Evaluating Reforms in Canadian Chicken Marketing Mechanisms Using a Linear-Quadratic Inventory Model

Abdessalem Abbassi, Laval University
Jean-Philippe Gervais, North Carolina State University

Abstract

Marketing institutions in supply managed industries are evolving due to broad globalization pressures. The output and sales decisions of chicken processing firms under two different pricing mechanisms are modeled using a linear-quadratic inventory model. Decision rules lead to structural equations that relate output and sales to their own lagged values, lagged inventories and lagged prices and cost indicators. A Generalized Method of Moments (GMM) estimator is applied to the system of equations. The null hypotheses no adjustment costs in processing and no role for inventories in marketing are rejected. We simulate the impacts of reforming the chicken pricing mechanism, moving from producers vs. processors bargaining to a formula-based price (referred to as “cost-plus"). Output in the industry is higher under the bargaining pricing system mostly because processors pay a lower price than under the “cost-plus" mechanism. Simulations reveal that producers' expected profits are lower on average under the bargaining system than under “cost-plus." Moreover, the “cost-plus" system reduces the variability of profits.