A federal class action accuses several industry players — including Smithfield Foods, Hormel Foods (HRL) and Tyson Foods (TYSN) — of colluding to fix the price of pork by exchanging confidential information via an outside market monitor called Agri Stats. The result, the suit says, caused consumers to pay artificially high prices.
The lawsuit, which is seeking in excess of $5 million in damages, has a dozen plaintiffs.
Average annual prices for the hog market were at or below $50 every year between 1998 and 2009 before surging to $76.30 in 2015, an increase of more than 50 percent.
From the news above, Smithfield Foods, Hormel Foods (HRL) and Tyson Foods (TYSN) are accused of colluding and fixing the price of pork intentionally. They used an outside market monitor, Agri Stats, to exchange private information, in which they use this to set an artificially high price to consumers.
Fixed pricing often occurs in oligopoly, which is a particular market structure with the dominance of a small number of firms. There are two types of oligopoly, one is collusive and one is not. In this case, Smithfield Foods, Hormel Foods, and Tyson Foods are collusive oligopoly, in which they agree with each other and act as a monopoly.
As these three pork manufacture companies form a monopoly in the market, they are able to make abnormal profit in the long run, due to the high barriers of entry and exit. Also, for collusive oligopoly, these three companies are not achieving productive efficiency and allocative efficiency.
Productive efficiency refers to producing at the minimum of ATC, which is the orange point. For Smithfield, Hormel and Tyson, they are producing at MC=MR, which is not the minimum point of ATC. Allocative efficiency refers to producing at D=MC, which is the green point. However, since they are functioning as a monopoly, they are not producing at the consumers-prefer level, therefore, allocative efficiency is not achieved. Due to the underproduction, welfare loss occurs and the three companies gain at the expense of consumers.