Two-stage oligopoly pricing with differentiated products: The Boston fluid milk market

Date of Completion

January 2001


Economics, Agricultural




This dissertation examines structural and reduced form models of differentiated products oligopoly. The Boston fluid milk market provides the empirical setting for this study. Using Information Resources Inc. scanner-data, it was possible to develop comprehensive market models that specify horizontal and vertical strategic interactions of the channel intermediaries (processors-retailers) and their demand and cost specifications. Within this framework, the impact of the Northeast Dairy Compact (NEDC) on the Boston fluid milk market is analyzed. ^ Dynamically, the estimated reduced form price reaction functions in Chapter-2, find that the lag structure of retail price response is short. In most case it is not more than two periods. The post-Compact period, competitive behavior of retailers changed dramatically with oligopolistic retail pricing becoming ‘soft’ as major retailers responded positively to each others price changes. ^ Chapter-3 develops a model for the analysis of the cost pass through rates (CPTR). We advance the theory and empirical analysis by introducing a disaggregate structural model that identifies strategic cross firm price shocks and corresponding pass through rates. This exercise finds that the pass-through rate due to changes in industry wide costs, i.e. the farm level milk price, is near 100%. CPTRs at the wholesale and retail level for firm specific cost shocks, however are approximately 50%. For the total channel, firm specific CPTRs are near 25%, the retail monopoly level. ^ The model in Chapter-4 incorporates recent developments in characteristics-based Nested Logit demand systems as well as a flexible Generalized Leontief cost function. The estimated retail level brand elasticities suggest that brand level competition is much stronger within a retail chain than across chains. Estimated profit margins across brands suggest higher margins for private labels. Analysis of the estimated Random Utility Model suggest that retail chains in Boston generate significant non-price utilities for consumers. ^ Regarding the NEDC, this research finds a significant price enhancing effect for the NEDC through focal point pricing. Both the estimated post-Compact profit margins and the estimated profit per period were higher after the Compact implementation. ^