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

  • Cotterill, Ronald W.
  • Dhar, Tirtha Pratim

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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Paper provided by University of Connecticut, Food Marketing Policy Center in its series Research Reports with number 25189.

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Date of creation: 2003
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Handle: RePEc:ags:uconnr:25189
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  1. David Besanko & Sachin Gupta & Dipak Jain, 1998. "Logit Demand Estimation Under Competitive Pricing Behavior: An Equilibrium Framework," Management Science, INFORMS, vol. 44(11-Part-1), pages 1533-1547, November.
  2. Nevo, Aviv, 1998. "Measuring Market Power in the Ready-To-Eat Cereal Industry," Food Marketing Policy Center Research Reports 037, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  3. 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.
  4. Ronald W. Cotterill & William P. Putsis Jr. & Ravi Dhar, 1999. "Assessing the Competitive Interaction Between Private Labels and National Brands," Food Marketing Policy Center Research Reports 044, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  5. Diewert, W E, 1971. "An Application of the Shephard Duality Theorem: A Generalized Leontief Production Function," Journal of Political Economy, University of Chicago Press, vol. 79(3), pages 481-507, May-June.
  6. Verboven, Frank, 1997. "Collusive behavior with heterogeneous firms," Journal of Economic Behavior & Organization, Elsevier, vol. 33(1), pages 121-136, May.
  7. S. Chan Choi, 1991. "Price Competition in a Channel Structure with a Common Retailer," Marketing Science, INFORMS, vol. 10(4), pages 271-296.
  8. Joseph V. Balagtas & Daniel A. Sumner, 2003. "The Effect of the Northeast Dairy Compact on Producers and Consumers, with Implications of Compact Contagion," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 25(1), pages 123-144.
  9. Hausman, Jerry A & Leonard, Gregory K, 2002. "The Competitive Effects of a New Product Introduction: A Case Study," Journal of Industrial Economics, Wiley Blackwell, vol. 50(3), pages 237-63, September.
  10. Azzam, Azzeddine M, 1997. "Measuring Market Power and Cost-Efficiency Effects of Industrial Concentration," Journal of Industrial Economics, Wiley Blackwell, vol. 45(4), pages 377-86, December.
  11. Gasmi, Farid & Laffont, Jean-Jacques & Vuong, Quang, 1992. "Econometric Analysis of Collusive Behavior in a Soft Drink Market," IDEI Working Papers 16, Institut d'Économie Industrielle (IDEI), Toulouse.
  12. 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.
  13. Slade, Margaret E, 1995. "Product Rivalry with Multiple Strategic Weapons: An Analysis of Price and Advertising Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(3), pages 445-76, Fall.
  14. Tsunemasa Kawaguchi & Nobuhiro Suzuki & Harry M. Kaiser, 1997. "A Spatial Equilibrium Model for Imperfectly Competitive Milk Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 851-859.
  15. Cardell, N. Scott, 1997. "Variance Components Structures for the Extreme-Value and Logistic Distributions with Application to Models of Heterogeneity," Econometric Theory, Cambridge University Press, vol. 13(02), pages 185-213, April.
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