Pricing Raw Product in Complex Milk Markets

The dairy industry is based on the production of a raw product that is nearly homogeneous— whole milk—on farms geographically scattered, and the disposal of this raw product in alternative forms—fluid milk, cream, manufactured products—and to alternative metropolitan markets. Alternative markets represent concentrations of population. These also are geographically dispersed, but with patterns imperfectly correlated with milk and product production. The problem faced in the study that formed the basis for this paper was to examine the interactions of supply and demand conditions and the interdependent determination of prices and of raw product utilization. As his paper shows, the author approaches the problem by first considering a greatly simplified model based on static conditions and perfect competition. This is modified to admit dynamic forces, especially in the form of seasonal changes in supply and demand. Noncompetitive elements are then introduced in the form of segmented markets and discriminatory pricing, based on ultimate utilization of the raw product. Finally, these models are used to suggest principles of efficient pricing and utilization, within the constraint of a classified system of discriminatory prices. This paper was originally prepared in connection with the study of class III pricing in the New York milkshed currently being conducted by the Market Organization and Cost Branch of the Agricultural Marketing Service. The object was to develop theoretical models that would provide a framework within which the empirical research work could be organized and carried out. The paper is published here because of its evident value as an analytical tool to research workers engaged in analyzing the efficiency of alternative pricing and utilization systems for milk and other agricultural products. It should perhaps be emphasized that the theoretical models presented involve a considerable degree of simplification, and that various amendments may be necessary in the empirical analysis of any particular milk marketing situation. It should also be understood that not all analysts will necessarily concur fully with some of the stated implications of Professor Bressler's model, particularly with respect to the explanation of classified pricing wholly in terms of differing demand elasticities and the extent to which classified pricing may act as a barrier to freedom of entry. Readers with a particular interest in the economics of the milk market structure may wish to examine the AMS study, "Regulations Affecting the Movement and Merchandising of Milk," published in 1955, which also contains analyses bearing on some of the problems considered in this article.