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Demand for differentiated milk products: Implications for price competition

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  • Elena López

    ()

  • Rigoberto A. López

    (Departamento de Economía , Universidad de Alcalá, and Department of Agricultural and Resource Economics, University of Conneticut.)

Abstract

We apply the Berry, Levinsohn and Pakes (1995) model to scanner data from Boston supermarkets augmented with consumer characteristics data in order to analyze consumer choices and price competition in a differentiated fluid milk market. Milk characteristics include price, fat content, brand name and the organic and/or lactose-free nature of the product. Empirical results show that consumer valuation of fat decreases with income but increases with the number of children. Low-fat and specialty milks, such as organic and lactose-free milks, are preferred by high-income consumers with no children. Although all milks are price elastic at the individual brand level, the cross-price elasticities are quite low and negligible for specialty milks. Based on calculated Lerner indexes, private label milks have the highest percent markups despite their lower prices, while specialty milks have the lowest markups despite their higher prices, which attests to a greater degree of market power for conventional and particularly for private label milk.

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Bibliographic Info

Paper provided by Universidad de Alcalá, Departamento de Economía. in its series Alcamentos with number 0805.

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Length: pages 26
Date of creation: 2008
Date of revision:
Handle: RePEc:alc:alcamo:0805

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Keywords: Demand analysis; random coefficients model; milk; consumer behavior; retail pricing; markups; competition.;

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References

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  1. Chidmi, Benaissa & Lopez, Rigoberto A. & Cotterill, Ronald W., 2004. "Retail Oligopoly Power, Dairy Compact, And Boston Milk Prices," Food Marketing Policy Center Research Reports 083, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  2. Junko Kinoshita & Nobuhiro Suzuki & Harry M. Kaiser, 2002. "Explaining pricing conduct in a product-differentiated oligopolistic market: An empirical application of a price conjectural variations model," Agribusiness, John Wiley & Sons, Ltd., vol. 18(4), pages 427-436.
  3. Sofia Berto Villas-Boas, 2007. "Vertical Relationships between Manufacturers and Retailers: Inference with Limited Data," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 625-652.
  4. Chidmi, Benaissa & Lopez, Rigoberto A., 2007. "AJAE Appendix: Brand-Supermarket Demand for Breakfast Cereals and Retail Competition," American Journal of Agricultural Economics Appendices, Agricultural and Applied Economics Association, vol. 89(2), May.
  5. Basak Canan & Ronald W. Cotterill, 2006. "Strategic pricing in a differentiated product oligopoly model: fluid milk in Boston," Agricultural Economics, International Association of Agricultural Economists, vol. 35(1), pages 27-33, 07.
  6. Nevo, Aviv, 1999. "Measuring Market Power in the Ready-to-Eat Cereal Industry," Competition Policy Center, Working Paper Series qt7cm5p858, Competition Policy Center, Institute for Business and Economic Research, UC Berkeley.
  7. Jerry HAUSMAN & Gregory LEONARD & J. Douglas ZONA, 1994. "Competitive Analysis with Differentiated Products," Annales d'Economie et de Statistique, ENSAE, issue 34, pages 159-180.
  8. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  9. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  10. Johnson, Stanley R. & Stonehouse, D. Peter & Hassan, Zuhair A., 1992. "Market Demand for Dairy Products," Staff General Research Papers 575, Iowa State University, Department of Economics.
  11. Ronald W. Cotterill & Pierre O. Samson, 2002. "Estimating a Brand-Level Demand System for American Cheese Products to Evaluate Unilateral and Coordinated Market Power Strategies," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(3), pages 817-823.
  12. Benaissa Chidmi & Rigoberto A. Lopez, 2007. "Brand-Supermarket Demand for Breakfast Cereals and Retail Competition," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(2), pages 324-337.
  13. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
  14. Aviv Nevo, 2000. "A Practitioner's Guide to Estimation of Random-Coefficients Logit Models of Demand," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(4), pages 513-548, December.
  15. Lass, Daniel, 2005. "Asymmetric Response of Retail Milk Prices in the Northeast Revisited," Research Reports 149026, University of Connecticut, Food Marketing Policy Center.
  16. Rebecca Hellerstein, 2004. "Who Bears the Cost of a Change in the Exchange Rate?," Econometric Society 2004 North American Summer Meetings 589, Econometric Society.
  17. Daniel A. Lass, 2005. "Asymmetric response of retail milk prices in the northeast revisited," Agribusiness, John Wiley & Sons, Ltd., vol. 21(4), pages 493-508.
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Cited by:
  1. Hovhannisyan, Vardges & Stiegert, Kyle W., 2011. "Vertical Channel Analysis of the U.S. Milk Market," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 103631, Agricultural and Applied Economics Association.

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