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Oligopoly Pricing with Differentiated Products: The Boston Fluid Milk Market Channel

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  • Ronald W. Cotterill
  • Tirtha Pratim Dhar
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    Abstract

    We model Boston fluid milk market after taking into account strategic interactions of the processors and retailers and estimate it using monthly propriety retail scanner data and other data from public sources from 1996 to 2000. Market demand is modeled using flexible nested logit demand system and processor level cost is modeled using flexible generalized Leontief cost function. Our modeled is flexible enough to capture the nature of competition between brands within store and across stores. We find that the brands compete much more vigorously within store and than across stores. This structure of competition fits squarely with Slade's (1995) assumption on retail competition. We also explore strategic implications of the North East Dairy Compact on retailers and processors using emerging methodologies of antitrust simulation. The predictions from the antitrust simulation analysis are consistent with the concept of "focal point pricing" at the Compact implementation, suggesting an increase of market power in the fluid milk marketing channel. Our estimated brand level total channel price cost margins also show that the margins increased after the Compact implementation.

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    File URL: http://fmpc.uconn.edu/publications/rr/rr74.pdf
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    Bibliographic Info

    Paper provided by University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy in its series Food Marketing Policy Center Research Reports with number 074.

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    Date of creation: 2003
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    Handle: RePEc:zwi:fpcrep:074

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    Web page: http://www.zwickcenter.uconn.edu
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    Related research

    Keywords: nested logit demand system; generalized Leontief cost function; fluid milk; marketing channel; North East Dairy Compact; Industrial Organization; Livestock Production/Industries;

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    1. Albaek, Svend & Mollgaard, Peter & Overgaard, Per B, 1997. "Government-Assisted Oligopoly Coordination? A Concrete Case," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 429-43, December.
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    Cited by:
    1. Tian, Li & Cotterill, Ronald, 2004. "The Theory of Price Collars: The Linking of Prices in a Market Channel to Redress the Exercise of Market Power," Research Reports 149025, University of Connecticut, Food Marketing Policy Center.
    2. Bonanno, Alessandro & Lopez, Rigoberto, 2007. "Competition Effects of Supermarket Services," Research Reports 149176, University of Connecticut, Food Marketing Policy Center.

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