Consolidation Occurred from Scale Economies

March 28, 2000

A new USDA study suggests that consolidation in the cattle and hog slaughter industries occurred because of scale economies: larger plants can product meat at slightly lower costs than small slaughter plants. A policy challenge is to ensure that high concentration does not erode price competition among packers, the study says.

"But scale economies cannot be a complete explanation for consolidation, because the cost advantages held by large plants are not particularly large," the study says. "Small plants appear to survive, and consolidation is staved off, in many industries with larger scale economies than those found in meatpacking."

For modest scale economies to lead to consolidation as massive as that in meatpacking, the industry likely was subject to strong price competition, the report speculates. "That is, small plants will close if market prices are below small plant unit costs, due to small differences between small and large plant unit costs."

Unionized plants had substantially higher wages than nonunion plants in the 1970s, but the effect on costs would be small because the share of wages in total costs was small, according to the report. For small cost differences to lead to plant closures and lockouts, the higher cost unionized plants would have to have been under strong competitive price pressures from the nonunion plants.

The report's conclusions on price competition among slaughter plants must be more speculative, "because they are based not on our own work but on the published literature, with far more information for cattle than for hogs."

And the existing literature suggests that departures from competition in cattle slaughter have been small and rare. "In competitive markets, product prices should equal marginal costs of production," the report continues, "while prices paid for inputs (such as cattle) will equal the value of the input's marginal product."

Several factors may have helped to increase concentration in meatpacking, but those effects are difficult to measure, says the report. They include economies of operating multiple plants, large firm marketing advantages, particularly in exports, and mergers among packing firms.

But if the pricing evidence is correct, says the report, then three measurable factors "clearly combined to help increase concentration in cattle slaughter: shifts in scale economies provided larger plants with modest cost advantages; aggressive price competition forced prices to move quickly near the costs of the low_cost market participants, and slow demand growth limited the number of efficient large plants in the market."

In hogs, scale economies and strong price competition also forced small plants to exit the industry, but faster demand growth allowed for more plants and lower concentration.

Access the report by clicking here.