Measuring market power and cost-efficiency effects of industrial concentration

In this paper I show how Appelbaum's framework for testing price-taking behavior in a single industry can be formally extended to consider concentration explicitly. In so doing, I separate the market power effect of concentration from its cost-efficiency effect. Data from the US beef-packing industry are used to illustrate an empirical application of the model. The findings support oligopsonistic market power and slaughter-cost efficiency in the industry. However, the cost-efficiency effect outweighs the market-power effect.