to gain from industrialization by limiting the spread of innovations and by tilting the market's results in favor of the players with market power," says MacDonald.

High concentration can lead to less competition but does not always do so, he adds.