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Strategic pricing in a differentiated product oligopoly model: fluid milk in Boston

  • Basak Canan
  • Ronald W. Cotterill

In an imperfectly competitive industry, differentiated products compete with each other with price rather than quantity as the strategic variable. Several previous studies have employed a generalized Nash-Bertrand model: Liang (1989), Cotterill (1994), Cotterill et al. (2000), and Kinoshita et al. (2002); however, only Liang has explored the theoretical foundations of that model. This article generalizes the Liang two-good model to three goods. A surprising and important result follows. Price-conjectural variations do not exist in models with three or more goods. Price-reaction functions, however, exist in multiple-good models. We estimate them jointly with a brand-level demand system to evaluate the total impact of a brand manager's price change on own quantity. In a differentiated product market, this is a useful addition to a partial demand elasticity approach, because a change in one brand's price typically engenders a price reaction by other brands that affects own quantity via substantial cross-price elasticities among substitutes. Strategic pricing in the Boston fluid milk market was also influenced by the existence of a raw milk price support program, the Northeast Dairy Compact. We find that the advent of the Compact was a focal point event that crystallized a shift away from Nash-Bertrand to more cooperative pricing. If the downstream market is not competitive, one needs to consider strategic price reactions when designing and evaluating agricultural price programs. Copyright 2006 International Association of Agricultural Economists.

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Article provided by International Association of Agricultural Economists in its journal Agricultural Economics.

Volume (Year): 35 (2006)
Issue (Month): 1 (07)
Pages: 27-33

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Handle: RePEc:bla:agecon:v:35:y:2006:i:1:p:27-33
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  1. Appelbaum, Elie, 1982. "The estimation of the degree of oligopoly power," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 287-299, August.
  2. Iwata, Gyoichi, 1974. "Measurement of Conjectural Variations in Oligopoly," Econometrica, Econometric Society, vol. 42(5), pages 947-66, September.
  3. Mills, David E, 1995. "Why Retailers Sell Private Labels," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 509-28, Fall.
  4. Cotterill, Ronald W. & Putsis, William P., Jr. & Dhar, Ravi, 1999. "Assessing the Competitive Interaction Between Private Labels and National Brands," Research Reports 25177, University of Connecticut, Food Marketing Policy Center.
  5. Baker, Jonathan B & Baresnahan, Timothy F, 1985. "The Gains from Merger or Collusion in Product-differentiated Industries," Journal of Industrial Economics, Wiley Blackwell, vol. 33(4), pages 427-44, June.
  6. Gasmi, F. & Vuong, Q.H., 1988. "An Econometric Analysis Of Some Duopolistic Games In Prices And Advertising," Papers m8903, Southern California - Department of Economics.
  7. Junko Kinoshita & Nobuhiro Suzuki & Tamotsu Kawamura & Yasuhito Watanabe & Harry M. Kaiser, 2001. "Estimating own and cross brand price elasticities, and price-cost margin ratios using store-level daily scanner data," Agribusiness, John Wiley & Sons, Ltd., vol. 17(4), pages 515-525.
  8. Cotterill, Ronald W., 1994. "Scanner Data: New Opportunities For Demand And Competitive Strategy Analysis," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 23(2), October.
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