A Small Sea Parasite Making Big Waves: Industry Consolidation and Collaboration under Spatial-Dynamic Externalities

Parasites and diseases represent major challenges in aquaculture. In the Norwegian salmon farming industry, costs associated with treatment of sea lice are surging and reached 5bn NOK or 10% of the industry’s total export value in 2015. In addition to the direct impact on production, sea lice affect the industry indirectly through stricter regulations and monitoring requirements. Another feature of the Norwegian salmon farming industry is increasing consolidation ever since the deregulation in the early 1990s. In this paper, we investigate whether and to which extent consolidation is driven by a desire to internalize the spatial disease and parasite externality. Theory suggests that such intra-industry spatial externalities create incentives both for mergers and acquisitions, or spatial cooperation, to increase coordination in pest management. Using spatial techniques to capture the geographical spread and density of sea lice, we estimate the spatial dependencies between neighboring farms. The analysis rests on a novel and unique dataset regrouping high frequency biological and financial information at the farm and company level, with industry-wide history of mergers and acquisition as well as of collaboration in the form of joint production. Using this dataset, we are able to identify the impact of sea lice and other pathogens on the structure and behavior of the industry.