An Application of Experimental Economics to Agricultural Policies: The Case of U.S. Dairy Deregulation on Farm-Level Markets
Current dairy regulations in the U.S. are the result of over 80 years of regulatory activities. Through the 1920s and 1930s the U.S. government passed various acts designed to increase the share of market surplus captured by sellers, which at the time was judged insufficient. Lately, budget constraints and commitments to freer trade agreement have let the government and some dairy sector leaders contemplate different levels of dairy deregulation. The elimination of the Federal Milk Marketing Orders (FMMOs), a cornerstone of U.S. dairy regulation, has emerged as a possibility. The thought of eliminating the FMMOs was particularly disturbing to milk producers because of uncertainty regarding what might happen to the farm price, the volume of raw milk supplied, market stability and price efficiency, and to the distribution of market surplus between dairy farmers and dairy processing plants. These particular questions have not been extensively studied before due to data availability problems. Data from the era prior to the establishment of FMMOs would be difficult to obtain, and probably not meaningful because FMMOs have been around since the late-1930s. Experimental economics is used to simulate U.S. dairy market conditions and the effect of the elimination of FMMOs. The experimental task is a simple 2 X 2 matrix laboratory game. The treatments are oligopsony and regulation. Perishability is represented by an advance production decision with no carry-over and is kept constant across the experiments. Experimental sessions comprised 12 periods and a practice period. Sellers made production decisions and received a pool price, while buyers made a price (bid) and quantity decision. The allocation of units produced is made by the monitor on a highest bid basis. The game is computer assisted. Experimental results indicate that, in the absence of regulation, buyers are successful in reducing market price below the perfectly competitive price and in capturing a larger share of market surplus than a competitive solution predicts. Regulation reduced the market power of buyers and the price fluctuation of raw milk, in an oligopsonistic market, and had no significant impact on the overall price efficiency of the market.
|Date of creation:||Sep 1997|
|Contact details of provider:|| Postal: Warren Hall, Ithaca NY 14853|
Web page: http://aem.cornell.edu/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Friedman,Daniel & Sunder,Shyam, 1994. "Experimental Methods," Cambridge Books, Cambridge University Press, number 9780521456821, December.
- Forsythe, Robert & Lundholm, Russell, 1990. "Information Aggregation in an Experimental Market," Econometrica, Econometric Society, vol. 58(2), pages 309-347, March.
- Brown-Kruse, Jamie, et al, 1994. "Bertrand-Edgeworth Competition in Experimental Markets," Econometrica, Econometric Society, vol. 62(2), pages 343-372, March.
- Ippolito, Richard A & Masson, Robert T, 1978. "The Social Cost of Government Regulation of Milk," Journal of Law and Economics, University of Chicago Press, vol. 21(1), pages 33-65, April.
- Stuart Mestelman & Douglas Welland, 1988. "Advance Production in Experimental Markets," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 641-654.
- Douglas D. Davis & Charles A. Holt, 1992. "Introduction to Experimental Economics," Introductory Chapters, in: Experimental Economics Princeton University Press.
When requesting a correction, please mention this item's handle: RePEc:ags:cudarb:122807. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If references are entirely missing, you can add them using this form.