A structural econometric model of vertical relationships is adopted to identify pricing behavior in the supply chain for fluid milk in the United States.The model consists of a system of equations that allows estimation of oligopoly power of dairy co-operatives and downstream firms, exploiting federal milk marketing order regulations to identify co-operatives' marginal cost.Akey finding is that co-operatives use their market power to raise the farm price of milk by almost 9% above marginal cost, resulting in an income transfer of more than 600 million per year in markets regulated by federal milk marketing orders.
Bibliographical noteFunding Information:
Metin Cakir is an assistant professor in the Department of Bioresource Policy, Business, and Economics at the University of Saskatchewan. Joseph V. Balagtas is a professor in the Department of Agricultural Economics at Purdue University. The authors are grateful to Jim Binkley and seminar participants at the University of Saskatchewan,the University of Nebraska,and the University of Maryland for constructive comments. All errors are our own. This research has been supported by the Agricultural Experiment Station at Purdue University and the Purdue Research Foundation. The senior authorship is shared.
- Dairy co-operatives
- Market power
- Milk marketing orders
- Sequential oligopoly