Imperfect Competition in Milk Retailing Vardges Hovhannisyan

Outline Background Demand and Supply Models Data Results Future Work

Background Increased need to better understand the milk demand (E.Lopez, R. Lopez, 2009) Do retailers exercise market power? (Capps, Sherwell, 2005) - Increased retail concentration - Introduction of private label products

Demand Model (BLP, 1995) Market level data Aggregate quantity and price Accounts for price endogeneity More realistic elasticity measures (vis-a-vis logit, nested logit) Characteristic based approach - solves dimensionality problem - allows for predicting demand for new products

BLP Demand Model How to construct the demand functions? - Aggregate demand for product j - Indirect utility function (i.e. assuming quasi-linear utility)

BLP Demand Model - Individual probabilities - Predicted market shares

BLP Demand Model - Demand equations - BLP aims at estimating

BLP Estimation GMM (why?) - Construct the GMM objective function based on the moment conditions - Need to obtain the implied values of via the BLP theorem BLP theorem For a given, a unique set solves the demand equations

Estimation Details Assume Indirect utility is Indirect utility from an outside good is

Estimation Details Integrate to obtain Simulate market shares Construct the demand equations

Estimation Details Contraction mapping solves the share equations (11) for the mean utility Obtain the market shocks (for logit ) Construct the moment conditions and the GMM objective function

Supply Scenarios Simple linear pricing model Hybrid model

Supply scenarios Non-linear pricing models o Manufacturer margin=0 with retailers as residual claimant o Retail markup=0 Manufacturer collusion

Supply Scenarios Retail collusion Monopoly

Data  Weekly data from IRI on the amount of milk sold and milk prices in  Market level data, no consumer or household purchase behavior observed  Products as brand-chain-fat content, focus on a Midwestern city in the U.S.  Markets defined as city*(a 4-week period)

ProductManufacturerRetail ChainFat Content# of 4-WeeksNot in 4-weeks 1Bareman's Dairy2Skim78 2Bareman's Dairy2Low78 3Bareman's Dairy2Reduced78 4Bareman's Dairy2Whole78 5Dean Foods Co1Skim78 6Dean Foods Co3Skim78 7Dean Foods Co1Low78 8Dean Foods Co3Low341-17,21,28-52,78 9Dean Foods Co1Reduced78 10Dean Foods Co3Reduced78 11Dean Foods Co1Whole78 12Dean Foods Co3Whole78 13Johnson & Johnson1Skim78 14Johnson & Johnson3Skim78 15Johnson & Johnson1Low ,42-51, Johnson & Johnson3Low Johnson & Johnson1Reduced78 18Johnson & Johnson3Reduced78 19Johnson & Johnson1Whole662-11,15,17 20Johnson & Johnson3Whole78 21Private Label1Skim711-7, 22Private Label2Skim251-35, Private Label3Skim78 24Private Label1Low711-7, 25Private Label3Low78 26Private Label1Reduced711-7, 27Private Label2Reduced251-35, Private Label3Reduced78 29Private Label1Whole711-7, 30Private Label2Whole251-35, Private Label3Whole78 32Organic Valley1Skim661-5, Organic Valley3Skim171-60,78 34Organic Valley1Low641-7, Organic Valley1Reduced661-5, Organic Valley3Reduced161-60,77,78 37Organic Valley1Whole661-5, Organic Valley3Whole171-60,78

ManufacturerMedian Price ($/pint)Mean Price ($/pint)Min Price ($/pint)Max Price ($/pint)St. Dev.Ave. Market Share (%) Bareman's Dairy Bareman's Dairy Bareman's Dairy Bareman's Dairy Dean Foods Co Dean Foods Co Dean Foods Co Dean Foods Co Dean Foods Co Dean Foods Co Dean Foods Co Dean Foods Co Johnson & Johnson Johnson & Johnson Johnson & Johnson Johnson & Johnson Johnson & Johnson Johnson & Johnson Johnson & Johnson Johnson & Johnson Private Label Private Label Private Label Private Label Private Label Private Label Private Label Private Label Private Label Private Label Private Label Organic Valley Organic Valley Organic Valley Organic Valley Organic Valley Organic Valley Organic Valley

Milk Price ($/pint) and Combined Market Share (%) by Manufacturer ManufacturerMedianMean PriceMarket Share Bareman's Dairy Dean Foods Co Johnson & Johnson Private Label Organic Valley

Preliminary Results Results from Logit Demand VariableOLSIV Price *-0.763* (0.041)(0.042) Product Fixed Effects Time Fixed Effects Measure of fit (R sq)0.934 Pints-capita-year Estimated price coefficient sensitivity to market definition *-2.434* (0.114) *-0.947* (0.050) *-0.612* (0.033) *-0.454* (0.025)

Estimation Results from the Mixed Logit Demand Specification Mean utilityIncomeIncome_sqAgeChildUnobserved Constant * * * * Price-1.946*5.119* * * (0.418)(0.020)(7.132)(1.483)(4.338)(0.003) Fat-5.324*4.590*3.560*4.355*2.168*0.504* (0.232)(0.261)(0.068)(2.562)(1.024)(0.001) Retail chain *-0.812* *12.245*-9.977* (0.008)(0.282)(1.427)(0.081)(2.548)(4.893) Retail chain * (0.067)(8.236)(35.785)(22.013)(9.614)(3.500)

ProductManufacturerRetail ChainFat ContentLogit Own-Price ElasticityMixed Logit Own PriceElasticity 1Bareman's Dairy2Skim Bareman's Dairy2Low Bareman's Dairy2Reduced Bareman's Dairy2Whole Dean Foods Co1Skim Dean Foods Co3Skim Dean Foods Co1Low Dean Foods Co3Low Dean Foods Co1Reduced Dean Foods Co3Reduced Dean Foods Co1Whole Dean Foods Co3Whole Johnson & Johnson1Skim Johnson & Johnson3Skim Johnson & Johnson1Low Johnson & Johnson3Low Johnson & Johnson1Reduced Johnson & Johnson3Reduced Johnson & Johnson1Whole Johnson & Johnson3Whole Private Label1Skim Private Label2Skim Private Label3Skim Private Label1Low Private Label3Low Private Label1Reduced Private Label2Reduced Private Label3Reduced Private Label1Whole Private Label2Whole Private Label3Whole Organic Valley1Skim Organic Valley3Skim Organic Valley1Low Organic Valley1Reduced Organic Valley3Reduced Organic Valley1Whole Organic Valley3Whole

Retail Market Power (Lerner Index) ProductManufacturerRetail ChainFat Content Lerner Index (%) 1Bareman's Dairy2Skim Bareman's Dairy2Low Bareman's Dairy2Reduced Bareman's Dairy2Whole Dean Foods Co1Skim Dean Foods Co3Skim Dean Foods Co1Low Dean Foods Co3Low Dean Foods Co1Reduced Dean Foods Co3Reduced Dean Foods Co1Whole Dean Foods Co3Whole Johnson & Johnson1Skim Johnson & Johnson3Skim Johnson & Johnson1Low Johnson & Johnson3Low Johnson & Johnson1Reduced Johnson & Johnson3Reduced Johnson & Johnson1Whole Johnson & Johnson3Whole Private Label1Skim Private Label2Skim Private Label3Skim Private Label1Low Private Label3Low Private Label1Reduced Private Label2Reduced Private Label3Reduced Private Label1Whole Private Label2Whole Private Label3Whole Organic Valley1Skim Organic Valley3Skim Organic Valley1Low Organic Valley1Reduced Organic Valley3Reduced Organic Valley1Whole Organic Valley3Whole0.801

Future Work Box-Cox Mixed Logit Model Supply scenarios implied by dynamic interactions among the retailers Structural change by the entry of Wall-Mart in 2003 Variable marginal costs

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