Quality measurement, transaction costs, and market structure in the United States slaughter cattle market

A large policy debate has arisen surrounding the increases in the level of quality measurement and the rise in exclusive dealing relationships in the U.S. slaughter cattle market in the 1990's. While the participants in these changes maintain that they are simple market responses to changes in the demand for and ability to control quality, others claim that the changes are the result of market power and the pursuit of oligopsony profit. This dissertation uses simple economic analysis to demonstrate that the observed changes are compatible with a competitive market environment and empirically measures the degree and impact of imperfect quality measurement and quality selection that occurs in the market.;It is found that, from 1997 to 1999, the choice (good quality) to select (bad quality) price spread averaged ;Other issues examined include the supply response of quality to quality premiums, the optimal level of quality measurement, the relationship between the level of quality measurement and vertical market structure, and the policy debate surrounding these issues. It is proposed that the increasing level of quality measurement may be the result of: (1) increased downstream valuation of quality; (2) technological advances increasing the ability of sellers to control quality; and (3) decreases in the cost of quality measurement. It is proposed that the rise in exclusive dealing relationships that is observed to occur when the level of quality measurement increases may be the result of: (1) increased marketing costs resulting from the higher level of quality measurement; and (2) facilitating specialization and rent generation by the reduction of uncertainty. Finally, it is also proposed that the observed division of political support and opposition is completely compatible with a competitive market and imperfect quality measurement.