That’s the title of a new working paper I’ve co-authored with my Purdue colleague, Meilin Ma. In the wake of the COVID-19 related disruptions to meat packing, I shared my thoughts about resiliency and ran crude simulations to try to understand how resiliency related to market concentration. In this new paper, we incorporate some of these ideas into a formal economic model that we can use to answer a variety of questions about the relationship between industry structure and resiliency. The model also helps us understand some of the price dynamics surrounding the packing plant shutdowns.
Here is the abstract:
“Supply chains for many agricultural products have an hour-glass shape; in between a sizable number of farmers and consumers is a smaller number of processors. The concentrated nature of the meat processing sectors in the United States implies that disruption of the processing capacity of any one plant, from accident, weather, or as recently witnessed – worker illnesses from a pandemic – has the potential to lead to system-wide disruptions. We explore the extent to which a less concentrated meat processing sector would be less vulnerable to the risks of plant shutdowns. We calibrate an economic model to match the actual horizontal structure of the U.S. beef packing sector and conduct counter-factual simulations. With Cournot competition among heterogeneous packing plants, the model determines how industry output and producer and consumer welfare vary with the odds of exogenous plant shutdowns under different horizontal structures of the sector. We find that increasing odds of shutdown results in a widening of the farm-to-retail price spread even as packer profits fall, regardless of the market structure. Results indicate that the extent to which a more diffuse packing performs better in ensuing a given level of output, and thus food security, depends on the exogenous risk of shutdown and the level of output desired; no market structure dominates. These results help illustrate the consequences of policies and industry efforts aimed at increasing the resiliency of the food supply chain, and highlights the fact that there are no easy solutions to improve resiliency by changing market structure. ”