G ENERAL P REMISES OF THE C ONSTRUCTION OF D UAL F EED M ODELS

The behavioral models of the compound feed industry developed in chapters 3 and 4 pre-suppose the truth of the following:

25 See section 1.4 above.

1. All compound feed producers simultaneously minimize their component cost with re-spect to actual factor prices and product quantities alone. Besides the crucial importance of the cost minimization postulate for the adequacy of a microeconomic cost function approach in general, this means that optimization based on expected prices and quantities is denied as well as the presence and anticipation of risk and uncertainty and the in-fluence of non-price and non-quantity data.

2. All compound feed manufacturers are price takers on the demand and supply side, i.e.

the factor and product markets are characterized by perfect competition. The economet-rically estimated parameters of cost function derived demand equal the true parameters of the data generating process only if the factor markets are perfectly competitive.

3. The compound feed manufacturers maximize their profits. This assumption of course implies assumption 1., but it is made separately because it is not essential for the demand side of the cost model considered in chapter 3, but only for the quantification of marginal cost. Together with assumption 2 it is needed to measure marginal cost by observed product prices using the rule "price equals marginal cost", which is only valid for profit-maximizing firms. In contrast, additional revenue maximization which, in conjunction with cost minimization constitutes profit maximization, is essential for the profit function model unfolded in chapter 4.

4. It is appropriate to handle the microeconomic behavioral model of an individual com-pound feed firm as if it were a model of the whole sector, i.e. the complex problem of aggregation over firms is neglected.

5. Technically, the compound feed producers act efficiently, i.e. do not waste factors of production. Hence, twice differentiable functions denoting the frontier of the production possibility set and its duals adequately describe their behavior, and it is not requisite to adopt a frontier modeling approach.

6. All input and output quantities are perfectly divisible and immediately disposable.

7. Microeconomic theory is empirically meaningful and all model parameters stay constant over time.

These premises can be justified by the following arguments:

Ad 1. Because the compound feed producers generally utilize computer-aided linear pro-gramming methods to optimize the composition of their products, a simultaneous and cost-minimizing calculation can be presupposed without further empirical evidence. To examine whether the compound feed producers actually minimize their total cost shall not be an object of discussion, since this would go beyond the scope of the work in hand.

Ad 2. Feed components are definitely homogeneous goods,²⁶ traded globally and in large quan-tities. The component markets are characterized by a very large number of participants on both supply and demand side, the latter not only in compound feed manufacturing, but also in on-farm feeding, in food processing, and in direct human consumption.

Hence, any significant market power of a single compound feed firm as a demander is ex-tremely unlikely. The supply side looks a little different, because the compound feed markets are locally segregated to some extent. But even if a supplier covers the whole demand of a region, his possiblity to raise prices before less expensive competitors enter his local market is quite restricted: like components, compound feeds are very homoge-neous goods. In the German compound feed sector, the biggest supplier has less than a 10% market share, but the plants and the corresponding local markets are spread all over the country, and thus the competition situation does not mirror the overall enterprise size.

Ad 3. The profit maximization assumption for the compound feed industry is justified as good or bad as for most other competitive industries. Most microeconomic studies cannot avoid to make it, and even in much more suspicious cases than the present one it is usu-ally claimed without comment.

Ad 4. Although no statement about the extent of the aggregation error is possible here, a sec-toral model based on behavioral assumptions for individual firms is entertained in the study in hand. In the absence of disaggregated data the aggregation error is an inevitable factor of uncertainty.

Ad 5. Inefficencies must be expected in every aspect of compound feed production. But since the model focuses on the combination of components to compound feed and tries to ne-glect non-component activities, the relevance of inefficencies seems to be sufficiently

26 See chapter 2.1 for a listing.

small: apart from shrinkage, which should be significantly smaller than 2%, a waste of components is not very likely.

Ad 6. This assumption is completely unproblematic as long as component inputs and com-pound feed outputs alone are considered. However, non-component activities are mostly long-run so that models developed which do not abstract from non-component activities would require a revision. In any case, divisibility and disposability problems are neglected here because they open up a new broad field of problems which lie beyond the scope of this study.

Ad 7. These very basic premises are mentioned to complete the picture but will not be subject of discussion.