A dynamic model of oligopoly and oligopsony in the U.S. potato-processing industry

In this paper, we estimate oligopoly and oligopsony price distortions in the U.S. potato chips and frozen French fries sectors, based on a linear-quadratic, multi-period optimization model of processors that face quadratic adjustment costs associated with a change in the processed quantity of input. Based on this model, we are able to derive a parameter that nests various types of firm conduct, ranging from price taking through Nash-Cournot behavior to collusion. In addition, we estimate market conduct and associated price distortions in a sub-game perfect, dynamic-feedback model, and compare the results with those derived from an open-loop model. The results indicate that the behavior of potato-processing firms is much closer to price taking than to collusion. Moreover, we find that price distortions due to oligopsony in the purchase of potatoes are smaller than oligopoly price distortions in either the potato chips or the frozen French fries sectors. [EconLit citations: L13, Q13.] © 2005 Wiley Periodicals, Inc. Agribusiness 21: 409-428, 2005.