Hiding the True Extent of Concentration and Market Power
         with Partial Ownership and Strategic Alliances 
                                 
                         C. Robert Taylor
                        Auburn University

We are in the midst of an incredibly rapid and incredibly massive reorganization of global
agribusiness firms that is unprecedented in the history of agriculture. Mergers, strategic alliances,
joint ventures, co-opting of co-ops, and partial ownership of other agribusiness firms makes the
emerging structure of agribusiness difficult to describe and to understand.  It is clear, however,
that the emerging web of firms with fuzzy alliances and other linkages may hide the true extent
of market concentration and market power.

The prevalent measure of concentration used in antitrust enforcement is the
Herfindahl-Hirschman Index (HHI).  If the HHI associated with a proposed merger exceeds
1800, and the increase is 100 or more, merging firms are told to expect a court challenge by the
Department of Justice (DOJ) or the Federal Trade Commission (Connor, p. 19).  The purpose of
this note is to illustrate that calculation of the HHI on the basis of reported market shares may
seriously underestimate market power if alliances or partial ownership of other firms in the
industry are not factored into calculation of the index. 

The high fructose corn syrup (HFCS) market is used for illustrative purposes.  Table 1 shows the
HFCS production capacity in 1997, as reported by USDA. Use of these reported market shares
gives an HHI of 1639, which is below the DOJ threshold for antitrust action.

What the standard statistics shown in Table 1 do not reflect, however, is that in 1997 Cargill
leased the ProGold plant, and that Archer Daniels Midland (ADM) purchased 30% of Minnesota
Corn Processors and also reportedly owned 16% of the British firm, Tate & Lyle (Guebert). How
to factor such partial ownership into calculation of the HHI is not clear.  One way would be to
add to a firm's market share the fraction of firms partially owned.  However, this may not reflect
the extent of market power, as partial ownership may lead to complete control of the other firms,
so a second way is to add to the controlling firm's market share the full market share of the
partially owned firms.   In the HFCS example, the first approach gives an HHI of 1984, while the
second approach gives an HHI of 3421, both of which are above the DOJ threshold.

This example illustrates that it is imperative that strategic alliances, joint ventures, partial
ownership of other agribusiness firms, and other fuzzy arrangements be considered by the
Department of Justice, Federal Trade Commission, and other entities concerned with regulating
concentration and market power.



Table 1.  North American HFCS Production
Capacity in 1997



Firm
                             Market
                             Share 
                              (%)
                                
                                
ADM
27


Minnesota Corn Processors
8


Tate & Lyle
17


Cargill
20


Pro Gold Ltd.
4


American Maize
8


CPC
8


Roquette American
3


Arancia and Almex (Mexican)
2



                            References

     Connor, John M., Concentration and Mergers in U.S. Wholesale Grocery Markets, Staff Paper
     97-09, Department of Agricultural Economics, Purdue University, June, 1997.

     Guebert, Alan, Justice Department Investigates More Charges in Corn Sweetener Market, Nov.
     23, 1997.

     United States Department of Agriculture, Sugar and Sweetener Outlook Report, SSS-221,
     September, 1997