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Beef Processing in the U.S.

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The Big Four—Tyson, JBS, Cargill, and National Beef—control 85% of U.S. beef processing. The cattle population is at its lowest level since 1951, making it difficult for the Big Four to operate efficiently. Even small plants built to process 450 cattle per day are now processing only 350.—bbc.com

Price-Fixing by the Big Four Meat Processors

All four companies—Tyson, Cargill, JBS USA, and National Beef Packing—faced allegations of conspiring to restrict beef supply and inflate beef prices, which led to price-fixing lawsuits and settlements.—reuters.com

Table 1 Hypothetical Payoffs of the Top Two Meat Processing Firms in the U.S.

Answer the following questions to check your understanding of the story.

Why would a firm struggle to enter the U.S. meat processing market?

Because __________ creates a barrier to entry.

Wrong! - A low minimum efficient scale makes it easier for new firms to enter. High cattle and processed meat prices are not barriers to entry.

That's Right! - At the minimum efficient scale, a firm processes the quantity of cattle that achieves lowest average cost. With the reduced cattle inventory, a new entrant cannot produce at the minimum efficient scale.

What type of market is the U.S. meat processing industry?

Wrong! - A monopoly has only one seller. Perfect competition and monopolistic competition have many small firms.

Well Done! - With a four-firm ratio of 85%, the industry is an oligopoly. A large minimum efficient scale makes the industry a natural oligopoly.

Were the Big Four firms accused of cartel-like behavior?

Wrong! - What is a cartel? Why can’t a cartel consist of four firms? Do all oligopolies act like a cartel? Does conspiring together to restrict supply always happen when the supply of an input decreases?

Good Job! - A cartel is a group of firms colluding to limit output, raise the price, and increase economic profit. The Big Four are accused of conspiring to restrict beef supply and inflate beef prices.

Suppose that Tyson and JBS make an agreement to decrease production. Table 1 shows the profits from complying or cheating on the agreement. What is the Nash equilibrium when the game is played once?

The Nash equilibrium is that Tyson _________, and JBS _________.

Wrong! - If both firms comply, either firm can increase its profit by cheating. If one firm cheats while the other complies, the complying firm can increase its profit by cheating.

Correct! - Regardless of Tyson’s action, JBS’s best action is to cheat. And regardless of JBS’s action, Tyson’s best action is to cheat. This is the Nash equilibrium.

Why would Tyson and JBS not play the Nash equilibrium?

Wrong! - If the game is played only once, cheating goes unpunished, so firms play the Nash equilibrium. Do four large firms necessarily comply? Why would a prisoners’ dilemma game not have the best outcome for the players?

Right! - When the firms play the game repeatedly, they comply because they earn more profit and cheating can trigger a punishment strategy.

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