Market Power in the Corn Sector: How Does It Affect the Impacts of the Ethanol Subsidy?

Abstract

Market power is discussed in debates about subsidies for ethanol production. The structural conditions in the corn industry create a case for concerns about market power. We develop an analytical model for determining the production and price impacts and the distribution of benefits from the U.S. ethanol subsidy when upstream sellers in the seed sector and downstream buyers in the processing sector may exercise market power. Results demonstrate that the impacts on prices and output are probably limited. Distribution impacts are much greater. Seed producers and corn processors with market power capture relatively large shares of subsidy benefits.

Keywords

• corn ethanol
• market power
• oligopoly
• oligopsony
• subsidy