gricultural Sc UNIVERSITY C A L I F O R N Ms - A. D. O'ROURKE • D. B. DeLOACH CALIFORNIA AGRICULTURAL EXPERIMENT STATION BULLETIN 850 This study describes and examines the structure of the California fresh and frozen fish and shellfish industry from the fishing through the retailing operations. It analyzes the interrelationships between structure and the industry's past and present perform- ance as a basis for estimating future developments. The shift of the California industry from its dependence on an abundant supply of a wide variety of fish and shellfish from adjacent coastal waters to an importer of these products from other states and foreign countries is reviewed. Consideration is given to the ecological, economic, and socio- logical factors that have contributed to a decline in the supplies of the more desirable species in California waters at a time when the total demand is increasing. Competition from various industry and recreational groups for the waters where fish spawn and grow has disclosed the disorganized and weak tactical position of the California indus- try in formulating a public policy relating to the use of the fishery resource. The analysis of the industry's structure and performance indicates a real need for a revitalization of the industry. This will require an infusion of new capital and managerial talent, as well as an elimination of many of the inefficient firms that now exist because of unduly favorable prices and margins. JUNE, 1971 THE AUTHORS: A. D. O'Rourke is Assistant Professor of Agricultural Economics, Washington State University, Pullman. He was formerly an Associate-in Agricultural Economics in the Department of Agricultural Economics, University of California, Davis. D. B. DeLoach is Professor of Agricultural Economics and Agricultural Economist in the Experiment Station and on the Giannini Foundation, University of California, Davis. The table of contents is on page 79. [2] THE CALIFORNIA FRESH AND FROZEN FISHERY TRADE1 INTRODUCTION The problem. During 1969 California's fresh and frozen fish and shellfish indus- try enjoyed the highest product prices and margins ever experienced, primarily because total fish consumption increased while production of the desirable species remained stable or declined, and the prices on substitute or competing protein food items, particularly meat, reached record highs (figure 1) . Despite the 1969 price conditions, leaders of the industry were concerned about its ability to sur- vive as a viable sector of California's economy, considering the bionomic and institutional changes affecting the fish- eries* businesses. Most of the problems faced by the fresh and frozen sector of the California fishing industry are common to other parts of the United States. However, the problems have been intensified by both a population increase from 7 to 20 million between 1940 and 1970 and a rapid in- dustrialization, neither of which is con- ducive to the maintenance of a fishery industry. Our research dealt, to some extent with the conditions under which a supply of desirable species of fish can be main- tained and made available for the Cali- fornia fresh and frozen fisheries users; but concentrated on the characteristics Price Index 140 "I I I I I I I r 58 59 60 61 62 63 64 65 / /A //' \ / / Fresh and Frozen Fish 'All Fish (r ,/ / •'Beef and Veal / \/ /' I 1 1 I I I I 1 1 I I I I I 1967 1968 Monthly I | I I I I I I I I l I I | I I I I M 1969 1970 Fig. 1 . U. S. Retail price index for beef and veal, all fish,* and fresh and frozen fish. Base 1957-1959=100. * Does not include canned, dried, etc. Source: Consumer Price Index, BLS (Monthly). 1 Received for publication October 6, 1970. [3] of the competition from both domestic and foreign sources, and on the efficiency with which industry performs its produc- tion and marketing functions. The capacity of the California fresh and frozen fish and shellfish trade to agree on and solve its basic problems has been weakened by prolonged and some- times bitter clashes of interest between fishermen and boat owners, fishermen and primary producer-wholesalers, and among primary producer-wholesalers (DeLoach, 1938, p. 28; Crutchfield, 1954, p. 83). Only recently has a new genera- tion of managers been able to patch over the deep cleavages among prominent in- dustry leaders who were immigrants or descendants of immigrants. In 1966 an attempt was made to secure a marketing order for fresh and frozen fish and shell- fish under the auspices of the California State Department of Agriculture. The order was not accepted by the industry, but its stated objectives indicate what the industry considered to be its main prob- lems. First, it sought authorization for an advertising and sales promotion program "for the purpose of maintaining existing markets and creating new and larger markets for such fish and seafood . . . and products thereof without reference to a particular private brand name or trade name . . . ," second, "to carry on or cause to be carried on reseach and survey studies in the marketing or dis- tribution of fish and seafood and products thereof." Clearly the sponsors of the pro- posed marketing order believed that de- mand stimulation was the major industry need. However, shortage of supplies of desirable species and an improving de- mand weakened support for the order and it was rejected. Since 1966, the short- age of the most desired species became even more pronounced, in the face of the rising consumption of fish and shellfish. Lacking a common objective and a willingness to join together for self- preservation, individual firms and the California industry as a whole become [ increasingly endangered as our nation restructures its priorities for the develop- ment and use of all resources. For ex- ample, to some people, the buoyant sport- . fishing-recreation-tourism complex would seem to yield greater long-term benefits to society than the struggling and often pat- ently inefficient commercial fish trade. In the international trade, the United States would seem to benefit from retain- ing low tariffs on fish in order to win access to other markets for goods in which it has a competitive advantage and to keep down food prices at home. Some also argue that California's commercial fish business ought to be sacrified for the sake of compensating gains in other sectors of the economy. Objective and procedures. This study of California's fresh and frozen fish trade aims to answer two questions: Is the ex- istence of such a business economically and socially justified, considering other demands for the use of the fisheries and the waters in which the fish breed and grow? And: Could the industry's present structure and performance be improved to fulfill better its economic and social functions? To meet these objectives we: • Examined the structure of the Cali- fornia fresh and frozen fisheries industry in order to learn the relationship between structure and the production and market- ing practices for the principal products sold through various marketing channels; and, insofar as possible. • Analyzed the economic performance of the industry, including an assessment of the effects on performance of certain institutional arrangements, demographic characteristics, comptition, and efforts to expand sale of fishery products. Research was constrained by data limi- tations. For an important part of our study we assembled, from miscellaneous sources, descriptive and statistical infor- mation which enabled us to present a co- herent picture of the current status of the industry and of the forces encouraging 4] change. This part has been thoroughly documented. For a second major part — the establishment of the relationship be- tween industry characteristics of struc- ture and conduct and observed perform- ance— we found that only under the assumptions of perfect competition could we relate given structural characteristics and market conduct to a socially desir- able norm of economic performance (see, for example, Bator, 1957, pp. 22-59). Such assumptions were used to analyze the primary producer-wholesaler sector, the only sector for which any meaningful data were available. The extent of devia- tions from the perfectly competitive equi- librium position could be taken as an approximate measure of the inefficiencies present in the producer-wholesaler sector of the industry. In other sectors, the assumptions of perfect competition either did not apply or could not be used because of lack of data. As an alternative we drew exten- sively from the concept of workable com- petition, whose advocates have striven to develop a listing of desirable economic- results which society can reasonably ex- pect. For example, society can reasonably expect firms to use efficient production and marketing methods, to be progressive \ in adopting new technology, and to equit- ably reward their labor, capital, and en- terprise (Sosnick, 1969, pp. 1-20). The major problem in applying the concept of workable competition is in finding ob- jective measures of what is efficient, pro- gressive, or equitable. The criteria for workable competition suggested by Sosnick (1969) have been used as a checklist in our systematic as- sessment of the industry's economic ef- ficiency. While some of these criteria were unimportant or inapplicable to this industry, most are discussed in descrip- tive terms and, where possible, a quanti- tative measure of efficiency was derived. For example, the quantity and quality of sales promotion were regarded as re- latively unimportant among those inter- [ viewed. In the case of product suitability, for which no quantitative measurement was possible, we did pinpoint those as- pects which posed obstacles or opportu- nities for the trade. For criteria such as efficiency of production and price flexi- bility, tentative objective measures were developed. On other criteria critical to both the trade and society, e.g., conser- vation of natural resources and external effects, the scope of the problem was so vast that we chose to describe the char- acteristics of the problem, its relationship to structure and performance, and to sug- gest a framework for specific research. Finally, keeping in mind the problems of decision-makers, we used the approach of the casual empiricist where the theo- retical underpinnings of perfect or work- able competition were not directly appli- cable. This applies particularly to a later section where published data on survival, growth, and distribution of firms over time were used to infer tentative con- clusions about the relative performance of the fish trade in California compared to that in other states. Sources of data. We relied on the many publications of FAO, in the U. S. Bureau of Commercial Fisheries, and the California Department of Fish and Game for much of the current and historical data on the production and consumption of fish in the world, the United States, and California. The U. S. Bureau of the Census reports provided summary data on the structure and characteristics of various sectors of the California fish trade. To supplement inadequate pub- lished sources, we conducted personal in- terview surveys of all the major firms in the California fresh and frozen fish trade at the primary producer-wholesaler, bro- ker, and fabricator levels, and inter- viewed three retail grocery chains — one national, one local, and one cooperative — prominent in the distribution of fish. However, in many cases the kind of data needed to evaluate the industry's struc- ture and assess its economic performance 5] was either nonexistent or unavailable. Accordingly, considerable improvisation and adaptation of standard measures of industry efficiency were needed to derive meaningful ec data available. meaningful economic lessons from the SUPPLY AND DEMAND World fish and shellfish production from 1948 through 1967 increased threefold (19.6 to 60.5 metric tons), mostly because of commercialization of fisheries in less developed areas of the world. The United States relied more on imports of fresh and frozen fish as its domestic production declined and its total consumption rose. By 1967, more than one-half of all fresh and frozen fish used for human consumption in the United States was imported. In California, one-half of fresh and frozen fish sold to consumers was obtained from other states or foreign countries. These out-of-state supplies, in general, consisted of the more desirable and costly species. California fishermen also encounter increasing competition from sports fishermen for the right to capture the available fish, and from other groups in our society who claim a higher right for the use of the waters from which the fish are taken. To maintain the industry as a viable force in the California economy, we have to (a) lessen the business risks of producing and marketing of fish, (b) infuse new capital, and (c) recruit new, qualified management personnel. California gets its supplies of fresh and frozen fish and shellfish from various parts of the world. Buyers from Califor- nia must compete with those from other parts of the United States and those from foreign countries. This section examines some of the basic facts about potential supply and likely competitive demand, which are relevant to the California trade. World Total estimated world production of fish has slightly more than trebled from 19.6 million metric tons (live weight) in 1948 to 60.5 million tons in 1967 (table 2). In North America and Europe, the rate of growth has been slowest. Since 1948 both Russia and Japan have built up large long-distance fishing fleets ( Borg- strom. 1964. p. 7 ) while many develop- ing countries have promoted fishing as a cheap source of supply of protein and an important export-earner of foreign ex- change ( FAO. 1968) . Production of crus- taceans and mollusks has not kept pace with that of finfish. Although the fresh market still accounts for the greatest volume of fish for human consumption, the proportion of fish marketed fresh or cured has fallen while freezing volume has increased more than sevenfold (table 1 ) . The most remarkable growth has been in fish reduced for oil and meal, which is now the single most important outlet for fish. World consumption data are even less reliable than those for production. Many countries keep poor or inadequate statis- tics. Different species sustain different weight losses in processing and market- ing; thus, live-weight volume may be a poor indication of weight actually con- sumed. This study needed some indica- tion where the world supplies of fish are consumed and where demand is growing fastest. The comprehensive FAO (1967) study gives an insight into the current and prospective levels of demand for fish and shellfish. The derivations from that study (table 2) show that in 1962. five areas — the L'nited States, E. E. C. U. S. S. R.. mainland China, and Japan — accounted for slightly more than 50 per cent of world consumption. Based on [6] Table 1 WORLD FISH PRODUCTION, BY REGION, GROUP OF SPECIES, AND UTILIZATION Region Africa North America South America Asia Europe Oceania U. S. S. R Group of species Freshwater fish Marine fisheries Crustaceans, mollusks Other aquatic animals and plants Utilisation Human consumption Fresh Freezing Curing Canning Other purposes Reduction Miscellaneous TOTAL World Production 1.0 3.6 .5 6.8 6.1 0.1 1.5 2.5 14.7 2.0 0.4 1.0 5.0 1.4 2.5 1.5 1.0 19.6 1948 1958 1960 1962 1963 1964 1965 million metric tons live weight 1966 2.1 2.3 2.6 2.7 3.0 3.1 3.2 4.0 4.1 4.5 4.4 4.3 4.4 4.4 1.6 4.4 8.3 8.4 11.0 9.0 11.1 14.6 17.4 18.6 19.0 19.3 19.9 21.4 7.8 8.1 8.7 9.0 9.7 10.8 11.6 0.1 0.1 0.1 0.1 0.2 0.2 0.2 2.0 3.1 3.6 4.0 4.5 5.0 5 4 5.4 6.4 6.5 6.7 6.8 7.2 8.1 23.9 29.0 35.3 36.1 40.7 40.4 44.1 2.9 3.5 3.8 4.1 3.8 4.1 4.3 0.6 0.6 0.8 0.7 0.7 0.7 0.8 27.5 30.9 33.4 34.6 35 5 36.1 38.6 14.5 16.3 16.9 17.3 17.6 17.5 18.4 2.7 3.4 4.3 4.7 5.1 5.7 7.0 7.3 7 5 8.1 8.5 8.4 8.1 8.2 3.0 3.7 4.1 4.1 4.4 4.8 5.0 5.3 8.6 13.0 13.0 16.5 16.3 18.7 4.3 7.6 12.0 12.0 15.5 15.3 17.7 1.0 1.0 1.0 1.0 1.0 1.0 1.0 32.8 39.5 46.4 47.6 52.0 52.4 57.3 1967 3.7 4.4 12.2 22.5 11.8 0.2 5.7 8.2 46.9 4.5 0.9 39.2 18.7 7.3 8.0 5.2 21.3 20.3 1.0 60.5 Source: FAO (1968a). Table 2 ESTIMATED SHARE OF TOTAL WORLD DEMAND FOR FISH AND SHELLFISH IN SELECTED ZREAS Area TOTAL World High-income Centrally planned Low-income United States E. E. C Japan U. S. S. R China (mainland) . Five-country TOTAL Actual 1962 100.00 42.49 27.19 30.32 5.46 6.90 15.90 8.45 14.18 50.89 1975 L 100.00 37.68 29.34 32.98 4.74 5.98 14.25 8.85 15.77 49.59 FAO projections 1975 H per cent 100.00 35.84 30.03 34.13 4.42 5.74 13 44 8.62 16.69 48.91 1985 LA 100.00 33.13 31.08 35.79 4.24 5.26 12.24 8.92 17.35 48.01 HB 29.20 31 52 39 19 3 71 4 77 10.57 8 12 18 73 Notes: L = Low GDP assumption H = High GDP assumption LA = Combination of low GDP assumption with low population assumption HB = Combination of high GDP assumption with high population assumption Source: FAO (1967). [7] these FAO projections of income and population growth for 1975 and 1985, the high-income countries will account for a steadily reducing share of world de- mand. By 1985, the U. S. share is likely to drop to around 4 per cent of world demand. Under most of the FAO assump- tions for all periods up to 1985, the United States will lag behind most of the world in rate of growth of per-capita gross domestic product, population growth, and the elasticity of demand for fish with respect to income2. These projections suggest that the United States, in bidding for world sup- plies to supplement its declining domestic catch, will face more powerful foreign competition in the next two decades. Since our population is now increasing only at about 1 per cent per year com- pared to the FAO projection of 1.4 per cent per year for the 1965-1975 period, we would expect to see some evidence of this stronger competition already ap- parent in our fish import and world trade figures. Indeed, between 1962 and 1967, while our imports of fish rose 47.9 per cent in volume and 38.5 per cent in value, world imports of fish rose 34 per cent in volume and 48.6 per cent in value indicat- ing the rising purchasing power of other countries (FAO, 1968a). Our share of total dollars spent on imported fish fell from 27.0 per cent in 1962 to 25.2 per cent in 1967 while, for example, Japan's share climbed from 1.2 to 6.2 per cent. The problem may be intensified in the future if the catch of many of the species in greatest demand in the United States fails to increase. Salmon, flounders, hali- but, Atlantic cod, haddock, and many shellfish supplies are decreasing. Table 3 UNITED STATES: SUPPLY AND UTILIZATION OF COMMERCIAL FRESH AND FROZEN FISH * 1950-1968 Year 1968f 1967. 1966. 1965. 1964. 1963. 1962. 1961. Averages 1960-1968. 1950-1959. Domes- tic produc- tion 597 633 643 647 613 631 626 616 678 632 688 Supply ports Begin- ning stocks Total sup- ply Utilization Total use Exports Domestic disappearance for food Military million lb 723 200 620 215 637 183 568 174 534 201 518 179 511 153 453 186 388 164 550 184 317 130 1,520 1,468 1,463 1,389 1,348 1,328 1,290 1,255 1,230 1,366 1,135 1,302 1,268 1,248 1,200 1,174 1,127 1,111 1,102 1,044 1,175 999 54 29 54 32 49 31 37 27 34 20 24 20 18 20 13 23 11 23 33 25 7 26 Civilian Total 1,219 1,182 1,168 1,136 1,120 1,083 1,073 1,066 1,010 1,117 Per capita pounds 6.2 6.0 6.0 6.0 5.9 5.8 5.8 5.9 5.7 5.8 6.0 * Includes finfish and shellfish. t Preliminary. Source: U. S. Department of Agriculture, 1966 2 For a theoretical discussion of the methods and results of these FAO estimates, see Goreux (1960, pp. 1-13). [8] United States Total utilization of commercial fresh and frozen fish and shellfish in the United States has moved upwards in step with population growth so that per-capita con- sumption has remained remarkably stable in the last two decades (table 3). How- ever, domestic producers have not been able to maintain their share of total sup- plies, which have had to come increas- ingly from imports. The share of total consumption provided by imports has risen from an annual average of 32.8 per cent in the 1950's to 49.2 per cent in the 1960's. Imports have come to dominate U. S. supplies of important sections of the fresh and frozen fish trade. For ex- ample, in 1968, they accounted for 87.6 cT cent of U. S. supplies of groundfish and Atlantic ocean perch fillets and steaks, and for 57.8 per cent of all other fillets and steaks. Much of this increase in imports is attributable to lower costs of catching and processing fish in many of the countries which supply the United States (U. S. Department of the Interior, 1969a, p. 53; Dykstra and Holman, 1968, pp. 105-07; and White, 1954, p. 6) . The volatility in the composition of supplies is reflected in significant changes in per-capita consumption of major fresh and frozen species. Comparing annual average per-capita consumption in the 1960's with that of the 1950's, shrimp, crab and flounders (including sole) have experienced increases of more than 30 per cent, and lobster about 20 per cent. In contrast, per-capita consumption of oysters, cod, haddock, ocean perch, and halibut has fallen from 10 to 30 per cent (table 4). While availability of supply has been an important factor contribut- ing to these changes, it has interacted with innovations in the technology of production and marketing, and shifts in consumer tastes. Frozen-fish sales grew Table 4 U. S. PER CAPITA CONSUMPTION OF LEADING SPECIES OF FRESH AND FROZEN FISH AND SHELLFISH, 1955-1968 Consumption per capit * Year Shrimp Oyster Crab Lobster Lobster tail Had- dock Floun- der, sole Hali- but Ocean perch Cod* 11 1.640 N. A. N. A. N. A. .172 .266 .477 .290 .356 .317 1967... 1.580 N. A. N. A. N. A. .153 .288 .429 .292 .319 .278 1966... 1.480 N. A. N. A. N. A. .143 .340 .463 .278 .342 .250 1965... 1.490 .216 .259 .182 .145 .334 453 .304 .325 .253 1964... 1.440 .241 .194 .194 .166 .330 .422 .346 .298 .265 1963... 1.320 .214 .183 .195 .161 .334 .398 .323 .309 .260 1962... 1.190 .227 .187 .165 .160 .385 .383 .357 .330 .250 1961... 1.230 .246 .198 .157 .146 .354 .356 .376 .343 .268 ■on 1.250 .246 .194 .163 .152 .345 .335 .396 .337 .283 Annual Aver- age 1955- 1959... 1.03 .317 .150 .149 N. A. .405 .313 .365 .385 .357 1960- 1968... 1.40 .232 .203 .176 .155 331 .413 .329 .329 .269 * Excluding frozen blocks. N. A. = Data not available. Source: U. S. Department of Interior 1969a and 1970, and Suttor and Aryan-Nejad, 1969. [9] % Ql Q5 Fig. 2. Impact of world supply and demand on U. S. supply and price of fish. rapidly in the 1940's. the convenience factor became prominent in the 1950's — notably in breaded shrimp, fish sticks, and breaded fish portions, while in the 1960's there was continued growth of pre- pared, prepacked, precooked, branded consumer packs (Gruber, 1968, pp. 227- 28). Much of the processing industry- has come to rely for raw materials on a steady supply of low-cost imported fish, principally in the form of frozen blocks or slabs. At the same time, an increasing proportion of domestic production of packaged fish is sold fresh (more than 60 per cent in 1968) . This heavy dependence of the fresh and frozen industry on the availability and price of foreign supplies of fishery products has important economic impli- cations for U. S. fishermen, processors, and consumers. A simple back-to-back diagram can be used to illustrate the essential features of the current situa- tion, and the likely impact of world trends in supply and demand discussed in the previous section (figure 2) . Figure 2 shows hypothetical fish sup- ply and demand schedules for the United States and for the rest of the world. If there were no trade, U. S. equilibrium price would be Pi and quantity de- manded and supplied, Q1. The rest of the [10] world equilibrium price would be P2 and quantity, QL>. However, with trade, effec- tive demand in the rest of the world becomes D + DE, that is, the rest of the world demand plus excess U. S. demand where DE equals excess of U. S. demand over supply at any price, and a new world price is established at P3. This has the following effects in the U. S.: Domes- tic supply falls from Qt to Q > Total sup- ply for the United States is increased to QG by imports of Q6-Qs and price falls to P;;. In the rest of the world, domestic supply retained at home falls from QL> to Q4. Exports are equal to Q -Q4 ( equals Qr-Q.) and price rises to P.; minus transport costs. What happens if, as projected by the FAO, demand in the rest of the world markets increases? The line DD, and accordingly the total world demand D + DE, will move upward and to the right cutting the supply curve at a price above P3 and reducing both exports and U. S. imports. This move would tend to hurt U. S. consumers and benefit U. S. producers. It is a moot question whether technological progress can permit the rest of the world supply schedule to shift downward and to the right with sufficient magnitude and speed to offset the effects of upward demand shifts on prices and trade. A weakening of the competitive pressure of imports could have signifi- cant implications for the future plans and prospects of the U. S. fishing fleet. California Like the United States, California's trade balance is in deficit with respect to fresh and frozen fishery products. While Cali- fornia's share of the U. S. population has been rising steadily through the last three decades, the share of U. S. supplies of fresh and frozen fish and shellfish com- ing from California fishermen may have declined slightly (table 5). Under the assumption" that California's per-capita Table 5 CALIFORNIA FRESH AXD FROZEN PISH SUPPLIES IN POINDS AND AS A PERCENTAGE OF TOTAL U. S. SUPPLIES AND CALIFORNIA'S POPULATION AS A PERCENTAGE OF TOTAL U. S. Total supplies U. S. From California fisheries California population Year Volume Percentage of U. S. supplies as percentage of total U. S. population million lb per cent 6.07 6.39 5.96 5.63 5.43 6.02 7.27 0.88 6.11 7.76 8.23 6.41 per cent 1968 1967 1966 1965 1964 1963.. 1962 1961 I960... Annual average 1960-1908 1955 1950 1940 1,520 1,468 1,463 1,389 1,348 1,328 1,290 1,255 1,230 1 , 366 1,127 1 , 070 816 89.1 93.5 82.8 75.9 72.2 77.6 91.3 84.6 83.4 87.4 88.1 52.3 9.59 9.53 9.48 9.46 9.37 9.26 9.10 8.95 8.77 9.29 7.83 6.98 5.23 Source: U. S. Department of Agriculture. 1970 and California Department of Fish and Game, miscellaneous bulletins. 3 Supported by recent findings for the Pacific region (Nash, 1970, pp. 2-3). [ii] consumption is at about the national average, and making allowance for some export of California species, it is prob- able that California fishermen now sup- ply less than one-half the state's con- sumption needs. Of the major species consumed, only in sole, rockfish, fresh salmon, and Dungeness crab are Cali- fornia suppliers a dominant factor. There is a small California shrimp fish- ery, but all haddock, cod, halibut, lob- ster tails, and scallops must come from outside the State. Statistics on California landings of fish and shellfish are reported by ports and by statistical areas. The statistical areas are as defined by the California Department of Fish and Game (e.g., Key 1930 1967 Landings j/V/l Population (Numbers represent percent of California total in each area) Fig. 3. California market fish and shellfish catch by area of landing, and distribution of California population by region, 1930 and 1967. [12] Heimann, 1968) and shown in figure 3. The diagrams superimposed on figure 3 and the data in table 6 illustrate the changes which have taken place in the California fresh and frozen fishery re- source since 19301. The most notable fea- tures are (a) the relative stability of the total catch since 1950, (b) the north- ward shift of the main supplying areas since 1930, and (c) the relative decline of the fishing areas nearest the Los Angeles and Bay areas, the major mar- kets for fresh and frozen fish. Given the growth in California's population, the relative stability of catch implies a sharp decrease in per-capita availability of fresh and frozen fish. Value of landings is heavily dependent on the composition of catch. It was $8.5 million in 1950, $10.5 million in 1960, and $13.6 million in 1967. Until the beginning of World War II, the San Francisco area was a leading supplier for many species, in particular sole and other flatfish, salmon, roekfish, sablefish, crab, shrimp, and oysters (DeLoach, 1938, p. 12). While the area is still a supplier of small quantities of a wide variety of species, its importance has declined. Depletion of the nearby resources encouraged greater exploita- tion of the Eureka area. War needs for seafood and improved technology led to the development of extensive processing facilities in Eureka. The story of one species found in abundance off Eureka is recorded by Hagerman (1952, pp. 10-11). "Less than 10 years have elapsed since the Dover sole ceased to be considered as a trash fish, and be- came a sought-after article of com- Table 6 VOLUME OF CALIFORNIA COMMERCIAL CATCH OF MARKET FISH AND SHELLFISH AND PERCENTAGE OF CATCH LANDED IN EACH STATISTICAL AREA, 1930-1967 Statistical area 1930 1935 1940 1945 1950 1955 1960 1965 1966 1967 nillion 11 /per cent Eureka 7.4 6.1 11.4 28.6 30.6 24.0 42.1 28.0 38.1 37.6 * 11.0 111 21.7 20.9 34.8 27.5 49.7 33.8 40.8 42.2 San Francisco 22.2 25.8 21.7 19.4 23.0 22.8 16.0 14.7 13.6 10.9 32.9 46.6 41.4 14.1 26.1 26.1 19.0 17.8 14.5 12.2 Monterey 19.4 7.4 6.4 21.3 12.8 21.9 7.9 14 3 17.3 17.1 28.8 13.4 12.2 15.5 14.6 25.1 9.4 17.3 18.5 19.2 Santa Barbara 1.0 2.9 3.9 4.4 4.4 8.6 9.7 9.6 10 3 11.5 • 1.5 5.2 7.4 3.2 4.9 9.8 11.5 11.5 11.0 12.9 Los Angeles 11.9 9.5 6.2 59.2* 9.5 8.2 7.4 14.5 12.3 10.3 17.6 17.2 11.8 43.2* 10.8 9.4 8.7 17.5 13.1 11.6 San Diego 5.5 3.6 2.9 4.3 7.8 1.9 1.5 1.7 1.9 1.7 8.2 6.5 5.5 3.1 8.9 2.1 1.7 2.1 2.0 1.9 TOTAL 67.4 55.3 52.3 137.1 88.1 87.4 84.6 82.8 93.5 89.1 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 * Abnormal volume attributable to landings of 53.4 million lb of Pismo clams. Source: California Department of Fish and Game, miscellaneous bulletins. 4 Market fish (table 6 and figure 3) include barracuda, flounders and sole, lingcod, rockfishes, salmon, sablefish, seabass, swordfish, and other species not canned. Shellfish include species of crab, prawn, shrimp, oyster, spiny lobster, abalone, and squid. [13] merce. New techniques of fish hand- ling, packaging, and freezing, intro- duced during the early war years, were very important in the develop- ment of a market for the Dover sole. It was learned that by the quick- freeze method the soft tissues of the fish would harden and produce a marketable fillet. Furthermore, since other species of flatfishes were be- coming less abundant, necessitating longer trips and greater effort on the part of the fishing fleet, the trawlers were glad to turn their attention to the large population of Dover sole which ranged along the northern coast of California in depths greater than those usually frequented by other commercial flatfishes." Eureka benefited from a similar devel- opment with respect to rockfish (Califor- nia Department of Fish and Game, 1949, pp. 118-19). The prominence of Dover sole and rockfish in the Eureka catch has continued for the last two decades. Dover sole in 1967 accounted for almost 14 per cent of the volume and more than 5 per cent of the value of total Eureka catch, while rockfish accounted for 6 per cent of the volume and 2 per cent of the value. The Eureka area in 1967 supplied over 80 per cent of California landings of Dover sole and 25 per cent of rockfish landings by volume and value. However, Eureka's present dominance in the Cali- fornia fresh and frozen fish trade stems from the wide variety of species in addi- tion to Dover sole and rockfish, e.g., salmon, crab, other bottomfish, shrimp, and albacore, found in neighboring waters. In contrast, the regions south of San Francisco rely heavily on the catch of one or two species. The shift of the supply side of the industry farther from the greatest con- centrations of customers has had obvious implications for the cost and location of processing and distribution facilities. Assuming constant freight costs per ton mile in real terms in both 1930 and 1967, the distribution cost per ton is likely to have risen because of longer average distances travelled. This is supported by a simple transportation model assuming that total supplies are absorbed in each area in proportion to its population. Average cost of distribution per pound, assuming constant freight charges, would have doubled between 1930 and 1967, thus greatly reducing the locational ad- vantage of California products over those shipped from out of State. Data on California supplies from out of State are inadequate in three ways: (1) little information is available on supplies from other parts of the United States; (2) data on imports of fish from foreign countries are combined for the California and Arizona customs districts (Keilman and Allen, 1969, pp. 10-17) ; and (3) there is no way of determining what proportion of these imports is in- tended for consumption in other states. However, we can assume that the bulk of these imports is consumed in Califor- nia. Imports of fresh fish into California and Arizona mainly from Mexico, have fluctuated between two and three million pounds in the years 1960-1967. Frozen fish imports (other than tuna for can- ning) from all countries have fluctuated around 70 million pounds in the same period. Seabass is the dominant fresh import. Shrimp is the major frozen im- port, usually accounting for 75 per cent of all frozen imports. Lobster tail imports have grown from 1.3 million pounds in 1960 to 9.0 million in 1967. Cod and swordfish are the only other frozen im- ports whose volume regularly exceeds two million pounds. Large quantities of northern halibut, salmon,5 crab, and flounder fillets from 5 In a letter of May 13, 1970, Lloyd Turnacliffe of the Meredith Fish Company, Sacramento, estimated annual shipments of northern halibut at 7-8 million pounds and salmon at 4-5 million pounds. [14] the Northwest states, haddock, perch, Maine lobsters, and scallops from the Northeast, and shrimp from the South- eastern states are sold in California. Most of the above items are received in frozen form. The daily, weekly, and seasonal sta- bility of supply of many California spe- cies is susceptible to dramatic fluctua- tions because of the size changes and migratory habits of the fish populations, weather, ocean temperature, number of vessels fishing, etc. To help firms plan for and adapt to cyclical or predictable variations in catch, the extent of varia- tion in landings of a species due solely to random or unpredictable elements (table 7) is used as an indicator. By use of the variate difference method, coefficients of Table 7 COEFFICIENTS OF VARIATION FOR QUANTITY OF LANDINGS, BY SELECTED SPECIES, SELECTED OPERATING EQUIPMENT, AND SELECTED AREA, 1939-1967 Selected fishery Coefficient of variation* Main species, total landings Sole per cent 14 16 Rockfish Sablefish 12 47 22 19 Shrimp 18 12 Squid 68 Main operating units, landings per unit Otter trawls: total catch per vessel Monterey area catch per vessel 23 59 San Francisco area catch per \ essel 23 24 Santa Barbara area catch per i Shrimp trawl catch per vessel -essel . 27 58 Salmon troll catch per line 30 Crab trap catch per trap 47 * Measures the variation in a time series due to ran- dom elements. The coefficient of variation is given in terms of the standard deviation as a percentage of the mean value. For a fuller discussion see Tintner, 1940, Carter and Dean, 1960. Source: Computed from California Department of Fish and Game, miscellaneous bulletins. variation were derived for annual land- ings of main species and for average annual landings per unit for main types of operating unit (Tintner, 1940). For example, the variation in annual landings of sole due to random factors was equal to 14 per cent of the mean quantity of landings over the years 1939-1967. Firms owning vessels or buying from fishermen suppliers are subject to great variation in supplies of individual spe- cies and considerable variation in total supplies, both seasonally and annually. In general, firms which specialize in one or a small number of species lead a pre- carious existence with little incentive to plough back the profits of good years into improving facilities. Two ways in which California firms have tried to com- bat this uncertainty of supply are ( 1) by broadening the scope of their operations. e.g., adding restaurant or retailing fa- cilities, and (2) by handling as wide a range of products as possible. Fish farm- ing offers a third alternative method of reducing uncertainty of supply. How- ever, in California it has gained only little attention, and primarily as an alter- native "crop" for rice growers and other farmers whose acreage can be adapted for the commercial rearing of fish. It has not been adopted by any of the firms cur- rently procuring or processing fish from the sea. Moreover, little or no research has been conducted on the long-term economic outlook for this activity. Sport fishing Sportfishing — fishing for recreational purposes — probably adds to the uncer- tainty of supply of California species. Of the nine leading species of sportfish, only three (salmon, rockfish, and California halibut) are also important in the com- mercial fresh and frozen fish trade (table 8). The sportfishing catch in Southern California dropped sharply after 1963. This does not belie the fact that sport- fishermen continue to be serious com- petitors for the available supply of spe- [15] Table 8 AVERAGE ANNUAL SPORTFISH CATCH, 1958-1961 AND 1963-1966 Species Total California* Southern California 1958-1961 1963 1963-1966 thousand lb 3,170 2,458 2,439 1,517 2,766 1,065 725 644 421 14,784 19,153 3,168 2,455 733 1,517 2,763 141 722 500 N. A. 11,999 13,264 1,579 Barracuda Rockfish Kelp and sand bass Albacore tuna Perch California halibut Croakers Salmon TOTAL for leading 9 species GRAND TO- TAL for all 565 881 1,208 110 616 280 1,090 N. A. 6,329 7,302 * Comparable data for total California for 1963-1966 not available. N. A. = Data not available. Source: California Fish and Wildlife Plan, 1965 (1966b) cies which have great commercial im- portance to specialist groups of fisher- men, e.g., lingcod, salmon, and barra- cuda. Competition between sport and commercial fishermen for rights to use the fisheries is keen. Moreover, the trend has been to curb certain commercial fishing practices to protect the resource for recreational use. Continued growth in the California population, if not ac- companied by an increase in availability of sportfish, could intensify the conflict between these two groups of fishermen. Ethnic influence The California fresh and frozen fish trade has in the past drawn heavily for its manpower on unskilled immigrants, many with experience of fishing under even harsher climatic and economic con- ditions. The first commercial fishermen in California were immigrant Italians fishing out of San Francisco. They were joined by Chinese, Portuguese, Norwe- gians, Yugoslavs, and Japanese (Sco- field, 1954, p. 7). Immigrant fishermen and their descendants have become lead- ers in seafood wholesaling, processing, and restaurant operations. Stricter immi- gration laws and more attractive alter- native occupations in other industries have virtually eliminated recruitment from abroad. Descendants of immigrants show a clear tendency to reject the fish industry as not meeting their personal standards for employment. Accordingly, there has been little headway in main- taining and improving the level of man- agerial competence needed to assure a dynamic industry. Despite all these problems, the process- ing sector of the California trade has grown rapidly, absorbing an increased volume of California landings and of fish from out-of-state sources. Total out- put has risen from a low of about 5 mil- lion pounds worth $2.1 million to the fishermen in 1951 to a high of 44.6 mil- lion pounds worth $27.9 million in 1967. A breakdown by leading products which primarily utilize species of California origin and byproducts primarily based on out-of-state raw materials gives a clue to the composition of total fresh and frozen fish consumption in the State (table 9) . In the 1960's an increasing volume of flounders, rockfishes, lingcod, and abalone from the California catch has been commercially processed. De- spite recent setbacks because of poor catch years, the long-term trend in salmon, crab, and oysters has been up- ward. Because total California catch has been stable, the rise in utilization in proc- essed form indicates a sharp decline in sales of whole round fish. The last main California product, squid, is mainly ex- ported. Of the products processed from out-of-state raw materials, shrimp and scallops have dramatically increased in volume. Halibut undoubtedly has suf- fered from reduced availability. The category, all other classifications, which includes mainly fish sticks and portions based on imported raw material, has [16] ■w s £ oo oo oo ro S.S CM CO CO lO lO t~ o t^ OS CO e^ oo 11 _T ^ oo OS _* v^1 Oi oo (C *"-' *■"' "53 t~- us 1* CO 3< e* oo co 3~ o 00 OS **■ *H "-1 ~* CO --f co »^ "5 oo 1 ^ ©} «-. CNf »-. •"»•»•■* =5 ~- — , CVJ "* .-6 .6 £ o ID "*- >>° o 3 cu-^t; «> almost doubled in volume since 1960. consumption of convenience items and These trends in output of processed of the more expensive shellfish. Strong products suggest that California is tend- demand accompanied by supply prob- ing to follow the patterns of fish con- lems in recent years have ensured Cali- sumption found for the United States as fornia processors a ready market for a whole, with rising incomes and in- their products with little expenditure on creased dining-out leading to greater promotion. INDUSTRY STRUCTURE The existing structure of the fresh and frozen fish industry in California is shaped by what is required to harvest, process, and market. Fresh fish sold to consumers quickly moves from the fishing boats into the dockside processing plants of producer-whole- salers, then to retail outlets and restaurants. If the Eureka area is excluded, about 80 per cent of California-caught fresh fish was marketed within a 50-mile radius of the landings. For frozen fishery products, time and distance are less important to preserv- ing quality. They may be sold from the fishermen to producer-wholesaler to wholesale- jobbers to retailers and restaurants to consumers Brokers are important intermediaries at all levels of marketing. The 26 producer-wholesalers interviewed for this study, probably one-third of the total, made 90 per cent, or $45 million, of all 1968 sales; the four biggest firms sold slightly more than 59 per cent and had 55 per cent of the assets of producer-whole- salers. In spite of this, the sampled firms were relatively small. On the average, their annual sales were below $2 million, their full-time workers numbered 45, and their investment, at replacement value, was about $668,000. Bank borrowing for working capital was commonplace among the larger firms, but internal financing and family sources dominated with smaller firms, reflecting their characteristic family ties. With possibly one exception, the 14 brokers surveyed were buying and selling on their own account. Their true brokerage activities accounted for a minor part of their business. This dual function was necessary for economic survival. Financing of fisher- men and producer-wholesalers, particularly in foreign countries was an expanding activity for the larger brokerage firms. Fabrication was becoming more important in California as the demand increased for precooked, ready-to-cook, and frozen fish dinners. The fish for fabrication came mostly from out-of-state, and the fabricators' sales were almost entirely to California restaurants and retailers. Interviewed retailers were optimistic about the future of fresh and frozen fish sales. Expansion of business seemed hampered by a lack of well qualified personnel and the maintenance of fish quality. Future development of the frozen fish business is likely to rest with multiproduct frozen food marketing firms. The main aspects of structure and con- at each level of the fish processing and duct of firms in the California fresh and distribution system. The location of the frozen fish trade are outlined in this three main classes of interviewees indi- section as a basis for a later discussion cates the structure of the industry ( figure of economic performance. Because pub- 4 ) . Almost all the primary producers lished data were insufficient for a mean- were located at fishing ports, often with ingful economic analysis, it was neces- their main plant on the landing dock, sary to interview a cross-section of firms All but one of the brokers were located [18] Eureka /O WW W - Primary Wholesalers B - Brokers F - Fabricators wwwww BBBBBBB San Francisco Sacramento o wwww %O0akland BB Monterey [Q ww Morro Bay Santa Barbara BBBB O Los Aneele: .O FFFFFFF San £edro WWWW wwww San Diego \QB Fig. 4. California fresh and frozen fish study: Location of firms interviewed. in the Los Angel* or Bay areas. All in Los Angeles, the fabricators were largest consumer market in California. The industry flow-chart (figure 5) shows the position and interrelationships of the various operators in the channels of trade. Statistics on the volume of fish products handled at each level are not available, hut one can glean considerable information about the characteristics of alternate channels. California's primary producer-wholesalers got their supplies mainly from California fishermen and sell mainly to other California whole- salers, retailers, and restaurants. How- ever, much of the supplies needed by California consumers came from other states and other countries. Brokers were often the key in procuring these supplies. Then, depending on the amount of proc- essing needed, seafood products were sold to fabricators or frozen-food whole- salers for distribution to restaurants, re- tailers, and institutions. Food chains [19] California Other U.S. Fishermen Primary Producer- Wholesalers Brokers Fabricators Frozen Food Wholesalers Restaurants Independent retailers «r " Food Chains Fishermen Primary Producers and Wholesale Markets U.S. Importers Foreign Exporters Brokers U.S. Exporters Foreign Importers Consumers Fig. 5. Major alternate trade channels for fresh and frozen fish and shellfish products (California, 1969). tended to deal as directly as possible with the primary producer. There were no auction markets for fish destined for the fresh trade fish. Primary producer-wholesalers The 26 producer-wholesalers that were interviewed during the summer of 1969 reported 1968 sales exceeding $45 mil- [20] lion, or more than 90 per cent of the estimated industry total. The 26 firms probably accounted for about one-third of the producer-wholesalers. The com- mon background of these firms was that at one time they obtained most of their supplies of fish from fishermen deliver- ing to the California ports where the pro- ducer-wholesalers had their main plants or branch receiving depots. They also provided initial preparation services such as sorting, eviscerating, trimming, and packing in crates (DeLoach, 1938). As our survey showed, a considerable shift from this earlier pattern took place grad- ually to compensate for changes in local supplies, new technology, market pres- sures within and outside California, and changes in consumer tastes. Structure. All the primary producer- wholesalers studied were relatively small firms. Thirteen of the 26 firms were cor- porations, 12 were partnerships, usually with two to four partners, and one had a single owner. Both the corporations and partnerships were largely family-owned- and-operated businesses in which the manager was usually a member of the family-owner group. Twenty had been founded by the present owners or in- Vessels Built Firms Founded 120 - 110 - 100 90 80 70 60 . 50 40 . 30 - 20 - 10 0 . 12 -I 11 10 - 9 - 8 7 -I 6 5 4 3 . 2 - 1 • □ Pacific Coast Otter Trawls Built California Wholesale Fish Firms Founded a/ Q 10-19 20-29 30-39 40-49 50-59 60-69 Fig. 6. Pacific coast otter trawls built and California wholesale fish firms founded in each decade, 1900-1969. 1 Data covers years 1960-1966. Source: Lyles, C. H., Fishery Statistics of the United States, 1966, U. S. Bureau of Commercial Fisheries, Wash., D.C., 1968, 678 pp. Data on wholesale firms derived from survey results. [21] herited. Of the six firms which had been purchased from previous owners, the most recent purchase was in 1956, the earliest in 1942. The average age of firms was 37 years. Only two firms had been founded in the last ten years and only six within the last 20 years. The close relationship between the date wholesale firms were founded and new vessel en- trants into the Pacific Coast Otter Trawl Fleet is evident from figure 6. In 21 firms the senior managers were of Italian de- scent, a factor pertinent to survival in a business where close personal ties are important. This racial dominance has changed very little since 1938 (DeLoach, 1938). By the standard of most other indus- tries, the firms used limited resources. Seventeen firms had only one plant (usu- ally no more than 40 feet by 80 feet of floor area for processing fish), only three had more than three branches and those were equally small receiving depots. The average number of full-time employees in 1969 was 31, of part-time, 56. Assuming four part-time employees as the equiva- lent of one full-time employee, average adjusted full-time employment was only 45 per firm. Average sales in 1968 were less than $2 million. Estimated total assets per firm averaged $415,000 at book value and $668,000 at replacement value. Concentration at this level of the industry was high. Of the two largest firms, one had two subsidiaries, the other had one. These two corporate groups accounted for 26 per cent of the book value of all firms, more than 60 per cent of full-time employees, almost 70 per cent of part-time employees, and nearly 40 per cent of 1968 sales. The four largest companies and subsidiaries accounted for 55 per cent of the book value of assets and 59 per cent of 1968 sales. Not only was a considerable part of the fish pro- ducer-wholesale business concentrated in the hands of four separate firms, some of these firms were also associated by family ties. Three main operations were carried on by most firms: preparation of fresh fish, freezing, and cold storage. However, in only a few cases was freezing a major operation, and in general cold storage capacity was sufficient only to handle the normal inventory needs. Over half the firms interviewed rented cold storage space for any additional buildup of in- ventory. In general, the largest firms had the most integrated operations. They owned boats, processing facilities, wholesale operations, and retail and restaurant out- lets. This suggests that expansion in terms of dollar sales in the industry came from adding more activities as much as from growth in any one activity. Nine firms combined owned a total of 35 boats (of which one specialist in shellfish owned 11) : six firms engaged in sea- food retailing. The smaller firms concen- trated either on procurement or distri- bution. Operating practices. The larger firms frequently obtained much of their work- ing capital from commercial banks. Al- though smaller firms used bank credit, they strongly relied on "family" re- sources for both working and fixed cap- ital, the latter being of no great signifi- cance because of the prevailing attitude among many firms that the fresh fish industry in California "has no future." The tendency, therefore, was to postpone indefinitely replacement of outmoded equipment and other facilities. No firm had obtained a government subsidy for its operations, although some thought this a necessity if the industry's supply problems are to be overcome. Firms were asked to list their main products and the main sources of supply for each. Sole was the main product for 16 firms, shrimp for 15, salmon for 13, crab for 12, halibut for ten, and rockfish and lobster for eight. A high proportion of products were sold fresh and un- [22] branded, with little effort by firms to differentiate the products they sold. How- ever, firms had limited monopoly power over items which were supplied mainly from their local area, such as squid in Monterey, abalone in Santa Barbara, bass in San Pedro, and totuava in San Diego. The fairly predictable day-to-day needs of standard items such as sole, rockfish, and shrimp usually were sup- plied from the producer-wholesaler's boats. Other supplies were bought locally from independent fishermen when possi- ble. However, in some items where Cali- fornia supply fell short of local needs — notably salmon and all shellfish, and in other popular items, such as haddock which is not produced in California — supplies were bought from out-of-state dealers through brokers. Estimates also were obtained as to the disposition of the products handled. In dollar terms, 46 per cent of total sales in 1968 were made to other wholesalers and almost 10 per cent to brokers. Twenty- three per cent of sales were made to re- tailers and 16 per cent to restaurants, leaving 5 per cent to miscellaneous out- lets such as institutions, ships, and pet- food manufacturers. The proportion of sales going to retailers and restaurants was significantly higher among firms in San Francisco and Oakland. Destination of sales seemed to be a function of firm size and nearness to main consumer mar- kets. The 14 per cent of total sales shipped out of California, mostly to the East Coast, came mainly from the four largest producer-wholesalers. However, within California the firms in the Eureka. Monterey, and Santa Barbara areas made only 1 per cent of their sales within a 50-mile radius of head office. Firms in Oakland. San Francisco. Los Angeles, and San Diego (the major consumer areas for both fish and shellfish) made over 70 per cent of their sales within a 50-mile radius. Selling procedures were fairly uni- form, the majority of firms usually quot- ing prices f.o.b. with a small minority quoting c.i.f. Not surprisingly, since 26 firms claimed a total of only 70 full-time sales personnel, practically all sales were made to customers who telephoned their orders to the seller or were called by the seller. Sixteen firms claimed that 90 per cent or more of their customer contacts and orders were by telephone. Personal sales calls were the main selling method of one San Francisco Bay area shellfish firm. Eleven firms used brokers, but in only two of these cases were brokers the main avenue for sales. Brokers were usually the firm's agent and were nor- mally paid a brokerage fee of 5 per cent, except on higher priced fish and shellfish products for which the fees were lower. Only 15 firms were able or willing to give a breakdown of sales by the days of the week, these being mainly smaller firms. About one-third of their sales were made on Mondays and Tuesdays, slightly more than one-half on Wednesdays and Thurs- days, and most of the remainder on Fridays. Conduct. An effort was made to ascer- tain the conduct of primary producer- wholesaler firms with respect to price, product, and promotional policies and other competitive behavior. Some evi- dence is available from written contrac- tual agreements between firm principals and parties within and outside the firm. Three firms, or approximately 10 per cent of all producer-wholesalers engaged in fishing, had written agreements with fishermen, stipulating minimum prices for a wide variety of fish and procedures for weighing, rejections, allowance for ice and slime, etc. However, because two of the largest firms participated in these agreements it is reasonable to hypothe- size that the contract prices act as a floor for prices throughout the State. Twelve firms had collective bargaining agreements covering plant employees or distribution workers. In general, union negotiators took cognizance of the indus- try's ability to pay so that agreed-on [23] minimum wages were 15 per cent below those in meat-processing plants.0 These collective bargaining agreements are ne- gotiated separately for each local union area. An effort was made to ascertain how firms determined prices and gross mar- gins.7 In answer to the question "what determines the prices at which you can sell fresh and frozen fish to retailers and restaurants?" more than 50 per cent of firms said, "supply of the species or- dered." This reply is confirmed by studies showing weak substitution effect between most species of fish (Suttor and Aryan-Nejad, 1969, p. 12). Less than 20 per cent of firms considered supply of all fish as the major determinant of price. Only three firms thought income an im- portant determinant of price which sug- gests that firms tend to look at pricing as a short-run decision. From other general comments, it appears that firms expect prices of California species to dip season- ally in midsummer as increased supply meets reduced demand. The majority of firms, 19 out of 26, claimed to have a target gross margin at which they aimed. Three said they sought an undefined "maximum possible level." Five others gave no specific fig- ure. For the remainder of the 19 firms, the range of gross margins cited was 10 per cent of sales for manufacturing oper- ations, 15-25 per cent for wholesaling operations, and 40-60 per cent for retail- ing operations. No firm claimed to have consistently achieved its targeted gross margin. The main reason for this emerged from answers to a further ques- tion as to their usual method of pricing their products. Seven tried to use the per- centage markup method, five attempted to base their prices to customers on a dol- lar or cent markup per pound, 20 firms or almost 80 per cent of all firms, said they closely followed competitors' prices, but only one firm which used the markup method claimed to be a price leader. In more detailed comments on this answer, firms revealed that their markup policy was quite flexible since they adopted whatever pricing method was necessary to sell their products in a competitive market. For example, competition among sellers on the higher-priced species often kept margins below 10 per cent while the margin on lower-priced fish often was very wide in percentage terms. To maintain their profitability, firms tend to charge higher prices — their esti- mate of what the market will bear — to customers with less bargaining power, so that at any time they are quoting not one price, but a "cluster" of prices (Crutch- field, 1954, p. 127) . Advertising expenditure was low, and most firms saw little or no competitive advantage in increasing that expenditure. The 26 producer-wholesalers contacted claimed to have spent a combined total of about $40,000 on advertising, or less than one-tenth of 1 per cent of their 1968 sales. Only seven firms considered it worthwhile for an individual firm to ad- vertise, 13 thought an industry-wide co- operative campaign to advertise fish would be worthwhile. However, only five had made any effort to use the fish educa- tional program materials issued by the National Seafood Institute or the U.S. Bureau of Commercial Fisheries. In general, competitive tactics of firms could be characterized as "live and let live." Firms conducted much business with each other. Financial links, racial links, and ties of family and friendship were strong among several California firms. Few firms seemed sufficiently con- fident of their competitive abilities to openly engage in predatory tactics such as sharp price-cutting, which might bring G Based on union agreements on file with the California Board of Industrial Relations, San Francisco. 7 Gross margin is the difference between the price paid for the raw material and the price re- ceived for the finished product and by-products and is equivalent to the value added by the handler. [24] costly retaliation. Competition, while earnest, was usually kept within bounds set by a firm's estimate of its rivals' abil- ity to react. Other industry comments. Certain questions of a historical nature were asked to help give perspective to the analysis of current structure and con- duct. These questions related to major changes in the industry since 1959, a span of ten years. Three firms had noted increased sales volume in all their activi- ties. Five, all south of Monterey, reported no change in business functions. One each had dropped out of boat owning, receiving facilities, fillet-making, retail- ing, and the small fish (mackerel, sar- dines) business. Activities seemed to be centering on wholesale distribution. Six firms claimed not to have been affected by new products and technologies. The smaller firms had been affected by the advent of portioned and graded instant quick-freeze packs and by prepared pre- cooked consumer and institutional packs for which most now acted as wholesale distributors. Larger firms with manufac- turing operations had been affected by the widespread use of mechanical and labor-saving devices such as fork-lift trucks, loading pallets, packaging, shrimp peeling, deveining machines, improved plant refrigeration, fast-freezing methods, and closed refrigerated delivery trucks. While much of the handling equipment has been improved and can now be op- erated electrically, processing operations are still carried on mainly by hand. The advent of air freight services had mark- edly broadened the potential market for high-price fresh fish and shellfish, but only four firms did sufficient sales volume in such products to take extensive advan- tage of these services. With regard to changes in the number and kinds of products offered for sale, in addition to the comments already made, there was general agreement that firms handled a greater number of prod- ucts in 1969 than in 1959. One manager claimed that six to eight items were suffi- cient to keep business profitable in 1959 but rising costs and intense competition in 1969 required about fifty items for profitable operations. However, only six firms could claim to have invested exten- sively in new buildings, handling or trucking equipment since 1959, indicat- ing that perhaps most of the product lines added were purchased in frozen packs. Of 25 firms explaining what they con- sidered to be "the principal obstacle to an expansion of the sale of fresh and frozen fish," 40 per cent said, "shortage of supply," 24 per cent said, "house- wives' ignorance of cooking methods," and 20 per cent said, "poor quality of products." Some also saw the unwilling- ness of meat butchers to handle fish as a reason for an alleged reluctance of re- tailers to stock fish. Economic overview. While concentra- tion ratios in the primary producer- wholesaler sector were relatively high, this seemed to represent more the weak- ness of many of the smaller firms than the result of deliberate effort by the four largest firms to attain monopoly power. It seems likely that the main source of monopoly power lay, if anywhere, in a firm's access to supplies of the more de- sirable California species. Product differ- entiation, either through branding, ad- vertising, or aggressive selling, seemed of relatively minor proportions. Evidence of two possible types of barriers to entry, uncovered by firm interviews, will be examined more thoroughly in a subse- quent section; however, it some areas it appeared that returns to existing firms were so low that new firms would be dis- couraged from entering the industry. Also, it appeared that a new firm wishing to enter the industry as a primary pro- ducer could be impeded from getting sufficient supplies of market fish by the existing network of financial, ethnic, and familv links. [25] While rising prices and stronger de- mand in 1968 brought an 8.5 per cent increase in total industry dollar sales, ten firms claimed no noticeable increase and three had experienced a decrease, primarily because of short supply of fresh fish. Four firms were expecting to go out of business within the next decade, rather than replace equipment and outmoded buildings. Undoubtedly, more strict health and sanitation requirements were speeding up the demise of some firms with obsolete buildings and equipment. Brokers Brokers in the fishery trade tend to per- form whatever business function they can perform as both a means of using their resources and of economic survival of their businesses. A broker is defined by the National Food Brokers Association (NFBA, 1959, p. 15) as, "an indepen- dent sales agent who performs the serv- ices of negotiating the sale of food and/or grocery products for and on ac- count of the seller as principal, and who is not employed or established by, nor an affiliate or subsidiary of, any trade buyer, and whose compensation is a com- mission or brokerage paid by the seller." A member of the NFBA cannot specu- late, nor can he buy or sell for his own account. By this definition 13 of the 14 California firms calling themselves fresh and frozen fish brokers where whole- sale merchants or jobbers, not brokers because they bought and sold fish on their own account. However, for the pur- poses of our discussion they will be re- ferred to by their customary title of "broker." The oldest surviving brokerage house was founded in 1933 to fill a gap created by the increasing geographical distance between supply and consuming areas. The business of brokers has in- creased greatly since World War II as U. S. domestic production of fish has lagged and trade in imported fish prod- ucts has continued to grow. Structure. The secondary function of fish brokers was to represent sellers, pri- marily for a flat commission. Also, brok- erage firms helped finance production by their overseas clients. In one case such financing amounted to 15-20 per cent of a broker's dollar volume, in another case for 30 per cent of the firm's total volume, and in a third for 45 per cent. Five brokers also represented buyers for a flat commission, but this was a minor part, probably 5 per cent or less, of their busi- ness. Nine of the firms did some split commission business with other brokers, often with firms located on the Atlantic coast and with foreign countries. Brokers need not ever have physical possession of products traded. Because transactions are usually conducted by telephone, a purchase of Indian shrimp landed in New York may be held there in cold storage until sold, and routed di- rectly to a large wholesaler or food chain. We were unsuccessful in our efforts to obtain sales data, either in volume or dol- lar terms, from the brokers interviewed; hence the usual measures of concentra- tion and size are impossible. However, considerable information was elicited about firm activities. More than half of the brokerage firms regularly provided marketing counsel to their suppliers on (1) the state of demand for different kinds of fish and shellfish sometimes to the point of dictating what should be produced. (2) sanitary conditions under which products must be produced and shipped to meet U. S. import regulations and Pure Food and Drug Act require- ments, (3) clearance through customs of imported products. (4) storage of prod- ucts for principals, usually in public cold storage, and (5) packaging and shipping of products to buyers. In addition seven of the 14 firms fi- nanced principals by advancing money on products during the marketing phase. As soon as the order was confirmed, the broker usually paid the supplier 75 per cent of the current value of the shipment based on New York market prices. On [26] Table 10 CALIFORNIA BROKERS HANDLING FIVE MAIN CATEGORIES OF FISH AND SHELLFISH, 1969 Item Broker 1 2 3 4 5 6 7 8 9 10 11 12 X X 13 14 Fish Fresh X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X Shellfish Fresh Frozen X (x) indicates item handled Source: Survey data. receipt of the goods, the broker then com- pleted payment to the supplier based on the New York market price on the day of arrival for the total shipment, after de- ducting a prearranged commission and interest charge, usually 5 to 8 per cent of total value. One broker also stipulated that risks in transit be borne by the sup- plier, raising a legal question — as yet un- resolved in the courts — as to who is the real owner of goods in transit. All brokers interviewed handled both frozen fish and shellfish (table 10) . How- ever, five did not handle fresh fish, seven fresh shellfish. Indeed, only one firm claimed to specialize in fresh fish, a re- flection of the problem of insuring con- tinuous supply. At the other extreme, one firm specialized in handling the frozen packaged products of a large national fish processor. No firm specialized in a single species of fish. Shrimp and crabs were most frequently mentioned as major products, followed by halibut, bottomfish. scallops, lobster tails, salmon, and sword- fish. While the brokers studied drew on worldwide sources for their products, most sales were made in the Southwest United States. Canada and Mexico were important U. S. suppliers. Other foreign suppliers were Iceland, Japan. Central and South America. India, and Aus- tralia. Within the United States, Alaska. Oregon, and Washington were important [ sources of supply of West Coast species while the major U. S. fish markets at New York. Boston, and Chicago were major sources of both East Coast species and imported products. The main market areas served were Southern California (nine firms), North- ern California (eight firms), Nevada (five firms), Arizona, Oregon, and Washington (four firms each), and Idaho and Montana (two firms each). Two brokers also had important export markets. All but one broker listed whole- salers ( including both fish and food wholesalers) as the main customers, while one-half named grocery chains as important customers. Export sales were made through foreign importers, agents and wholesalers, or through U. S. ex- porters, including brokers and jobbers specializing in military supplies. Conduct. Like the primary producer- wholesalers, brokers appeared to be rea- sonably competitive within certain gen- tlemanly limits. One broker stated that Southern and Northern California firms had a tacit agreement not to bid aggres- sively for business in the other's territory. These territories were defined to include southern Nevada. Arizona, and west Texas in the southern area and the re- maining Pacific and mountain states in the northern area. Brokers also tried to avoid competing with their own whole- saler customers. For example, in deciding 27] whether or not to fulfill requests from large food chains for supplies, brokers, as a general rule, would only meet such a request if no wholesaler customer was already serving the chain retailer's terri- tory. No doubt the potential volume of business with the food chain and the strength of possible adverse reaction from other customers were important offsetting factors in such decisions. Advertising and promotion were not major factors in competition. The species handled and its source, e.g., Alaska King crab, Mexican shrimp, West Australian lobster, were the main guarantees of a product's desirability, although some of the larger brokers, and those affiliated with larger corporations, placed greater emphasis on their own brand. The price setting operations of the broker, which will be examined more thoroughly in a subsequent section, ap- pear to be critical in transmitting the proper price signals to producers, distrib- utors, and consumers. Because ex-vessel prices in many cases have a fixed mini- mum, primary producer-wholesalers have a relatively constant markup to cover preparation costs, and because retail prices tend to be maintained at the same base level for long periods, the broker bears much of the brunt of adjusting price to the current level of supply and demand. If supplies are plentiful, the broker may take a smaller gross margin, if supplies are drying up, he may raise his margin.8 Changes in margin tend to be made gradually. For example, if the broker believes price ought to rise, he can reduce quantity discounts, switch the range of quotes, e.g., 60-70 cents per pound to 65-70 cents per pound or 65- 75 cents per pound, and in other ways test out the firmness of demand. Simi- larly, he will reduce price only gradually, for example, by giving an especially favorable quantity discount on current price to a large-volume buyer. One last aspect of conduct of relevance to pricing is the extent of the speculative activities of broker firms. The uncer- tainty of the fish trade and the seasonal nature of harvesting of important species, such as salmon, halibut, and crab, lead to considerable price fluctuations over a period of a few months. Speculators will- ing to buy at a time of plenty for future resale at a time of shortage help to reduce price fluctuations and stand to make con- siderable profit once price has risen suffi- ciently to offset storage costs. While it is clear that brokers participate in this kind of speculation, it is not so clear what the economic impact of such speculation is on other sections of the California fresh and frozen fish trade. Economic overview. The brokers ex- amined in our study were primarily in- volved in scouring the world for supplies of many species of fish to satisfy the large Pacific and mountain market. Their op- erations were complementary to the pri- mary producer-wholesalers studied, in that they sought products not available from the California fisheries. In addition, because many of their overseas suppliers were small with limited capital, they usu- ally financed those firms. Because of the two main prerequisites for a brokerage business — capital and availability of a telephone — the size of existing firms did not seem to be a seri- ous barrier to entry of new firms. How- ever, qualifying experience and a lack of established sales contacts could have been insurmountable obstacles. One large canner had entered and subsequently withdrawn from the brokerage business because the required flexibility and speed of decisions with respect to large sums of money demanded a kind of expertise that could not be obtained within the normal decision-making process in its other cor- porate activities. Brokers are more vul- nerable to gradual whittling away of parts of their product line. Many claimed 8 More detailed cost studies would be required to determine how low gross margin may go before break-even point is reached. [28] that their operations could only be kept profitable by handling an ever wider variety of products, due to the inroads being made on their markets by inte- grated, multiproduct, producing, and marketing firms. The seasonal nature of many of the products handled by brokers had encour- aged many of them to accumulate inven- tory for speculative purposes. Their cen- tral position in the distribution chain also had given them a major role in price setting. Both these aspects and their re- lationships will be examined in later sec- tions. Fabricators Both fresh and frozen fish arrive in the larger consumption areas from local or re- mote supply areas still in the form of a raw commodity. At the same time, many fish products are unacceptable to restau- rants, retailers, or consumers in this com- modity form. The conversion into conven- ient prepared ready-to-cook or precooked consumer cuts and packs has grown up as a separate business activity usually at major distribution centers. In California, processing for sale to final consumers tends to take place in Los Angeles. Seven of the largest fabricators in Los Angeles were interviewed about their activities. Because of the importance of imported items in their product mix. much of their supplies were bought through the brokers. Structure. Six of the seven fabricators interviewed were small, financially inde- pendent firms; the seventh was a sub- sidiary of an international conglomerate with large interests in fish and food. Firms at this level tended more often to specialize in specific products or product groups. Three specialized in shrimp proc- essing; a fourth specialized in fresh prod- ucts bought through brokers from outside California. The remaining three firms handled a wide variety of products. Among all firms scallops, oysters, and cod were next to shrimp in importance. [ The primary operations performed were breading (principally of shrimp), fillet- ing, and steaking. The chief customers of the fabricators were food chains, ca- terers to the restaurant and institutional trade, and general-line wholesalers. Ability to carry inventory of frozen fish is an important determinant of sur- vival in the business because many of the products handled are produced on a seasonal basis. Five of the firms held an average of three months' inventories of raw materials in their own freezer stor- age, and a sixth used commercial freezer storage. Of the five who also kept some inventory of finished products, four kept these in commercial storage, only one in its own facilities. It was not possible to obtain details of other important struc- tural characteristics such as size of firm, extent of concentration, etc. Conduct. Even though they sell a more finished product than previous types of firms discussed, fabricators do not seem to wield other than a minor influence on price at any level. They are price-takers both as buyers and sellers. They must buy at or near the world or I . S. market price and sell to firms with large bar- gaining power, such as general whole- salers and retail food chains that often have alternative supply sources in other states or countries. Some have made ef- forts at product differentiation by adver- tising and promoting their branded prod- ucts in consumer size packages, but only one or two have brands recognized out- side the Los Angeles area. The owner of one firm which had voluntarily adopted the U. S. Department of Interior's qual- ity inspection program believed that a reputation for high quality was the best competitive weapon. Industry comments. Of the seven fab- ricators, four cited shortages of supply of the species they handled as their major operating problem, another cited lack of capital and rising labor costs, and a sixth named deficiencies in the quality of prod- ucts handled. However, improved de- 29] mand for processed fish products in re- cent years, and their belief that this would continue, seemed to four firms to be the most encouraging aspect of the industry. Two foresaw fewer but larger firms which would be capable of secur- ing a steady share of the available sup- plies. Two had plans to diversify into nonprocessing activities associated with fish, while one planned to move his shrimp operation to Mexico because of the higher wage levels in Los Angeles. Economic overview. The fabricating sector of the trade is now in its present location as a result of the environment that existed in California one or two decades ago. If the sector were to be re- organized, it is doubtful if the same loca- tion and size of firms would be judged optimal. The independent firms, squeezed between the world market price on the supply side and large buyers on the de- mand side, have sought the remedy of broadening their business functions and the range of products carried. Their main competitors were and are the national packers of branded frozen fish products. Some have been forced to become distrib- utors for national packers of frozen food. Their processing operation was the type which could benefit from the capital, technical expertise, and organizational capacities of larger corporations, so that their future as independent California operators may be limited. Retailers Thirty years ago fresh and frozen fish was retailed primarily by small, inde- pendent seafood retailers and by inde- pendent retailers of meat. Today, fresh and frozen fish is sold mainly by super- market grocery firms stocking an average of more than 7,000 other items. In 1968, the approximately 227,000 grocery stores in the United States totaled sales of $78 billion. The 35,900 supermarkets ac- counted for 16 per cent of all stores but 74 per cent of total sales. Firms with 11 or more stores accounted for 18.900 supermarkets, or 41.3 per cent of all sales. The five largest retail food chains together sold over 20 per cent (Parsons, 1969). Since such a small number of firms have extensive control over the pri- mary point of contact of producers with consumers, the attitudes of store man- agers toward selling fresh and frozen fish is especially significant to all sectors of the fishery trade. It would have been desirable to study in depth the structure and conduct of food retailers as they affect sales of fish products. However, because of the limita- tions of time and money, it was possible to examine only a few firms. Hence, it was decided to interview three grocery chains which had made efforts to im- prove on the unsatisfactory results ex- perienced by chains in general in han- dling fish. One of these firms was a na- tional chain, another was a large Los Angeles-based chain, and the third was a small Los Angeles-based chain. Con- trary to the Progressive Grocer findings (1969, supra, p. 20), all three chains were convinced that fish, properly han- dled, could be a highly profitable item with considerable customer drawing- power. The chains disagreed, however, on the most effective path to profitability in handling fish. The largest chain handled little fresh fish, but it was attempting to build up its fish sales with frozen and precooked items. The meat marketing manager tried to maintain quality in frozen fish by in- sisting that products still unsold after three days on display in a refrigerated cabinet be disposed of. He admitted diffi- culty in enforcing this order. The firm charged a price at or below that of most competitors for both frozen and pre- cooked fish. The large Los Angeles-based chain had built up its seafood products section to the point where it accounted for 6^ to 7 per cent of total dollar sales (more than four times the national average) by em- phasizing quality, stocking fresh fish [30] wherever possible (fresh sales accounted for one-third of its seafood sales), and charging a price considerably above its competitors to reinforce the claims of superior quality and freshness. The small Los Angeles chain emphasized quality, freshness, and the competitive prices of its seafood items. The latter two chains were committed to what they termed "service" selling of seafood. This policy was particularly ap- plicable to fresh fish and shellfish, but it also helped sales of frozen seafood. By service selling these chains meant having a trained fish butcher available in any retail outlet where volume warranted it to prepare fish cuts to housewives' speci- fications and to give advice on purchas- ing and cooking of fish. Both claimed to have the training programs and the su- pervisory capacity necessary to insure high quality service from their fish butchers. Providing a competent fish butcher in every major supermarket of every major retail food chain would be a formidable task, and is still a long way in the future. Most food chains are more likely to follow the pattern of the largest chain interviewed, which was giving in- creasing emhpasis to prepacked, pre- cooked seafood items. It is possible that both methods of promoting seafood could prosper side by side. A Florida study cov- ering the years 1965-1967 reported, "None of the respondent stores relied solely on frozen fish, but an impressive number expected the frozen pack to in- crease in use. It is significant, also, that they expected fresh fish to make a come- back." (Hearn and Menke, 1968, p. 57) The two larger food chains, whenever possible, bought directly from producer- wholesalers or fabricators of fresh, fro- zen, and prepacked items. The second of these, which had large fresh sales, relied heavily on local producer-wholesalers for these supplies. The small Los Angeles food chain used local producer-whole- salers and brokers for most of its sup- plies of fresh, frozen, and prepackaged fish. The larger chains carried up to six months inventory of high-priced frozen fish and reflected a seasonal supply pat- tern in their own or commercial cold storage facilities. The smaller chain car- ried only 7-10 days inventory of frozen fish. Fresh supplies were purchased twice a week and inventory averaged two days supply. All three chains had noted a lessening of the prominence of Friday as a sales day for fish with a resultant eas- ing of the weekly inventory problem. Waste and spoilage losses were put by one chain at "probably under 5 per cent," much of it due to cutting up fish in the store. All three chains considered their fish business relatively successful with good growth prospects. The largest chain saw greatest potential in prepackaged, pre- cooked items. The other national chain had found that in opinion surveys, con- sumers associated its name with its qual- ity fresh fish department. Paradoxically, while its "service" seafood trade was buoyant, it had not had the same success as competitors with precooked items. While the firm desired to maintain its existing trade, it was concerned about being left behind in the convenience end of the market. The small Los Angeles chain, believing that its survival in com- petition with larger rivals depended on the special appeals it could offer cus- tomers, was planning to increase its ef- forts to supply fresh fish where possible, and to provide a qualified fish butcher to serve customers in each of its stores. [31] IMPACT OF STRUCTURAL CHANGES ON PERFORMANCE Sales volume of California's producer-wholesalers, after 1954, concentrated in fewer firms because, between 1954 and 1963, 37 per cent of the smaller firms dropped out (compared to an 11 per cent national average) and a few firms adopted more aggressive production and selling practices. The 1963 average annual sales for the California firms of $563,900 was 30 per cent above the national average. Data for the entire country indicates that operating expenses as a percentage of sales were considerably lower for larger- than smaller-volume firms, which implies that economies were obtained through increased sales volume, resulting from a better use of plant, labor, and equipment and delivery facilities. The number of brokerage firms in California remained stable while elsewhere in the nation it declined by 18 per cent. California brokers averaged annual sales of $1.57 million, or about 20 per cent more than the national average. Sales volume of fish brokers was problably maintained by diversification into new products and into fish jobbing-wholesaleing functions. The number of California fabricators rose from 13 to 29, but the value of production per establishment averaged much lower than similar firms elsewhere in the country. The lower volume reflects the localized trade territory of the California firms and the unavailability of the species most commonly used by the fabricators. In general, the fisheries industry showed little evidence of the dynamic growth that is needed to meet the requirements of an expanding population. One reason may be a shortage of fish because of depletion. Another, the availability of more suitable out- lets for labor and capital. In this section we shall (a) examine the statistical changes that have oc- curred at each level of the California fresh and frozen fish trade since 1954. (b) compare these with the changes that have taken place in other states, and (c) draw some inferences from the analysis regarding the relative impact of structure on the economic performance of each level of the California trade. Basic data were drawn from the Census of Manufac- tures for 1954, 1958, 1963, and 1967 (preliminary) and the Census of Business for 1954, 1958, and 1963, on the three classifications relevant to our analysis: (a) Fish, seafood, merchant whole- salers (SIC5046), (b) Fish, seafood, merchandise agents, hrokers (SIC5046) , and (c) Fresh or frozen prepackaged fish (SIC2036). Each classification is discussed separately beginning with general results and trends for the United States and the Pacific re- gion, and comparing and contrasting these with specific results for California. Merchant-wholesalers This Census of Business category includes the special group of primary producer- wholesalers discussed previously, includ- ing both those wholesalers whose prime characteristic was their close ties with supplying fishermen and those who acted primarily as distrihutors of fishery prod- ucts purchased for resale. General results for the United States. While the number of fish mer- chant-wholesalers in the United States declined by more than 10 per cent from 1954 through 1963, total dollar sales and dollar sales per establishment (one indi- cator of size of firm) apparently rose (table 11). However, if one deflates these dollar values by either the consumer price index or the index of wholesale [32] Table 11 FISH, SEAFOODS, MERCHANT-WHOLESALERS, U. S. ESTABLISHMENTS AND SALES BY REGIONS, SELECTED, STATES AND SELECTED SMSA's— 1954, 1958, AND 1963 Location Establishments 1954 1958 1963 Sales 1954 1963 Sales per establishment 1954 1958 1963 number million dollars thousand dollars United States Regions North East North Central South West States Maine Massachusetts New York Florida Washington Oregon California SMSA's Los Angeles-Long Bead San Francisco-Oakland 1,808 650 227 711 220 117 150 226 158 51 22 127 1,591 597 169 653 172 109 128 214 154 41 15 99 1,602 601 166 665 170 111 128 204 168 44 11 87 653 . 6 276.1 122.7 167.6 87.2 22.6 76.1 119.1 42.8 14.9 4.4 58.0 23.3 18.5 621.6 260.5 107.4 176.7 77.1 N. A. 73.2 117.8 44 5 19 5 N. A. 47.2 16.3 N. A. 692.8 298.9 92.9 N. A. N. A. 28.2 90.4 122 3 56.9 27.4 4.1 49.1 16.0 19.0 361.6 424.8 540.6 235.8 396.5 192 9 507.6 527 0 270.7 291.8 200.6 456.5 542 2 463 . 6 390.7 436 3 635.2 270.7 448.1 N. A. 572.1 550.5 288.9 476.6 N. A. 476.5 507.8 N. A. 432.5 497.4 559.6 N. A. N. A. 254.0 706.6 599.7 338.9 622.3 373.5 563.9 534.8 656.1 N. A. = Data not available. Source: U. S. Bureau of the Census, 1954, 1958, and 1963. prices of fish, it is clear that in real terms total wholesale sales decreased and sales per establishment increased little during the three census periods. The decline in numher of estahlishments and relative stagnation in sales volume was experi- enced in every region. The census data reveal some of the ways in which the trade adjusted to this situation. In 1954, merchant-wholesalers in Standard Metropolitan Statistical Areas with more than one-half million inhahitants accounted for 28 per cent of all establishments and almost 50 per cent of total sales. By 1963 their share had risen to 41 per cent of all estahlishments and almost 60 per cent of total sales. The number of establishments in the remain- der of the United States (i.e., non- SMSA's) fell dramatically from 1,034 in 1954 to 671 in 1963. The survivors had average sales 30 per cent larger than a decade previously, although still below the overall U. S. average. An important factor in the survival of the smaller firms in the industry seems to have been their success in reducing the percentage of operating expenses to sales between 1954 and 1963, either through greater utilization of capacity or through general improvements in oper- ating efficiency (table 12). In contrast, firms with sales of over Si million experi- enced increases in their operating ex- pense ratio in the same decade. The larger firms were hit more by increasing payroll expenses, either because of their greater proportion of hired nonfamily labor or their urban location where col- lective bargaining is a more important factor. At the same time they failed to increase their share of total seafood sales. Despite heavy attrition, establishments with annual sales of less than $200,000 33] Table 12 MERCHANT-WHOLESALERS, U. S. NUMBER OF ESTABLISHMENTS BY DOLLAR SALES VOLUME AND OPERATING EXPENSES AS A PERCENTAGE OF DOLLAR SALES, 1954, 1958, AND 1963 Establishments Operating expenses as percentage of sales Establishments classified by dollar sales volume 1954 1958 1963 1954 1958 1963 number per cent Total establishments, U. S 1,808 1,591 1,602 16.4 14.7 15.6 Establishments operated entire year, total 1,744 1,543 1,544 16.4 14.7 15.6 With annual sales of: 1 $10,000,000 and over 2 0 j 6.0 N. A. N. A. $ 5,000,000-89,999,000 5 5 N. A. 13.7 $ 2,000,000-84,999,000 38 34 47 10.3 12.7 12.6 $ 1,000,000-$1,999,000 93 83 103 13.8 13.8 14.6 $ 500,000-$ 999,000 192 169 192 18.7 14.7 15.6 $ 300,000-$ 499,000 213 215 277 19.4 17.2 17.4 $ 200,000-$ 299,000 195 201 200 20.0 15.8 17.2 $ 100,000-$ 199,000 385 309 318 23.4 17.2 17.5 $ 50,000-$ 99,000 310 239 | 402 ( 26.1 30.0 J 20 7 Less than $50,000 313 286 31.9 37.9 Establishments not operated entire year 64 48 58 16.0 15.9 24.9 N. A. = Data not available. Source: U. S. Bureau of the Census, Census of Business, Wholesale Trade, 1954, 1958, and 1963. in 1963 accounted for 45.6 per cent of establishments and almost 10 per cent of total sales. The Pacific region. In contrast to the entire United States, the Pacific region, including Washington, Oregon, and Cali- fornia, experienced a significant growth in the share of regional sales accounted for by larger establishments. Those with sales of more than $500,000 increased their share from 60.8 per cent in 1954 to 67.6 per cent in 1958. In the 1963 data, with Alaska and Hawaii also included, such firms accounted for 70.3 per cent of Pacific area sales. This growth has not heralded an expansion of total Pacific area sales over the period, but rather rapid attrition among smaller establish- ments in the area. California. Inevitably, merchant-whole- salers in California have been affected by national and regional trends. The num- ber of establishments fell from 127 in 1954 to 99 in 1958 and 87 in 1963. Cali- fornia's share of total U. S. sales fell from 8.9 per cent in 1954 to 7.1 per cent in 1963. Although sales per establishment consistently remained above the national average, they were lower at each succes- sive census. In contrast to the national scene, the two major SMSA's in Califor- nia, Los Angeles-Long Beach and San Francisco-Oakland saw their share of total U. S. sales decline from 6.4 per cent in 1954 to 5.0 per cent in 1963. This series of unfavorable statistics does not mean that the surviving firms in the California wholesale fish trade may not have been able to improve their profits even though Stigler (1958, pp. 54-71) would argue that falling share of industry output by a particular class of firm is an indication of inefficiency. Undoubtedly. California firms have suf- fered such a drop, and subsequent heavy attrition in firm numbers. However, the decline in local supplies of fish has been a major contributing factor. Firms have tried to offset rising unit costs by han- dling a wider range of new products and [34] Table 13 FISH SEAFOODS, MERCHANDISE AGENTS, BROKERS, U. S. ESTABLISHMENTS AND SALES BY REGIONS, SELECTED STATES, AND SELECTED SMSA's Location Establishments Sales Sales per establishment 1958 1963 1958 1963 1958 1963 number million dollars thousand dollars 86 26 16 17 27 1 9 13 6 13 13 9 3 71 19 13 17 22 N. A. 6 10 6 4 13 7 3 125.5 39.2 | 46.5* 39.9 N. A. 14.9 19.5 4.2 23.0 15.5 11.6 N. A. 92.6 24.7 27.9 N. A. N. A. N. A. 3.8 18.5 5.1 1.9 20.4 13.6 3.9 1,459.8 1,506.8 f < 1,408.2* 1,477.6 N. A. 1,650.2 1,503.3 701.5 1,768.4 1,193.0 1,285.2 N. A. 1,304.4 1,298.3 Regions North East 2,148 2 South West N. A. N. A. States N. A. Massachusetts 638.2 1,851 5 Florida Washington California -SMSA's Los Angeles-Long Beach San Francisco-Oak- land 852.5 468.5 1,567.2 1,936.3 1,311.7 * Estimated for combined North Central and South. N. A. = Data not available. Source: U. S. Bureau of the Census, Census of Business, Wholesale Trade, 1958 and 1963. increasing throughout of existing prod- ucts. Clearly, their efforts have met only limited success. Merchandise agents, brokers General results for the United States. Less complete data are available here than on the merchant-wholesalers. The census category, "merchandise agents, brokers" is indistinguishable from the broker group described on page 29. The number of establishments, total dollars sales, and average sales per estab- lishment all declined from 1958 through 1963 (table 13) . Only the South and the state of Florida recorded no decline. The share of total U. S. sales accounted for by the five leading states, Massachu- setts, New York, Florida, Washington, and California, dropped from 61.4 per cent to 63.6 per cent between 1958 and 1963. On average, sales per brokerage estab- lishment in 1963 at $1.3 million were three times as large as sales per mer- chant-wholesaler establishment. About 80.3 per cent of establishments and 91.3 per cent of sales were in SMSA's with more than one-half million inhabitants. More than 70 per cent of brokerage es- tablishments had less than seven em- ployees. Approximately the same propor- tion of wholesaler and broker firms were partnerships. Among brokers, average sales per partnership establishment were more than twice the national average and almost twice that of the more numer- ous corporate establishments. In contrast, sales of partnership establishments among merchant-wholesalers averaged only half those of corporate establish- ments and were almost 20 per cent below the national average for all merchant- wholesalers. [35] California. For the purposes of our study, a most pertinent contrast is that the number of California brokers re- mained unchanged from 1958 through 1963, but their total sales increased 31.4 per cent. California brokers also were larger, sales per establishment being 20 per cent above the national average in 1963. California's share of national sales rose from 12.4 to 22.0 per cent in the five-year period. Clearly, much of this in- crease in sales arose in the Los Angeles- Long Beach and San Francisco-Oakland SMSA's. These two areas increased their share of national brokerage sales from less than 12 per cent to 18.8 per cent. The large decline in brokerage sales in the state of Washington may indicate at whose expense, at least on the West Coast, California brokers have increased their sales. From the limited data available, one can assume that, as of 1963, California brokers were successfully combating the general decline in the seafood brokerage business, possibly by adding new product lines and by increasing their merchandis- ing activities. From our discussions with 1 brokers in 1969, we learned their im- " portance in the trade channel has been undermined somewhat by processor- wholesalers and fabricators selling direct to retail chains. j Fresh or Frozen Fish Prepackagers or Fabricators General results for the United States. Establishments in the fresh or frozen prepackaged fish category of the Census of Manufacturers would include those firms, described as fabricators. Out- put of these establishments in dollar terms has increased each year since 1954 (table 14). Total value added also has increased each year except for a minor check in 1962. However, the number of establishments and the total number of employees has shown only halting growth over the years 1954 to 1967. While out- put per establishment has risen in each successive census period, output per pro- duction worker has shown a faltering, upward progress. This latter condition may reflect not solely the relative effi- Table 14 FRESH OR FROZEN PREPACKAGED FISH U INDICATORS, 1954-1967 S. KEY INDUSTRY Year* Establish- ments Produc- tion work- ers Value of produc- tion Value added by manu- facturer Value of ] Per estab- lish- ment production Per produc- tion worker Value add- ed/value of production Capital ex- penditure, new/value of production number thousand dollars million dollars thousand dollars dollars per cent 1967.. 499 21.5 558.2 165.3 1,118.6 28,773 29.61 1.56 1966.. N. A. 19.2 492.7 151.7 N. A. 39,154 30.79 1.91 1965.. N. A. 18.7 464.2 138.3 N. A. 27,467 29.79 1.34 1964.. N. A. 20.6 428.2 128.1 N. A. 23,022 29.92 1.26 1963.. 547 20.1 391.2 118.5 715.2 21 , 855 30.29 1.56 1962.. N. A. 16.0 344.5 101.3 N. A. 22,226 29.40 2.90 1961.. N. A. 17.2 332.3 101.5 N. A. 21,719 30.54 1.02 I960.. N. A. 18.8 328.3 100.3 N. A. 19,426 30.55 1.22 1959.. N. A. 18.0 317.0 89.7 N. A. 19,937 28.30 2.18 1958.. 446 17.6 310.1 83.5 695.3 19,878 26.93 1.19 1954.. 295 11,232 176.8 48.7 599.2 15,738 27.57 1.59 * 1967— census preliminary report; 1959-1962, 1964-1966— annual survey of manufacturer's data; 1954, 1958, and 1963 — census report. N. A. = Data not available. Source: U. S. Bureau of the Census, Census of Manufacturers, 1967, Fresh and Frozen Prepackaged Fish (pre- liminary report, Washington, D. C, 5 pp.") [36] ciency of labor but, in addition, certain factors exogenous to the firm such as availability of total supply, mix of prod- ucts available (whether expensive or in- expensive species), and the demand for that product mix. Value added by manufacture, as a pro- portion of the industry's total value of production, was stable at around 30 per cent from 1960 through 1967. Value added is derived by subtracting the cost of materials, supplies, containers, fuel, purchased electricity, and contract work from the value of production plus miscel- laneous receipts. It represents all business inputs, including all fixed and variable costs, plus net profit. In the absence of ac- tual profit data, value added represents the best available economic measure of the relative importance of different in- dustries and of different segments within an industry. Where value added repre- sents a stable percentage of value of pro- duction, and value of production is in- creasing as in this case, it can be taken as a long-run sign of a reasonably healthy industry. The industry's total new capital expen- diture in 1967 amounted to less than $20,000 per establishment or 1.56 per cent of the value of production, the same percentage as in 1963. The 1963 Census reveals that the entire industry spent less than $2 million on new structures and additions to plant, and only $4.1 million on new machinery and equipment. The capital expenditure percentage compares unfavorably with that in other similar food processing industries.0 The limited information available by firm size sug- gests that, contrary to expectation, the larger firms did not report ploughing back a greater proportion of earnings in new capital expenditure. This may be a reflection of the failure of larger firms to increase their share of total output from 1954 through 1963. Data on the per cent of value of production accounted for Table 15 FRESH OR FROZEN PACKAGED FISH, U. S. PER CENT OF VALUE OF PRODUCTION ACCOUNTED FOR BY THE LARGEST COMPANIES, 1954 AND 1963 Percentage accounted for by Year Four largest companies Eight largest companies Twenty largest companies Fifty largest companies per cent 1963 1958 1954 25 18 24 38 30 37 53 47 56 68 68 N. A. N. A. = Data not available. Source: U. S. Bureau of the Census, Census of Manufacturers, 1963, Vol. I, Summary and Subject Statis- tics, Washington, D. C, 1966. by the largest companies shows little evi- dence of increased concentration (table 15). Indeed, evidence on firm size in terms of number of employees shows that in 1963 establishments with fewer than 50 employees increased their share of total establishments to 80.6 per cent over the decade and their share of total output to 30.5 per cent. California. Based on the criteria dis- cussed above, the California trade emerges favorably in comparison with other states and with results for the entire United States. In the years from 1954 through 1967 the number of California fabricating establishments more than doubled and value of production in- creased twelve-fold (table 16). Califor- nia's share of total U. S. output rose from 1.35 per cent in 1954 to 4.91 per cent in 1967. Even though dollar value of out- put per establishment in California has been below the national average, output per production worker has been consis- tently above the national average. Cali- fornia's percentage of value added to value of production has remained slightly above the national average at each cen- sus. Since payroll expenses as a propor- 9 For example, new capital expenditure was 3.66 per cent of value of production in 1967 for frozen fruits and vegetables, 1.99 per cent for poultry dressing plants. [37] Table 16 FRESH OR FROZEN PREPACKAGED FISH, KEY INDUSTRY INDICATORS, COMPARATIVE DATA FOR THE U. S. AND CALIFORNIA, 1954, 1958, 1963, AND 1967 Item United States California 1954 1958 1963 1967* 1954 1958 1963 1967* Establishments (number) (per cent) 295 100.0 440 100.0 547 100.0 499 100.0 13 4.4 27 6.1 34 6.2 29 5.8 Production workers (num- ber) 11,232 15,457 17,936 19,400 127 485 883 900 Value added ($1,000) 45,657 82,368 118,451 165,300 616 4 441 7 221 9,000 27,400 4.9 Value of produc- tion ($1 , 000) . . . 164,625 100.0 307,399 100.0 391,174 100.0 558,200 100.0 2,220 1.4 10,410 3.4 22,605 5.8 (per cent) Capital expendi- ture, new ($1,000) 2,813 3,637 6,095 8,700 55 N. A. 386 400 Value of produc- tion: per establish- ment ($1,000) per production worker ($) 558.1 14,657 698.6 19,887 715.1 21,809 1,118.6 28,773 170.8 17,480 385.6 21,464 664.9 25,600 944.8 30,444 Value added/ value of produc- tion (per cent) . . . 27.73 26.80 30.28 29.61 27.75 42.66 31.94 32.85 Capital expendi- ture, new/ value of produc- tion (per cent) . . . 1.71 1.18 1.56 1.56 2.48 N. A. 1.71 1.46 * Preliminary. N. A. = Data not available. Source: U. S. Bureau of the Census, Census of Manufacturers, 1954, 1958, 1963, and 1967. tion of value of production are below the national average, one would expect the California industry to be more profitable than that in many other states. The per- centage of new capital expenditure to total value of production was above the national average in both 1954 and 1963, during the period of continued growth in establishments and sales. Significantly enough, however, the new capital expen- diture percentage was below the national average in 1967, the first census for more than a decade in which the number of California establishments showed a de- cline. Clearly, firms in California are suffering some attrition, perhaps because of supply or cost constraints. [38] A PROCEDURE FOR MEASURING PERFORMANCE Our analysis indicated that at least eight of the 26 producer-wholesalers had insufficient management inputs, and that the industry in general could have used its capital, labor, and management inputs more effectively. Three tables of optimal combinations of inputs derived from our analysis are presented for use by firm managers and policy-makers as tentative indicators of relative firm efficiency. While our surveys provided some evi- dence of inefficiencies in the California fresh and frozen fish trade at every level, these data were not such as to allow us to develop objective measures of perform- ance of the industry. For example, it would have been desirable to measure profit levels in the industry relative to an objective norm such as the average profit level in comparable industries. However, no usable data on profit levels were avail- able. Even if the data had been available, the use of profit measures as a perform- ance norm would have been vitiated by the fact that some firms appeared to seek the maximum profits that could be ob- tained only after they had fulfilled such objectives as (1) providing employment for family members, (2) avoiding those forms of competition which would arouse retaliatory action, and (3) minimizing price fluctuations as a means of increas- ing industry stability. Despite data limitations for the most meaningful type of analyses, we chose to seek some measures of performance by using our 26-firm survey data to derive a production function from which we could get some indication of the level of efficiency of firms in the California pri- mary producer-wholesaler sector. Outline of Procedure Regression analysis was used to derive an aggregate production function for the primary producer-wholesaler sector re- lating dollar value of sales to the capital. labor, and management factors of pro- duction. The working hypothesis was then made that competition in the sector was perfect, and the estimated function used to determine the Pareto-optimum [ level of output in terms of the optimal mix of factor inputs for given prices of the factors. The efficiency of each firm's production was then measured in terms of deviations from the optimal input mix. Because firms may not be flexible in their ability to alter the level of use of each input, tables were derived setting out the optimal level of each input for given levels of the other two inputs. The pro- duction function analysis was extended to examine the influence of certain structural characteristics on sales. Fi- nally, in light of the results obtained, the aggregate production function approach to measurement of performance was re- evaluated, and the validity of the work- ing hypothesis of perfect competition reexamined in terms of the sensitivity of results to relaxation of some of the ten- ets of perfect competition. It was believed that an attempt to mea- sure technological relationships between inputs and outputs would have benefits over and above any tentative results we obtained (1) in detecting any gross in- efficiencies or misallocation of resources within the sector, and (2) in focusing attention on those features of the sector on which future data collection and eco- nomic analysis might most profitably be centered. The assumption of perfect competition could be justified on the grounds that in general firms in the sector were small, they had to compete with many other types of firms at the local level for sup- plies of labor, capital, and management, and to sell their products in state and national markets open to products from many sources. 39] Estimating A Production Function for the Primary Producer- Wholesaler Sector Although the production function is in- tended to represent the technological relationship between inputs and output of a single firm (Henderson and Quandt, 1953, pp. 42-84), its use has been ex- tended to the measurement of interfirm, interindustry, and international relation- ships (see also Walters, 1963). An em- pirical estimate of an aggregate produc- tion function using firm observations as data points can be thought of as repre- senting an envelope curve to existing production possibilities or a long-run technological relationship assuming firms are at tangency points to the envelope. Its obvious applications are to throw light on broad policy issues. Either linear programming or calculus can be used to seek that combination of inputs which will maximize output and achieve other pertinent profit, cost, or technical re- quirements. Given the form of the data available, it seemed reasonable to proceed on an assumption that a continuous, single- valued function could be estimated using regression analysis. The linear program- ming approach was abandoned because it was found impossible to define "typ- ical" or "representative" processes re- lating fixed combinations of inputs to outputs. Problems encountered in the esti- mation process. The problem involved in assuming a uniform technology among firms in the industry was paralleled when we tried to define industry inputs and output. In empirical estimation, firms were assumed to have three inputs — labor, capital, and management — and one output, sales revenue in dollars. Labor per firm was reckoned in terms of full-time equivalent employees, four seasonal employees being assumed to be the equivalent of one full-time employee. Differences in age, skill, and specializa- tion were not taken into account. Capital could not be quantified so readily. Capital includes all those produc- tion and financial services which com- bine with labor to generate output. How- ever, no census of plant, machinery, equipment, or financial resources was available. From our interviews a figure was obtained for total assets employed in the business, both at book value and at estimated replacement value. While book value generally is arrived at by standard accounting procedures and re- placement value is based on subjective judgment, the estimates of replacement value should more accurately represent the relative amounts of capital employed in each firm. However, what contributes to output is not capital per se (which is a stock concept) but the flow of capital services during a year. This flow was assumed to be equal to depreciation plus market rate of interest on average capi- tal invested. For an investment of $1,000 in year one, assuming straight-line de- preciation of 10 per cent per annum and given a market rate of interest of 10 per cent, the flow of capital services would be $155 or approximately 15 per cent of the total investment.10 Other combinations of methods of depreciation and levels of depreciation and market rate of interest could be used. Given the broad policy aims and the assumptions of the analysis, 10 Capital in year t (t - 1, 2 . . . 10) will equal $1,000 - (t - 1) ($l,000d), where d is rate of depreciation. 10 Average capital = 2 [$1,000- U - 1 ) ($l,000d) ]/10. t = 1 10 Flow of capital services = [$l,000d + r S [$1,000 - (t- 1) ($1,000^1/10. t = l For d — .10, r = .10, flow of capital services = $155. [40] the production function was estimated arbitrarily using only one level of flow of capital services, i.e., 15 per cent of the replacement value of each firm's total assets. In addition, since we were using cross-section data for assets at re- placement value at one point in time, we could more readily accept the assump- tion that all firms faced the same rate of depreciation and the same market rate of interest. The third factor of production in- cluded in our analysis was management. Other attempts have been made to in- corporate a management variable in pro- duction functions by use of analysis of covariance (Hoch, 1962, pp. 34-53), test devices (Johnson, 1961), etc. It seemed to us that in the fresh and frozen fish trade the caliber of management avail- able to a firm would be reflected in the actual steps taken to adjust to changing market and technological conditions. Each firm had provided answers to ques- tions about (1) adoption of new tech- nology, (2) new products, (3) new pro- duction and handling techniques, (4) changes in business functions, in the decade 1959-1969, and (5) about cur- rent attitudes to advertising. On each of the first four criteria, firms were allotted points from 0 to 10 — the greater the number and size of adaptations made, the higher the score. For example, firms which had adopted no new technology scored 0 on the first criterion, the one firm which had adopted new packaging, quick freezing, shrimp peeling, and re- frigeration methods scored 10 points. On the fifth criterion, firms were assigned one point for each favorable answer to the questions on use of and attitudes to advertising and promotion. An index of management for each firm was obtained by summing its scores on each criterion. Out of a maximum of 43 points, the highest score obtained was 27, the low- est 1. Despite the inevitable intrusion of subjective judgment, the scores do ap- pear to represent relative strength of management.11 It was recognized that one could not be certain a priori that the management factor so derived was in- dependent of labor and capital. Finally, mention must be made of the problems associated with the measure of output used. Some of the 26 firms studied were primarily processors with a ratio of value added to raw material costs of about one to one (based on Nash and Miller, 1969, p. 10). Others were primarily wholesalers whose services were represented by the wholesale markup, so that the ratio of raw material costs to value added averaged four to one (estimated survey data). Nor did firms handle a uniform product. Most handled a wide variety of products rang- ing from high-priced items such as shrimp to low-priced items such as cat- fish. Even on the same item, firms claimed that markup tended to vary with the strength of competition, local trade practices, and level of buyer sophistica- tion. Accordingly, there were a number of imponderables in each firm's produc- tion function which might render invalid attempts to relate the capital, labor, and management of firms to their sales. It was necessary to make the assumption that the effect of such imponderables would be random and contained in the error term of our estimated function and that the error term would be small, or that its mean would be zero. It would also have been preferable to have measured output of these firms in "units" of service provided rather than in dollar terms, and furthermore, if dollar terms had to be used, dollars of value added rather than dollars of total sales would have been preferable. How- ever, the only data that were available were dollar value of total sales. Of the 26 primary producer-whole- salers studied, usable data on dollar sales, n Analysis of covariance tests showed that a management index greater than 10 was significantly related to increased sales revenue. [41] capital, labor, and management were obtained from 22 firms. Various possible forms of production function were tested. In general, linear equations had a large standard error, and squared or cross- product variables had insignificant co- efficients. A Cobb-Douglas form gave best overall results. It was estimated by ordinary least squares using a log trans- formation. The usual assumptions were made that the functional relationship was correctly specified, that there were no errors in the variables and that the dis- turbance terms were not correlated.12 The estimates obtained suggest that one can approximately delineate broad structural relationships within this sector of the California fish trade and can make de- ductions about its economic efficiency. Results. The basic equation attempted to derive the relationship between the capital, labor, and management variables discussed above and 1968 firm sales. The following notation was used: Y = 1968 sales (thousand dollars) ; K = Capital employed (thousand dollars) ; L = Labor employment (numbers) ; M = Management (progressiveness index) . The resulting estimate was as follows: (5.1) logy = 1.887+ .130 log£ (.639) + .490 logL (2.581) + .305 logM (1.763) #2 = .709 J = 2.848 5V=.268 The multiple correlation coefficient is sig- 13 Presence of errors in the variables would lead to parameter estimates that are biased and inconsistent. Presence of serial correlation may imply misspecification of the functional relation- ship and while yielding unbiased parameter estimates, will render invalid the usual tests of signifi- cance. 13 We tested the hypothesis that the production function is linear, homogeneous, i.e., the coeffi- cients sum to 1, by means of an F-test, F= [((?2-Qi) (N-P)]/Qi distributed with 1 and N-P degrees of freedom, where Qi = sum of squares of deviations of the original regression, Q-_ - sum of squares of deviations of the same regression with the coefficients restrained to sum to 1, N = num- ber of observations, and P - number of independent variables. The F- value of .268 was not signifi- cant at the 5-per cent level (Tintner, 1965, p. 122) . 11 Observations at a point in time may contain purely random elements. Empirical relationships derived from such observations cannot be taken to represent the true underlying relationships. Be- fore estimation, these random elements must be removed. [42] nificant at the 1-per cent level. The coefficients are all less than 1 and posi- tive. With 18 degrees of freedom, the t- value (below the coefficients in paren- theses) of labor is significant at the 5-per cent level, of management at the 10-per cent level. The capital coefficient is non- significant, probably because of high correlation (.83) of capital with labor. The Durbin-Watson statistic is in the inconclusive range. However, the stan- dard error of the estimate of the depen- dent variable is slightly less than 5 per cent of its actual mean value, a reason- ably encouraging result. The numerical results are also in the anticipated range. Because the coefficient of each variable input is less than 1, the requirement of diminishing marginal productivity holds. The sum of the co- efficients gives an estimate of returns to scale of .925. However, the hypothesis that the true value equaled 1 was re- jected.13 At this stage, it is reasonable to hypothesize that firms in the industry are operating at about the level of con- stant returns to scale. As might be ex- pected in an industry with rather simple technology the labor input contributes most to output, and capital least. How- ever, the contribution of management is higher than expected. One objection to derivation of a pro- duction function from cross-section data is the ''regression fallacy" pointed out by Stigler (1952. p. 143 ).u Because two years of sales data were available, but only one year's data on inputs, the aver- age firm sales over the two years were regressed against the input data. In a separate formulation, the two annual ob- servations for each firm were regressed against the input data. The results were little different from those derived from the basic model, suggesting that the re- gression fallacy is not a major problem in our results. Efficiency measures based on the assumption of perfect competition If we assume that all firms are profit maximizers and that perfect competition exists in both product and factor mar- kets, it is possible to reach preliminary conclusions about the industry's effi- ciency. The industry will maximize output within any specified cost con- straint, where the rate of technical sub- stitution between two factors is equal to the ratio of their prices. Rates of tech- Table 17 CONDITIONS FOR MAXIMUM OUTPUT DERIVED FROM THE ESTIMATED PRODUCTION FUNCTION Input pairs Rate of techni- cal substitution* Ratio of prices Capital-labor Capital-manage- ment Labor- management K 3.77— L K 2.35— M L .62— M 30.00 10.00 0.33 * For example, the rate of technical substitution between capital and labor is defined as 3K/3L and is equal to dY/dL/dY/dK, the ratio of the marginal value productivities. The rate of technical substitution be- tween capital and labor is the rate at which capital must be substituted for one unit of labor so as to keep output constant. For a firm with 100 units of labor and $50,000 worth of capital it would require $1 .885 of capital to sub- stitute for one unit of labor (i. e., (3 . 77 X 50)/100 = 1 . 885). Source: Survey data. nical substitution between factors, de- rived from our estimated equation, are Table 18 CALIFORNIA PRIMARY PRODUCER-WHOLESALERS, OPTIMAL RATIO OF FACTOR INPUTS AND ACTUAL FOR 22 FIRMS Optimal*. Actual 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Mean Capital/labor (0) Capital/Management 7.96 (3 3.00) (0) 4.25 (25.38) 5.26 11.53 2.12 6.36 3.00 4.20 3.45 2.65 2.63 1.31 9.11 4.55 6.04 36.25 2.81 25.00 12.00 4.29 1.50 1.13 2.78 5.77 4.80 3.43 1.73 45.00 7.53 45.15 4.82 8.43 2.15 1.00 7.93 11.10 10.00 9.38 3.38 3.18 2.50 .83 2.86 3.72 2.63 1.17 4.59 9.58 Labor/management (.21) .53 (1.73) 21.92 3.00 1.40 .77 .50 .50 6.00 8.89 .36 .75 2.08 .71 26.00 6.00 1.75 .47 1.40 .94 .94 .33 1.30 .44 3.93 * The figures in parentheses give lower and upper bounds for the optimal values (without parentheses) derived from the production function on the assumption that the true values may lie within one standard error of the com- puted coefficients. Source: Survey data. [43] shown alongside estimates of the ratios of their prices (table 17). The prices chosen, $6,000 for one unit of labor, S200 for a $1,000 unit of capital, and $2,000 per unit of management, are in- tuitive estimates. Average wages per full- time employee in the industry are prob- ably close to the figure cited. The price of capital includes charges to cover inter- est, risk factors, etc. The return of $2,000 per unit of management is based on the reasoning that a manager with a pro- gressiveness index of 20 should be able to earn $40,000 in the best alternative employment. From table 17 we can derive the op- timal ratio of factor inputs. These, to- gether with lower and upper bounds on the optimal ratio and the current actual ratios for the 22 firms studied, are pre- sented in table 18. It seems clear that the optimal capital/labor and capital/ management ratios are very sensitive to errors in the estimated coefficients. How- ever, it does seem that at least eight firms have insufficient management relative to the labor employed. The dependent variable, Y, used in estimation is in dollar value terms. Ac- cordingly, the first derivative of Y with respect to any factor is the marginal value product of that factor.1*"' The firm will maximize profits where the marginal value product of each factor equals its price. For given levels of any two factors it is possible to determine what level of use of the third factor will maximize profits (table 19a, b, c). For example, a firm with 100 employees and a manage- ment index of 15 could maximize profits by having an annual flow of capital ser- vices of $44,130, equivalent to total assets of over $220,000. Managers in the in- dustry can compare these tables of opti- mum combinations of inputs with their current use of inputs as a broad guide to firm efficiency. Variations in the basic model were used to explore other aspects of the pro- duction function for the primary pro- ducer-wholesaler sector. Through use of dummy variables added singly to the basic forms of the production function described above, a test was made of the influence of other firm characteristics on sales revenue. Only two, ownership of a fleet, and location north of Monterey (that is, near the largest supply sources) , were significant at less than the 20-per cent level. Form of incorporation (part- nership or corporation), family owner- ship, dependence on internal financing, Table 19(a) OPTIMAL LEVEL OF ANNUAL CAPITAL FLOW FOR GIVEN LEVELS OF LABOR AND MANAGEMENT* Number of employees 25 50 100 200 400 600 5 dollars 13,740 20,310 30,020 44,310 65,460 82,260 Management 10 17,520 25,880 38,280 56,490 83,470 104,800 Index 15 20,190 29,840 44,130 65,120 96,200 120,900 20 22,340 33,000 48,810 72,020 106,400 133,700 25 24,160 35,690 52,780 77,890 115,100 144,500 30 25, 740 38,040 56,260 83,030 122,700 154,100 * For each combination of number of employees (column heads) and management index (row heads) we can read off the optimal level of capital required. For example, for a firm with 200 employees and a management index of 15, the optimal level of annual capital flow would be $65,120, which would be equivalent to total firm assets of $434,000. Source: Empirical analysis discussed in the text. 15 For example in the Cobb-Douglas form used where Y = AKaLbMc, A, a, b, and c constants, aY/aK - the marginal value product of capital and is equal to aAKa~1LbMe. [44] Table 19(b) OPTIMAL LEVEL OF LABOR FOR GIVEN LEVELS OF CAPITAL AND MANAGEMENT* Capital (dollars) 25,000 50,000 100,000 200,000 400, 000 600,000 employees 5 .15 .18 .22 .26 .31 .34 Management Index 10 15 .23 .29 .27 .35 .33 .42 .39 .50 .47 .59 .52 .66 20 .35 .42 .50 .59 .71 .78 25 .40 .48 .57 .68 .81 .90 30 .44 .53 .63 .75 .90 .99 * For each combination of capital (column heads) and management index (row heads) we can read off the optimal level of labor required. For example, for a firm with capital of $50, 000 and a management index of 20, the optimal level of labor required would be .42 employees or less than two seasonal employees (given four seasonal employees in equi- valent to one full-time employee). Source: Empirical analysis discussed in the text. Table 19(c) OPTIMAL LEVEL OF MANAGEMENT FOR GIVEN LEVELS OF CAPITAL AND LABOR* Capital (dollars) 25,000 50,000 100,000 200, 000 400,000 600,000 25 management index 2.94 3.35 3.82 4.34 4.95 5.33 Number of employees 50 100 4.80 7.82 5.46 8.90 6.22 10.14 7.08 11.54 8.06 13.14 8.70 14.18 200 12.76 14.50 16.55 18.81 21.47 23.12 400 20.79 23.67 26.95 30.68 34.93 37.68 600 27.67 31.51 35.87 40.83 46.49 50.16 * For each combination of capital (column heads) and labor (row heads) we can read off the optimal level of man- agement required. For example, for a firm with capital of $100,000 and 100 employees the optimal level of manage- ment would have an index of 10.14. Source: Empirical analysis discussed in the text. unionization of workers, urban location, distance to main markets, age of firm, and favorable and unfavorable attitude to advertising all had insignificant co- efficients. Data were not available to allow further tests of the relationship between structure and conduct and mar- ket performance. Evaluation of the Aggregate Production Function Approach to Measurement of Firm Performance Despite the stated data limitations the empirically derived production function [4 gave results consistent with theoretical expectations, and with known informa- tion about the level of technology avail- able in the industry. While better data may aid in refining the estimates pre- sented here, it is believed that they ful- fill the broad aims outlined at the begin- ning of this chapter, namely, (1) show- ing the approximate relationships be- tween inputs and output in the industry, in particular the prominent role of labor and management, (2) detecting gross inefficiencies, especially in the use of labor relative to insufficient managerial talent, and (3) by focusing attention on these apparent problem areas, demon- strating to future researchers where eco- nomic analysis might most profitably be applied. Validity of the Working Hypothesis of Perfect Competition The results of our analysis, using the assumptions of perfect competition, sug- gested that in only one respect, namely the managerial talent available relative to total labor employed, did firms in the industry significantly deviate from the optimal position of perfect competition. One might conclude that competition was thereby rendered imperfect and that nothing could be said about the relative efficiency of firms. However, we would ar- gue that the weaknesses in the industry's performance highlighted by the analysis under the assumption of perfect compe- tition do accurately reflect the ineffici- encies actually present in the industry and do indicate the direction of the changes which must be made if the industry is to improve its performance. Accordingly, the tables of optimal input mix derived under the assumption of perfect competition can be used by firm managers and policy-makers as tentative indicators of relative firm efficiency. Our results, however, have been shown to be sensitive to error because of data and statistical problems encountered dur- ing the estimation process. Much still remains to be known about the influence of capital and management on the rela- tive performance of firms in the industry. EX- VESSEL PRICES An effort was made to quantify the main factors influencing the average annual ex- vessel prices of the twelve leading California species of fish and shellfish sold in the fresh and frozen fish trade. Price variations could be explained mostly by the volume of landings of the species, the price of its leading substitute product, and the prevail- ing level of per-capita income in California. In the case of all species, a 1-per cent increase in landings caused a less than 1 per cent decrease in price and thereby increased the gross returns to fishermen. An increase of 1-per cent in the level of in- come led to an increase in landings, varying by species between 0.26 and 8.4 per cent. The elasticity coefficients are generally favorable for fishermen who can increase their landings of fish. However, the factors favorable to increasing landings are offset by negative forces, particularly by the mounting evidence that the known supplies of the most desirable and some of the less desirable species harvested in California waters are already fully utilized. This section shows the results of our statistical analyses of the chief influences on ex-vessel prices of the 12 leading spe- cies of finfish and shellfish handled by the California trade. We applied a simple standard analysis to each species, namely that price was functionally dependent on three independent variables — quantity offered, price of the leading substitute commodity, and consumers' income. In Waugh's words: "Such routine mass production methods have both ad- vantages and disadvantages. They enable us to get enormous amounts of statistical results which are comparable between commodities. On the other hand, any analysis which uses the same equations for all commodities is likely to overlook essential features in the markets for the individual foods.77 (Waugh, 1964, p. 27) The analyses also allowed us to look at performance in one further aspect — the economic efficiency of the industry in harvesting the California fishery re- sources. To offset the disadvantages cited by Waugh we determined the structural, [46] institutional, or biological factors influ- encing the price of each species, and, where possible, analyzed the factors in- fluencing the price of the species studied in the broader Pacific Coast supply and marketing area, including Alaska, Wash- ington, Oregon, and California. Ex-vessel demand for California species No previous statistical estimates of de- mand for California species have been published. Some guidance was available from the growing number of empirical demand studies of East Coast U.S. spe- cies which have been completed during the 1960's (Nash and Bell, 1969). How- ever, the background information on many of the California species is not complete enough to consider these esti- mates as definitive. Apparent deficiencies in our results are pointed out, to guide other researchers. The basic model The basic model hypothesized for all 12 species was: Pi = 1(QuPi,i), where P, = annual average California ex-ves- sel price of the ith species, (i=l-...12), Qi - annual average California per- capita catch of the ith species. (£ = 1...12), P; - annual average California ex- vessel price of the /th species. (/=1 .. .12 and 7 + i), / = annual average California per- capita personal income. All prices and income were deflated by the consumer price index. In a number of cases it was difficult to specify an ap- propriate substitute price, Pj, either be- cause it was unclear which species were close substitutes, or because data were not available on substitute species. In some cases, a "reference product" price was used in place of a substitute price, a reference product being one whose price appears to act as a reference or guide to the price of another product. For example, the price of Dover sole appears to influence the price of less abundant sole varieties. Such reference prices are an important guide to the pric- ing decisions of fishermen, entrepreneurs and policy-makers. The major variations in the basic model employed were (1) the addition of dummy variables to examine the pres- ence of a time trend or cyclical factors in price or to isolate abrupt shifts in price because of institutional changes, and (2) deletion of the substitute price variable where it was a major source of collinearity. Method of estimation and func- tional forms used. All equations were estimated by single-equation least squares. Conceptually, a recursive model (e.g., a Cobweb model) or a system of simultaneous relationships would seem more appropriate, but a lack of data on the factors other than price — biological, oceanographic, climatic, etc. — which af- fect the supply of each species, make these methods of estimation inapplicable. The specification of price as the de- pendent variable appears logical for fish species, because of the erratic harvest from the ocean, daily, seasonally, and over time, and the resultant variation in both prices and gross returns. Usually, the volume of catch is price determining rather than price determined. Data on volume and value of catch of approximately 60 species or subspecies of fish landed in California are reported in the annual catch bulletins of the Cali- fornia State Department of Fish and Game. We selected for analysis the 12 species consistently most important in dollar terms to the fresh and frozen fish trade, and used graphic analysis to de- termine the most appropriate functional form for each regression. As a result, linear, logarithmic, semilogarithmic, and [47] inverse forms were used in analyzing the supply-price responses for different spe- cies. Results of basic equations. The best equation for each species is shown in table 20. In general, the statistical prop- erties of the estimated equations were good. Except for the quantity coefficient for sablefish, all the coefficients had signs which conformed to theoretical expec- tations. Alternative specifications of the problem failed to produce a satisfactory sablefish equation.10 The salmon, rockfish, shrimp, and oyster equations showed evidence of posi- tive serial correlation. This may be re- lated to the other major problem en- countered in analyzing the influences on prices of these species, i.e., the difficulty of finding a substitute product yielding statistically significant results. More de- tailed study is needed in this area. With the exception of abalone, cyclical or trend variables were not significant in explaining price variations. The impact of changes in the inde- pendent variables on the dependent vari- ables can best be seen when expressed in relative terms. The price flexibilities can be read directly from table 20 for those equations in log form. For example, the sole equation tells us that a 1-per cent increase in the quantity of sole landed would lead to a decrease in ex-vessel price of .386875 of 1 per cent, a 1-per cent increase in the beef price index would lead to an increase in the sole price of .532769 of 1 per cent, and a 1-per cent increase in income to an in- crease of .301233 per cent. For comparative purposes it is more convenient to present the results in terms of price elasticities with respect to quan- tity and income (table 21). The out- standing feature of the quantity elas- ticities is that they are greater than unity in absolute terms for all species, imply- ing that fishermen by catching more of any species or by reducing the price could increase their total returns. Con- versely, efforts to curtail catch or to raise price would reduce their total returns. For all species the income elasticity was positive, although for three species the elasticity coefficient was less than unity. Why Do Fishermen Not Increase Landings? The results suggest that total revenue for each species can be increased by increas- ing the quantity available. In the unlikely event that quantity of all species were increased simultaneously, this would not automatically still hold, because buyer's preferences for the species may vary. However, the fishermen's total revenue for individual species could be raised by increasing quantity available. A number of different hypotheses as to why the fish- ermen themselves do not take steps to increase landings were suggested in dis- cussions with industry leaders: • Long-run elasticities derived from annual data are less relevant to the de- cision-making processes of fishermen and primary producer-wholesalers than the occasional bad days when an exceptional run of fish, especially those marketed fresh, have led to plummeting prices and total revenue. (See, for example, Thomas, 1968, pp. 15-17.) • Total gross revenue is not usually considered to be as relevant to the fish- ermen as total net revenue. Fishermen may be unwilling to increase landings be- cause net revenue would decline. • Because of the limited size of many fish populations, quantity landed cannot be increased. • Various legal and institutional re- straints, or lack of capital, prevent the fisherman from harvesting the available resources to the fullest. It is possible to examine some of these hypotheses critically in light of available evidence for each species discussed. In 10 Graphic analysis revealed no clear pattern of relationship between landings and price of sablefish. The problem may be due to inaccurate reporting of prices or landings by fishermen. [48 o O 02 CO ~ E*S i« lO « lO ■* OC -r CM CO ■* CM CS CM OS. OS CI CI CM M $ as - Q- _,_ ■.s 5 Pj Q /_N f5 s s~ Ph "5 • - OS CO X CI o3 eo o l~ CO 'O CO o CO o CO o CO O K o "p CN ^H ,_,' TH' ,_,' CM ^h' ,_ H ,_' Q CO ce CO CM CSS X OC t^ Sj t^ co BO CO X X o OS — OS 33 — OS OS os — OS lO CO CO OC V CM as »o OS * co Cl OC CN CO CM cc t" c lO * CN CI r— CO o co .— . o as CM s © CM lO re s ro CO iO c" oo oo S 3 © oo ~ CM — x CO OC OS oc 00 oo 3 ~ o CO e CO 00 ce OC «o CI CM t- CO -r o '—I o — . CI CO OC X O CM 1—1 S3 „ t^ IQ ,_,' ,_,' CM O ,_! O -r "5 + + 2 + w + + w + w + + G + w + ^ i CO '3 S3 Ph £> --3 OS 3 to J3 1 pq X as c 73 £ 3 ~Z x X CO X OS en '3 33 Ph O o a "as as co M £ °3 Ed r « «a * Ph fc +3 M c 3 Q 0 X CO as as IE 'c s co X X X c, > a» a e '5 co I to Pm o 3 OQ CO OS 00 * CM oc CO 1 CO • r- * c CT irt OS ,—, CM s CI OS lO w >o OS - cc" cr oo CM O ss '30 ■ o «o »c lO -- CI G CI >n oo CO CO' ■^ CM CO OO o t^ c CI o o ■"* CO ._,' CO OS CO _' O + + + v"' + w + + ^ + ^ + >. "5 tx CO CM t^ I-- CM * ■ o •o >o OO CO __ CO * 00 ■ ~ oo s X CM as X co r~ lO r- o CO iO 38 o CO X f~ oo r^ C oo i~ x X —^ as CI X) «5 >^ ua 00 c ce r-- ~ r- io 33 3 CO ■* CM s CM ■~ o co CI CM CO CM CO S «5 oo CM OS CO Tf UB _ CO -r' CM vj- CM -h ^>i 1 1 1 + 1 1 1 1 1 1 1 1 ^^ +J oc -f t^ ■* £ c CN »o co CM i.~ U5 53 SO id OS I- OC CO ce CB IQ CM c c c Cf a > 1 1 'f / pi GO J C cc a c _c3 cj .2 J3 £ ** o as _3 03 S3 O O =5 o «<- o a _£ ■*J . CO c. . -^ -3 S3 co C c3 o -^ as -^ ttS S o 2 as as" kj 3^; a as ^ ilil § B be * in as 33 *n co u eg as . %**•£ * as-- c a M co « Mas _o , OS O - S3 33 > i- as 3 > S _as ,a Lo" »-)— O o o Table 21 EX-VESSEL PRICE AND INCOME ELASTICITIES FOR SELECTED CALIFORNIA SPECIES OF FINFISH AND SHELLFISH Species Quantity elasticity with respect to price Quantity elasticity with respect to price Sole Salmon Rockfish Lingcod California halibut Sea bass, white - 2.585* - 3.552* - 3.357* - 8.275* -10.441* - 4.128* - 3.923* - 4.189 - 7.225* - 6.435 - 3.471* + .779* +4.626* +1.983* +3.266* + .262 +2.005* + 327 Shrimp Spiny lobster +5.041 +6.462* +8.445 +2.166* Notes: For the form log Pi = Constant — a log Qi + b log P,- + c log / the quantity elasticity is — 1/a, the in- come elasticity is -\-c/a. While this method does not give the true elasticity (of demand theory) it is sufficiently accurate for our purposes and is "less objectionable" than alternative methods (Sosnick, 1962, p. 731). For the form Pi = Constant — a Qi + b Pj + c I, the quantity elasticity is P/Q/dP/dQ and the income elasticity (f/Q) (dP/dI)/(dP/dQ). For the form log Pi = Constant - a Qi + b Pj + c I, the quantity elasticity is 1/aQ, the income elasticity is al/cQ. Estimates of elasticity based on coefficients signifi- cant at the 5 per cent level are marked with a single as- terisk (*). the case of salmon, landings have been on a downward trend since 1946. Com- petition from sport-fishermen is likely to remain keen. At the same time that spawning grounds for salmon are being reduced by logging and other lumbering operations, dams, and various forms of pollution, the number of licensed trollers operating in California has increased, ap- parently attracted by high and rising prices relative to other fish. Without fur- ther protection or large-scale develop- ment of spawning grounds, salmon is likely to remain in short supply, from both California and other Pacific Coast waters. The best available data for other species of fish and shellfish are found in the 1965 California Fish and Wildlife Plan which classifies fish by level of utili- zation and quality of scientific informa- tion available (table 22) . Good or moder- ate information was available on all items Table 22 RESOURCE INVENTORY INDEX Species Status Sole, Dover 3A Sole, English 2A Sole, Petrale 2A Sole, Rex 3B Rockfish, various species 3A-3C Sablefish 3B Lingcod 3B California halibut 2A Sea bass, white 3 A Market crab 2A Shrimp, ocean 2 A Spiny lobster 2B Abalone, red 3A Oysters, giant Pacific 2A Key 1. Overfished or needs to be protected. 2. Substantially fully utilized. 3 . Moderate potential of expanded use. 4 . Large potential for expanded use. A. Good information. B. Moderate amount of information. C. Largely speculative. listed. Seven species were thought to be "substantially fully utilized," seven — in- cluding Dover sole and rockfish — were thought to have moderate potential for expansion. With existing technology, Cal- ifornia is near the maximum possible yield, as is evidenced by the fact that increases in boats, fishermen, and oper- ating gear in use in trolling, salmon, and crab fishing, has not brought increased total landings. Evidence also shows that fishermen are more concerned about the short-term im- pact on their income of increased land- ings rather than the long-term market development possibilities which could bring a permanently higher level of in- come. This applies particularly to the many part-time and small boat fishermen (Thomas, 1968). However, negotiated agreements, notably between trawlermen and primary producer-wholesalers are more concerned with longer-run effects. Through sliding price scales, based on volume delivered and size of fish, these agreements attempt to smooth the natural fluctuations of landings and prices. For example, a number of major primary producer-wholesalers specify before each trip the quantity of bottomfish which they require from their affiliated fishing vessels, and, in case of changed market [50] Q £ o CO 33 co oo 00 t- CM CO t~ CI OO «0 T ""*! CM ■"*) OS 00 CN CM Q ! CO CO O: o OS -f* CO US oo »o oo i OS OS OS OS oo oc w t^ os 00 i l »o CO * CO oo ~r * oo * T * O0 * § co * s %, OS * CM * xn * IO 1^ * co ^^ CO '-^ IO ^-~ OS s~. OS — ' CO -H o os o S OS — CO CO os — t^ OS oo — < t~~ CO 8 OO CO CM OS CO o CM tO r^ co "* *2 CO l>- ^< OS o n< »o CO *3< CO O OS CO oo >C CNI OS T n< o CO CO c | co CM CM T H £ oj c II oj "3 -3 M § I 1— 1 Cv 00 —^ s a O 3 -H ° Ph x: « 3 o ^ >H CQ OJ OJ Z 4: oo oj "3 -3 oo - ^ 3 oj A OJ 5 S a ¥ 3 "7 •- X M OJ '5 | 2 O o 3 CQ o os * «rt 00 CM * SO t~ * r^ * CO CO » »o * CO * 00 o co o .—^ m s~* O0 ^^ OO s~. lO ^v OS ^— , CO »0 O CO os co OO OS iO -r 00 — OS CO CO CO co r^ CM CM ~r co o ^r CM t^ o r~- oo oo CO o IO IO CM 00 1^ CO O IO CO CM o >o CO Csl o -^ co — i to CM CM -H ITS o CM IO ^ 00 — <■ + w + w + w + v 1 + ^ 1 + w + CO 1^ oo oo CO * OS * >o o * «o X IO * «o * CM o * oo * CM t^ X o * OS ^— OS ^^ m — . o ^-> o t^ os OS 03 OS >o IO IO r^ »o co »o CO OS 00 oo OS co CO »o o CO 3 co >o o •f t~ t~ o CO oo O O 1 ' 7 7 CM 1 7 CO i i £ 1 1 o Cu i bi csf b£ 3 b£ bt M M =£ U _o c o % £. o o o 3 o o ""■ "" ' ~~ "" 1-1 rt , 0 u. c 3 00 c3 03 .2 j3 '3 OJ a "8 I oj CO cp CQ -3 -d CJ _; 1 A 8 : eg "3 f» CO HI 00 "cv 00 SS co "O) "* 1 8 o u a "o> g .5 "3 -* 5 oo 13 OJ 00 ej C -C 00 R cS _ 00 a oj "I 1 o, 1 s > I 4 o g 1 8 c^ > S X 3 a) e > « > cad i •S oj 1 &3 fci 05 Q ^2 ^] o . OJ o oo cj 3 cE— 3 oj* — - O " co y ».« oj s.H ^ Oj 03^ o a-^ t- *~* o . oo * oo - "S si " !h c3 h SS 3 M &CQ O 03 5T3 OJ > oj CJ3 lo ^O K H-+H- conditions, amend their instructions by radio contact with vessels still at sea. These arrangements have greatly reduced the violent fluctuations in prices and in- come once so typical of the fish trade. Where these protective arrangements exist it should be more feasible for fish- ermen and primary producer-wholesalers to plan for long-term expansion of land- ings. A more serious obstacle to long-range planning seems to be lack of capital. In- creases in operating units have been greatest in those sections of the industry — for example, salmon trolling or crab fishing — where costs of entry are low. New entries to the trawler fleet are lim- ited by the high cost of a fully-equipped vessel. Most trawlers are owned or fi- nanced by primary producer-wholesaler firms or their affiliates. In turn, the will- ingness of these firms to add to the trawler fleet must depend on the relative weights they attach to increased catch in good years compared to increased fixed charges in poor years. Fish Prices in the Pacific Coast Region17 It would have been desirable to analyze prices of the species already studied at the wholesaler, broker, fabricator, and retailer levels in California. Because data were not available, we attempted to gain insights from analyzing the prices of those species within the broader Pacific Coast market. In a number of cases we could estimate price equations for the whole fish ex-vessel and the fresh or fro- zen processed product (table 23). Equa- tions tend to include lower R2 and a greater number of insignificant coeffi- cients than their California counterparts. All ^-statistics are adequate, but the problem of correct specification of sub- stitute products remains intractable. For processed flounder, the quantity coeffi- cient had a positive sign, probably the result of faulty data. For flatfish and rockfish, ex-vessel and processed lingcod, the income coefficient was negative and significant, yielding negative income elas- ticities. This is not consistent with the results for California and requires fur- ther study. The price and income elastici- ties derived from these equations are shown in tables 24(a) and 24(b). One would anticipate that elasticity of quan- tity with respect to price would be smaller for the larger market area or the proc- essed version of a product, and that elas- ticity of quantity with respect to income would be larger. Where the coefficients are significant and one can have confi- dence in the elasticity estimates, this does tend to hold true. Table 24(a) ELASTICITY OF QUANTITY WITH RESPECT TO PRICE FOR SELECTED SPECIES OF FISH AND SHELLFISH Species California ex-vessel Pacific Coast Ex-vessel Processed Salmon Flounders Rockfish Lingcod Dungeness crab Shrimp Oysters -3.552* -2.585* (sole) -3.357* -8.275* -3.923* (market) -4.189 -3.471* - 1.693* (king) - 5.182* -26.936 - 1.729* - 2.663* - 1.350* -12.128 -13.837 Note: Estimates of elasticity based on coefficients significant at the 5 per cent level are marked with a single as- terisk^). "Includes Alaska, Washington, Oregon, and California. [52] Table 24(b) ELASTICITY OF QUANTITY WITH RESPECT TO INCOME FOR SELECTED SPECIES OF FISH AND SHELLFISH Species California ex- vessel Pacific Coast Ex-vessel Processed +4.626* + .779* (sole) + 1.983* +3.266* + .327 (market) +5.041 +2.166* + .981 (king) - 1.659 -16.952 +31.216* + .992* + .394 + .821* +5.895 Flounders Rockfish +2.865* -5.791 Dungeness crab Shrimp Oysters Note: Estimates of elasticity based on coefficients significant at the 5 per cent level are marked with a single terisk(*). Our analysis suggests that California fishermen could increase their total re- turns by increasing landings of any in- dividual species. However, an attempt to increase landings of all species at the same time could so overburden existing markets and market facilities that prices and total returns would decline. Clearly, long-term efforts to increase fishermen's income must depend on selective in- creases of landings complemented by the adaptations in marketing facilities among primary producer-wholesalers, brokers, and retailers needed to insure that the increase can be absorbed without undue short-term market distortion. PRICING PRACTICES Administered pricing was commonplace at most levels of production and marketing of fresh and frozen fish and shellfish landed in California. This form of pricing helped stabilize the market, particularly for products in relatively short supply. The effective- ness of such a system rested on the ability of primary producer-wholesalers to estimate their market needs under given price conditions and to inform their fishermen-suppliers. Contracts between the Eureka fishermen's association and the primary producer-whole- salers kept prices paid to fishermen from fluctuating within a season, and also dis- couraged over-harvesting by providing a downward sliding scale of prices when the volume delivered exceeded a prescribed level. Follow-the-leader pricing was necessary for the survival of smaller producer-whole- salers. Monopoly pricing was customary for both fishermen and handlers of such less plentiful species as abalone and salmon. The price stability at the retail level reflected the administered pricing of each retail firm. Minor upward or downward variations in wholesale prices were not carried through to retail prices. Market conditions during 1968-1969 favored sellers at all levels. Hence, both prices and margins on most species rose appreciably above those of previous years. As could be expected from the diver- sity of the California fresh and frozen fish trade, and the problems associated with low income to fishermen and uncer- tain supply of fish, the trade has devel- oped different pricing practices. To carry out our analysis of pricing practices, weekly data on prices and quantities were needed. It was possible to acquire such data only for some species at some levels [53] of the marketing system, for the years 1967, 1968, and 1969.18 Even though price and quantity data were lacking for a completely self-contained model of the entire price system for the California fresh and frozen fish trade, it was pos- sible to do partial analyses of the main relationships within the price system. In the first part of our analysis we ex- amine the week-to-week influences on the price paid to California fishermen for Dover sole, rockfish, king salmon, silver salmon, and crab. Of particular impor- tance in our analysis is the extent of the influence exerted by the special market- ing arrangements in the Eureka statis- tical area on the California prices. A sec- ond section looks at the pricing practices of one Los Angeles broker who is a major handler of fresh fish from Eureka, Cali- fornia, and of frozen fish from the At- lantic seaboard. A third section focuses on the pricing practices of a major na- tional food chain with supply sources and retail outlets both inside and outside California. A fourth section analyzes the available data on the prices and quanti- ties of species imported into California and their relationship to cold storage holdings and to the pricing decisions of fishermen, wholesalers, brokers, and re- tailers. The business policy implications of the findings from these separate sec- tions on the firm, industry, and public are drawn together in the last section of this chapter. Prices Received by California Fishermen Dover sole. Landings of Dover sole have a pronounced seasonal cycle (fig- ure 7) . On the average, about 80 per cent of the California catch is landed between May and October. In 1967 and 1968, a reduced California price in the summer months reflected these increased land- ings. However, in 1969, despite the usual peak summer landings, price did not de- crease, as usually. An examination of Eureka prices helps to explain this. Eu- reka accounts for 90 per cent of the Cali- fornia landings of Dover sole. The Fish- ermen's Marketing Association, bargain- ing agent for the Eureka trawlermen, secured an agreement from the Eureka primary producer-wholesalers setting the minimum price for Dover sole at 7.25- 7.50 per pound for the six months begin- ning May 1, 1969. The higher price, 7.50 cents, was to be paid for the first 12,000 pounds on each boat trip, and 7.25 cents for any catch above 12,000 pounds.10 This compared with the minimum price of a flat 7.50 cents for the previous six months. In addition, two large producer-whole- salers stated that they specified in ad- vance the quantity of bottomfish, such as Dover sole, they required on each trip. In a sense, therefore, institutional controls were used to reduce the uncertainties associated with the catch levels of Dover sole and to hold price paid to fishermen within fairly narrowly prescribed limits on that species. Our statistical analysis of Dover sole at Eureka showed that last week's price, seasonal pricing arrangements, and mis- cellaneous cyclical factors significantly influenced current price (table 25). The quantity landed in any one week did not significantly affect price in that week, evidencing the tight institutional control over price. The general level of Dover sole prices tended to fall about one-half cent during the summer months. Rockfish. Based on the figures for 1967-1969, the California rockfish catch averaged approximately the same vol- ume, price, and total value to fishermen as that of Dover sole. However, unlike Dover sole, total landings were more evenly distributed throughout the year, 18 Special analysis conducted by the Marine Fisheries Statistics section of the California Depart- ment of Fish and Game, Terminal Island, California. 19 These agreements are negotiated for a season or a year and set minimum prices for all leading species landed in Eureka. [54] Price (cents per pounds) so CN m CM 00 - oo m . o o a ^D C C < <-\ . o On \j no a> Os Q. <— to •^ 5 o o On += 0 o O .E o -H T3 .< c < o £0 o o it E "5 "o u - .. c .9 I »- o a) a > M CD o c o 00 CO O CN CN ^ CM -f I> DC O CO S lO ~ cc o cr. >c Oi — OS £ CO £ o OJ .--, CO -— s o ^ « »o oo u t- c OS t- oo CO CD co — c CM — i lO CO O o o c o CM CM + G + ° 1 CM 1 C- I ci * M sr c3 OO /-v CC £ 3 ~ Oi ^-v CN »H ir co cr CM CD 00 CO o 5C oo OC O O t^ lO a O CO c c^ CO CO CD O -m 1 N-' + Si + ^ + ^ + - c J Q * 0 p] fi- CO ,-v ^f ^^ o++ le i s CM oo CO CD o3"tf CD 00 > s >c Q( c^- r- »o S § C Cl CO fl 1 I i § ^^ §~ 2 CD 00 © cr O p "O O CM S © o> a >o c o cr 3 Of c CO S t~- c 05 c t- o O O CM co + 1 s-' 1 1 1 " — 1 w m O ^ t^. -j- >ra OS ^-v o IO CM © c «5 t^ O x* O OC cr CO i^ «e CO eo OO CO PL,~ CN o CO »o t> 03 OS '— xf t^ + S + J3 + S + 2 + CO + ^ ' '^ >c oc ,_, ~f ic oc c c- »o o s CB « OS CM c c o- w or -* O O 03 CO c C o 00 + + + 7 + 1 g e p c c c c ro to 03 03 "S C t- 33 £ c £ ^ «^ "o TS « C « Jj O j J* 4« i co 0 I 55 h-S- Price (cents per pound) so m rH rn vO & CN CTN O H < CM ■H oC o «0 o H On 0 — a i— 1 1 co •O c Os O SO o m O u- o a> 00 CN 00 vD m o> CN oo .H 3 g •c O ro 0) "O CM >» *fc -r? O _* w o II m m ST -5 o O 32 © ear. The last main procedure for determin- ing prices uncovered in our study con- cerned the many small firms at every level of the California fish trade. Of necessity, these firms were price takers or followers, the price being set either by the cooperative actions of larger firms as, for example, in the case of Dover sole, or by the operations of the free mar- ket, as in the case of rockfish. Our anal- ysis suggests that non-Eureka firms were not sheltered by the special Eureka area pricing arrangements. Because each of these firms was small and financially weak, it could not adjust quantity to reduce the uncertainty caused by lack of control over price. In conditions of tem- porary oversupply. firms either had to take a sharply reduced price or find friendly firms in other areas willing to absorb some of the surplus. In recent years, however, a greater problem has been shortage of supply. While this has led to a rise in the general level of fish prices, many of the smaller firms have not been able to maintain sufficient vol- ume to offset rising cost. A chronic over- capacity exists in almost every sector of the trade. Net margins have been de- pressed to a level which permits many firms to survive but few to prosper. None of the small firms surveyed had sufficient confidence in its own solvency to adopt a really agressive sales policy for fear that it would be the one to perish in any subsequent price war. Several of the small firms surveyed were surviving only by using their invested capital as a sub- stitute for business income. [67] UNCERTAINTY OF FUTURE SUPPLY Uncertainty of the future supply of fish and shellfish from California's coastal waters is a major stumbling block to long-term planning for the State's fresh and frozen fish trade. Known existing stocks are small and threatened by overfishing, by domestic and foreign commercial fishermen, and by pollution. The known remedies for supply short- ages— hatcheries, harvesting of species not now generally utilized for human con- sumption, and fish farming — have contributed little to a lasting solution of the supply problem. Because many activities of a modern industrialized society have become in- compatible with a large, healthy coastal fishery, society may have to decide whether it is willing to forego or limit certain other uses of its natural resources in order to conserve its fisheries. In turn, the fishery industry must decide whether to exploit the domestic stocks while they last or try to build up those stocks as a basis for future growth. Another alternative for the industry is to abandon its dependence on local supplies and, if possible, become distributors and fabricators of imported fish and shellfish. The marketing order sought by the California fresh and frozen fish trade in 1966 saw the industry's main task to increase per-capita and total consump- tion. However, as our study has shown, total fish consumption has increased, but the supply situation has deteriorated to such an extent that it caused anxiety among our interviewees. The uncertainty about the volume of California landings of most species for any day, week, or month makes short- term planning of fishing effort, level of employment, production, and sales ex- tremely difficult. The greater uncertainty as to whether the commercial fish trade can continue to harvest annually the same or increased quantities of the vari- ous species also increases both the risk and uncertainty of long-term decisions about continuance in business, renewal of assets, extent and location of new investments, and adoption of more effi- cient technologies that require additional capital. Many firms have deferred these decisions for years by using up their assets, but such deferment is not possible indefinitely. We shall now examine (1) the major causes of current supply problems, (2) attempted remedial measures to maintain or increase this California resource, and (3) the choices facing the fish trade and society. Major Causes of Current Supply Problems The decline of the commercial catch and fishing activity in many California lo- calities can be attributed to four types of causes discussed here. Biological or ecological. Almost all the fresh and frozen species landed in California are caught in the narrow band of sea running parallel to the California coast above the continental shelf. Since the shelf is narrow, it can only support a finite population of the desirable spe- cies. A large proportion of the fish popu- lations live in a few large rivers, estu- aries, and shallow bays. The size of the population of any species, if left undis- turbed by man, mainly depends on the population on which it feeds, and on the population which feeds on it. Cycles of nature can lead to changes in the size of population at any level in the food chain. Fish populations are a renewable re- source in the sense that if man harvests only some of the population each year, and sufficient spawners are left to pro- duce replacements for those captured or lost from other causes, the population size will remain stable. Biologists speak of "maximum sustainable yield" to de- fine the maximum catch that can be taken from a fish population without [68] causing it to decline. However, under conditions of free entry into most fish- eries and in the absence of controls on volume, operators tend to fish up to that level where average revenue equals aver- age cost, which often occurs at levels of catch beyond "maximum sustainable yield." This could result in overfishing and a decline in the absolute size of the fish population. Apparently, this has been one factor in the decline of the San Francisco area catch and it is now a threat to the Eureka fisheries, especially crab and salmon. A second major threat to fish popula- tions is pollution. It is blamed for the destruction of valuable salmon runs, oyster beds, and other fishing grounds. In the "hydrologic cycle" the waters of the ocean turn into vapor, are carried to land by winds, fall as rain or snow, and gradually return by overland flow or subsurface percolation to the ocean (Parson, 1964. p. 23). Water at each stage of the cycle is a valuable ingredi- ent for human activities, either as an aid in production, for power and energy, for recreation, or for disposal and dilu- tion of society's wastes. However, as population has grown and the uses of water have multiplied, the finiteness of the supply has become apparent. Alter- native uses have increasingly come into contention. Pollutants of every kind — sewage, soil, silt, toxic wastes, thermal pollutants, radioactive wastes, and other contaminants — have reached levels in many rivers where all fish life is threat- ened (Webb, 1966, pp. 26-28). A fur- ther danger from pollutants arises from the tendency of biological systems to con- centrate pollutants at increasingly higher levels as one moves up the food web : ''Measurements taken after an 0.2 part per million application of toxaphene in Big Bear Lake, California, show how concentrations grow through each suc- cessive link in the food chain. As a result of this treatment plankton had concen- trated it to 73 parts per million; fish that [69 ate the plankton, to 200 parts per mil- lion; and pelicans that ate the fish con- tained 1,700 parts per million. Hatchery trout fed the contaminated plankton were poisoned." (Hull, 1964, p. 139). Pollution adds to the uncertainty sur- rounding the future supply of California species of fish because one cannot foretell when a single major source of pollution, for example, a wrecked oil tanker, may destroy a major fishing ground. Nor can anyone foretell the long-term eco- logical consequences of the gradual buildup in quantities of pollutants enter- ing the ocean ( Ehrlich and Ehrlich. 1970. pp. 53-64; Hull, 1964, pp. 135- 38) . With California's 20 million people and technologically advanced agricul- ture, industry, military, and power ac- tivities, use of water (and risk of abuse) certainly will continue to grow, leading to increasing strains on fish populations. Competition for existing supplies of fish. Competition for California com- mercial fishermen in harvesting of sup- plies of fish comes from two main sources — California sportfishermen and foreign fleets. The number of angling licenses issued in California has more than doubled from less than one million in 1950 to more than two million in 1969 (California Statistical Abstract. 1959. p. 125). Already sportfishermen take a high proportion of the annual catch of rockfish, salmon, and other important commercial species. To meet expected rapid growth in sportfishing, the Cali- fornia Fish and Wildlife Plan calls for more access routes, marinas, and piers which will bring the sportfisherman and the commercial fisherman into more di- rect confrontation (California Depart- ment of Fish and Game, 1966a, p. 33). Little is known about the volume of catch or the species taken by foreign fleets in international waters off the Cali- fornia, Oregon, and Washington coast. However, for years the Pacific Marine Fisheries Commission (1970) has been calling on the federal government to find ] some way to prevent Russian and Jap- anese vessels fishing off the California coast from taking any species already being harvested at maximum sustainable yield, to regulate the take of species not fully utilized, and thereby prevent de- pletion, and to protect U. S. fishermen from damage to their boats or gear by foreign vessels. The industry is particu- larly aggrieved that foreign vessels may fish off the U. S. coast using gear or methods forbidden to U. S. fishermen and then sell their catch in competition with domestic fishermen. However, there is no such competition in the California fresh-fish market. Should the U. S. government find a way to curtail the fishing operations of foreign vessels off the California coast, the same restrictions are likely to be ap- plied to U. S. fishermen by Mexico and Peru. Hence, there is no easy solution. Competing uses of the sea. Compet- ing uses of the sea may reduce supplies of fish available to the commercial fish trade either by cutting off access to cer- tain areas, by making it more difficult and costly to fish certain areas, or by directly affecting fish populations. The sea remains a major thoroughfare for goods to flow into and out of California from the United States and the world. Density of shipping is particularly dam- aging to fishing grounds near major ports or estuaries. Pleasure boats, now mainly motorized, proliferate. Offshore oil rigs and similar underwater obstruc- tions endanger vessels and fishing gear. In addition, the growing need for metals has turned attention to the possibility of deep-sea mining (U. S. Commission on Marine Science. Engineering, and Re- sources. 1969) . Institutional restrictions. A maze of legal restrictions on the commercial fish trade has developed over the years in response to special interest groups among commercial fishermen, sportfishermen. conservationists, and others. The catch which can be taken from a fishery is regulated by such means as closed sea- sons, limits on gear used, restrictions on size or sex of fish which may be har- vested, with little regard for the eco- nomic consequences of such regulations. Some species or locations in California rivers or coastal areas are already com- pletely closed to commercial fishermen. In a national context, the California fresh and frozen fish trade is profoundly influenced by the protection accorded to U. S. boatbuilders, and the lack of protection for the fish trade in com- parison with fishermen in other coun- tries. New vessel costs are often twice as high in the United States than in other countries. Yet our law forbids the use of a foreign-built vessel in the U. S. com- mercial fisheries (Dykstra and Holman, 1968, p. 106) . At the same time, labor and operating costs in the United States are far above levels in other countries. Continuing high levels of imports are virtually assured by plans to eliminate tariffs (already at a low level) on most fish and shellfish by January 1, 1972 (U. S. Tariff Commission. 1968 and 1969). In the case of groundfish fillets, repeated studies have found imports con- tributing to the economic deterioration of that sector of the industry (U. S. Department of the Interior. 1969. pp. 3-4). Imports depress U. S. prices, and while the U. S. fish trade is left to adjust as best it can, foreign countries compen- sate their fishing industry by subsidies both direct and indirect. An expected imposition of new sanitary regulations on fishing vessels, processing, and dis- tribution plants will likely take its toll of the less efficient firms. Attempted remedial measures California has been among the leading states in attempting to remedy defici- encies in its fish supply. The first salmon hatchery in California opened on the McCloud River before 1880, and fish cul- ture has continued (despite frequent [70] shortage of funds) since then (Cobb, 1930, pp. 643-52) . A small but valuable oyster fishery was kept going for many years although seed oysters had to be imported (Barrett, 1963). Successful efforts have been made to revive the northern California shrimp fishery (Dahlstrom and Gotshall, 1969, pp. 20- 25). Even pollutants have been turned to advantage. Auto wrecks dropped in the sea off California reportedly provide a refuge for fish and also the necessary base on which kelp beds can get started, which, in turn, attract fish (Hull, 1964, p. 290). However, all these efforts have made only a miniscule contribution to supplies of California fish. Even though California Fish and Game authorities are testing the fea- sibility of harvesting greater supplies of presently underutilized species such as hake, saury, anchovy, and jack mackerel, the California fresh and frozen fish trade is unlikely to derive much benefit. These species are more suitable for animal feed, fertilizer, or canning (Ahlstrom, 1968, pp. 65-80). In addition, they are im- portant sources of food for species, such as salmon, which are harvested for the fresh and frozen trade. The net effect of greater harvesting of underutilized species, therefore, might be a decrease in overall supplies available to the fresh and frozen fish trade. Fish farming may offer a means of increasing the commercial supply of fish, provided prices continue at present levels. Fresh-water fish culture of eel. carp, and trout is a major industry in Japan (Brown, 1969). Catfish farming has become important in Texas, Ar- kansas, and other southern states, and has gained a foothold in California. One economic study of costs in Georgia cat- fish farming suggests that cheap and plentiful land and water are vital in- gredients for a successful operation (Brown, et al., 1969). Because of the alternative uses for California's land and water, it is unlikely that either ingredi- [ ent can be used effectively for fish farm- ing. Moreover, heavy market develop- ment costs may be needed to provide the sales volume essential to successful oper- ations. The choices posed to the fish trade and society by inadequate supply The fish trade, as well as society, faces a number of critical choices because of the pervasive character of the supply problems of the California fresh and frozen fish trade, inadequate remedial measures, and a likelihood that many fish species native to California waters may be irrevocably lost unless further drastic measures are taken quickly. Choices facing the fish trade. One alternative for the California fresh and frozen fisheries industry would be to pursue a positive program for develop- ment based on maintaining and restor- ing the fishery resources of the State. Such an effort to revitalize the industry would require (1) a large transfusion of new capital, management, and tech- nology into the industry, (2) a drastic rationalization of the number, size, gear, and fishing methods of the fishing fleet, and of the number, size, location, and operating techniques of processing and distribution plants. (3) extensive co- operation of members of the industry in self-policing and self-regulation, and (4) persuasion of other parts of society to take the complementary measures needed to make the industry's efforts effective. A second alternative is a similar re- vitalization program based on fabricat- ing of both imported and local fish. Because the industry would have no exclusive control over imported supplies, its distribution, marketing, and promo- tional techniques would need to be com- petitive with those of large multiproduct corporations. A further alternative is to exploit what remains of the commercial fishery re- sources for maximum short-term profit, 71] on the assumption that industry efforts will in the long run be futile against adverse forces. If this policy is adopted, society may express its displeasure by directly intervening in fishing, process- ing, and marketing operations. Choices facing society. Because the commercial fresh and frozen fish trade is relatively small by any economic cri- terion, society has not fully explored the choices it faces in that area. Clearly, the level and type of many alternative uses of the State's water resources are not compatible with restoration of the Cali- fornia fisheries. Here are some questions society must ask itself: (1) Would it derive greater benefits from the improvement of the California fisheries than from existing or other uses of its resources? Such improvement would require large expenditures for restoration and maintenance — in addi- tion to heavy sacrifices of gains currently derived from activities incompatible with such restoration and maintenance. How much is society willing to pay for a viable California fishery? (2) Would society be willing to sacri- fice the benefits derived from a viable California fishery for the increased util- ity to be gained by devoting its water resources to other ends? Preservation of its fisheries may not be the choice by society. Given the risk of accidental dis- aster and the probably low returns to investment in a fishery resource, society may opt to exhaust the resource as a commercial venture now, rather than carry the burden of preserving it for future generations (Carlson. 1969. pp. 5-7). (3) Finally, society in the future might come to consider social welfare from an international rather than a national view- point. In such a case, international wel- fare might be more nearly maximized by drawing a greater share of the U. S. supplies of food fish from other countries and concentrating more of the U. S. resources now devoted to the commer- cial fisheries in other activities. Conclusions and Implications One overriding conclusion emerged from our study: The industry's foundation and growth since the mid-nineteenth century rested on the natural abundance of many desirable species of fish and shellfish within easy reach of California ports. For a century fishermen and firms in the industry have exploited those re- sources, but were ill-equipped to meet either unusual demand conditions or threats to the supply of the species handled. Now natural abundance is under pressure from many activities of civilized man, from the resultant pol- lutants, and from the claims of recre- ationists for increasing rights to the ocean and its resources. Hence, the ques- tion arises whether desirable fish and shellfish exist in sufficient quantity to fulfill any substantive increase in con- sumption. [72 The commercial fresh and frozen fish trade employs only about 4,000 full-time or part-time fishermen or workers or one- twentieth of 1 per cent of the California working force. Even ancillary activities such as boat building, manufacture of gear, demand for special transportation, and packaging, probably contributes less than 1 per cent of California income. Hence, the industry must be well or- ganized and "speak with one voice" if it is to have any substantive influence on state and federal policy formulation. Because the industry has not been able to present a united front to policy-makers, it also has failed to convince the influ- ential groups in society that it deserves any special consideration. This is a se- vere omission, because the crux of the problem of economic survival of the commercial fresh and frozen fishery rests ] mainly on some major changes in public policy relating to resource use. The California fresh and frozen fish trade heavily depends on the utilization of local fish supplies. Many of the cir- cumstances which depress returns from such utilization are beyond the trade's control; for example, competition for available supplies from foreign vessels harvesting fish off the California coast, protection to U. S. boat builders which increases fishing costs, gradual reduc- tion of tariff barriers on low-cost imported products, and others. Un- doubtedly, also, the fishing industry has received less favorable treatment from policymakers than have many other sec- tors of society in overcoming their prob- lems. Unlike agriculture, it receives no major subsidies, little protection, and has no extension service. In many cases, the depletion of the commercial fisheries is a direct result of concessions granted to public utilities, land developers, lum- ber companies, or sportfishermen for which the traditional users, the commer- cial fisheries, receive no compensation. Recent favorable trends, however, sug- gest that it is not yet too late to establish a viable industry, provided adequate sup- plies are forthcoming. Rising income levels in foreign countries have increased demand, the medical profession is en- couraging the use of fish, and grocery chains show evidence of an enlivened interest in fishery products. Should the industry succeed in avoiding sudden dis- aster from one large-scale pollutant or through the steady attrition resulting from more powerful and hostile bionomic forces, our study suggests several ways in which it might approach its other major problems so as to improve its rela- tive performance. (1) A large infusion of new capital is required to enable firms to replace obsolete plant and equipment needed to meet sanitary regulations and the tech- nological competition from both domestic and foreign sources. The industry's in- ability to halt the rise in the share of many desirable species being imported is further evidence of its lagging tech- nology. (2) Choice of new technology must be based on adequate research and de- velopment, taking account of the species available, the resources of individual firms in the industry, and the markets to be served. At present, economic re- search and development is minimal either at the firm or industry. Yet without it, new investment cannot be directed effi- ciently. (3) Redirection of investment and a rationalization of the production and dis- tribution systems may mean a severe reduction in the present number of firms and plants. But no other alternative ap- pears feasible if the industry is to be- come a viable force in California's econ- omy. (4) The structure, conduct, and per- formance of the industry in the past have been greatly influenced by the dominance of closely-knit ethnic groups and strong family ties. As in the rest of society, these allegiances have been breaking down, reducing the supply of new talent to the industry. Many principals in the industry are only a few years from retirement and have no family successor. When fam- ily members are unwilling or unavailable to enter the industry, little or no effort has been made to hire, train, and pass on control to competent outsiders. Yet such an infusion of new talent is needed to give the industry the will and the energy to make the dramatic changes necessary for its survival. (5) The primary producer-wholesalers have not accepted the challenge posed to their traditional activities by the grow- ing importance of imports of the most desired species, and by default have al- lowed this import trade to fall into the hands of fabricators and other types of firms. Even in using California species, they have been lax. Apart from the Eu- reka area where a high level of year- [73] round supplies has been maintained, the few successful firms were able to over- come their difficulties by departing from their traditional primary producer-whole- saler roles, in particular, by adding res- taurant facilities. Firms must acquire flexibility in their business activities. For example, our study indicates that con- sumer demand is strong for the recently developed prepackaged, pan-ready fro- zen, fresh, and precooked items that account for about 80 percent of all fish and shellfish sales in California. These frozen fish and shellfish are mainly im- ported. California-produced fish are now sold largely in fresh form. (6) Despite industry efforts to reduce the uncertainty of the trade by arrange- ments which lead to stable prices, varia- tion in quantity by week and by season still causes wide fluctuations in total in- dustry receipts at certain levels. Our analysis has shown that much of the variation can be explained by seasonal and cyclical influences. Advances in bio- logical knowledge of the main California species could make it possible for man- agers and policymakers better to plan the use of the fisheries' resources. (7) Price rigidities in the Eureka area seem to arise from collective bargaining with fishermen and the economic power of the producer-wholesalers. Our limited survey of retail prices gives evidence of an administered pricing system. Neither system for stabilizing prices may be con- ducive to an expansion of consumption. (8) Finally, the industry needs to make certain that the relevant public authorities are aware of the many legal restraints now hampering the efficient use of the fishery resource. It also should encourage a full official review of the in- dustry's problems and their possible solution. ACKNOWLEDGMENTS Valuable assistance and information was furnished for this study by owners and managers of firms at all levels of the California fisheries' trade. C. M. Ghio and John Gilchrist, President and Manager, respectively, of the California Seafood Institute, were especially helpful in enlisting the cooperation of Institute members in our surveys of producer-wholesale, wholesale, broker, and retail businesses engaged in either buying, processing, or selling fish and shellfish products. The California Department of Fish annd Game and the U. S. Department of Interior's Terminal Island Office of the Bureau of Commercial Fisheries supplied much of the basic production and price data used in our analysis. We are thankful to Samuel H. Logan of the Department of Agricultural Economics, University of California. Davis, for his critical reviews of the several drafts of our manuscript. LITERATURE CITED Ah j.strom, E. H. 1968. An evaluation of the fishery resources available to California fishermen. The future of the fishing industry of the United States, DeWitt Gilbert, ed., University of Washington Publi- cations in Fisheries — New Series. 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Pacific Marine Fisheries Comm. Ann. Rept., 1965, Portland, Oregon, pp. 26-28. White, Donald J. 1954. The New England fishing industry. Cambridge: Harvard University Press, 205 pp. 6i/i,-5,'71(P:M92D)JF [78] CONTENTS Introduction 3 Supply and Demand 6 World 6 United States 9 California 11 Sportfishing 15 Ethnic Influence 16 Industry Structure 18 Primary Producer-Wholesalers 20 Brokers 26 Fabricators 29 Retailers 30 Impact of Structural Changes on Performance 32 Merchant-Wholesalers 32 Merchandise Agents. Brokers 35 Fresh or Frozen Fish Prepackages or Fabricators 36 A Procedure for Measuring Performance 39 Outline of Procedure 39 Estimating A Production Function for the Primary Producer-Wholesale Sector 40 Efficiency Measures Based on the Assumption of Perfect Competition . . . 13 Evaluation of the Aggregate Production Function Approach to Measurement of Firm Performance 45 Validity of the Working Hypothesis of Perfect Competition 46 Ex-vessel Prices 16 Ex-vessel Demand for California Species 47 The Basic Model 17 Why Do Fishermen Not Increase Landings? 48 Fish Prices in the Pacific Coast Region 52 Pricing Practices 53 Prices Received by California Fishermen 54 Case Study: A Los Angeles Broker 59 Case Study: A Major National Retail Chain 62 Efficiency of Pricing Practices 64 General Characteristics of the Pricing System 64 Uncertainty of Future Supply 68 Major Causes of Current Supply Problems 68 Attempted Remedial Measures 70 The Choices Posed to the Fish Trade and Society by Inadequate Supply ... 71 Conclusions and Implications 72 Acknowledgments 74 Literature Cited 74 [79]