1. Imperfect Competition in Milk Retailing Vardges Hovhannisyan

2. Outline Background Demand and Supply Models Data Results Future Work

3. 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

4. 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

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

6. BLP Demand Model - Individual probabilities - Predicted market shares

7. BLP Demand Model - Demand equations - BLP aims at estimating

8. 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

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

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

11. 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

12. Supply Scenarios Simple linear pricing model Hybrid model

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

14. Supply Scenarios Retail collusion Monopoly

15. Data  Weekly data from IRI on the amount of milk sold and milk prices in 2001-06  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)

16. 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 & Johnson1Low4118-19,42-51,54-78 16Johnson & Johnson3Low3132-78 17Johnson & Johnson1Reduced78 18Johnson & Johnson3Reduced78 19Johnson & Johnson1Whole662-11,15,17 20Johnson & Johnson3Whole78 21Private Label1Skim711-7, 22Private Label2Skim251-35,61-78 23Private Label3Skim78 24Private Label1Low711-7, 25Private Label3Low78 26Private Label1Reduced711-7, 27Private Label2Reduced251-35,61-78 28Private Label3Reduced78 29Private Label1Whole711-7, 30Private Label2Whole251-35,61-78 31Private Label3Whole78 32Organic Valley1Skim661-5, 71-78 33Organic Valley3Skim171-60,78 34Organic Valley1Low641-7, 71-78 35Organic Valley1Reduced661-5, 71-78 36Organic Valley3Reduced161-60,77,78 37Organic Valley1Whole661-5, 71-78 38Organic Valley3Whole171-60,78

17. ManufacturerMedian Price ($/pint)Mean Price ($/pint)Min Price ($/pint)Max Price ($/pint)St. Dev.Ave. Market Share (%) Bareman's Dairy0.3160.3210.2460.4980.0460.015 Bareman's Dairy0.312 0.2440.4980.0410.015 Bareman's Dairy0.312 0.2430.4980.0400.037 Bareman's Dairy0.3130.3140.2430.5220.0420.047 Dean Foods Co0.3210.3370.2430.6370.0670.180 Dean Foods Co0.3340.4180.2431.0740.1920.158 Dean Foods Co0.3430.4140.2431.0740.1790.225 Dean Foods Co0.3440.4110.2431.0740.1740.211 Dean Foods Co0.3590.4110.2431.0740.1640.335 Dean Foods Co0.3780.4540.2441.0740.2030.309 Dean Foods Co0.3860.4490.2441.0740.1920.348 Dean Foods Co0.3970.4830.2451.0740.2130.322 Johnson & Johnson0.4120.5360.2451.0740.2570.296 Johnson & Johnson0.4370.5760.2451.0740.2720.278 Johnson & Johnson0.4550.6000.2451.1500.2820.268 Johnson & Johnson0.4730.6150.2451.1500.2850.262 Johnson & Johnson0.5240.6530.2451.1500.2950.244 Johnson & Johnson0.7940.6800.2451.1500.2930.231 Johnson & Johnson0.8790.7010.2451.1500.2950.218 Johnson & Johnson0.8980.7230.2451.1500.2890.205 Private Label0.8820.6980.2301.1500.2980.277 Private Label0.8770.6900.2301.1500.3010.268 Private Label0.7890.6670.2301.1500.3070.633 Private Label0.5580.6470.2271.1500.3110.662 Private Label0.4790.6280.2271.1500.3130.924 Private Label0.4340.6110.2271.1500.3131.003 Private Label0.4230.6060.2271.1500.3140.974 Private Label0.3960.5900.2271.1500.3131.374 Private Label0.3860.5760.2271.1500.3121.369 Private Label0.3830.5730.2271.1500.3121.336 Private Label0.3690.5590.2271.1500.3111.564 Organic Valley0.3810.5780.2271.1500.3161.509 Organic Valley0.3840.5810.2271.1500.3161.491 Organic Valley0.3960.5990.2271.1500.3201.438 Organic Valley0.4270.6150.2271.1500.3221.392 Organic Valley0.4410.6180.2271.1500.3211.377 Organic Valley0.5060.6340.2271.1500.3231.332 Organic Valley0.5650.6360.2271.1500.3221.317

18. Milk Price ($/pint) and Combined Market Share (%) by Manufacturer ManufacturerMedianMean PriceMarket Share Bareman's Dairy 0.3130.3150.115 Dean Foods Co 0.3510.4222.088 Johnson & Johnson0.4990.6362.003 Private Label 0.4340.62210.383 Organic Valley 0.4270.6099.856

19. Preliminary Results Results from Logit Demand VariableOLSIV Price -0.617*-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 25 -1.669*-2.434* (0.114) 50 -0.759*-0.947* (0.050) 75 -0.499*-0.612* (0.033) 100 -0.373*-0.454* (0.025)

20. Estimation Results from the Mixed Logit Demand Specification Mean utilityIncomeIncome_sqAgeChildUnobserved Constant 0.1066.099*-12.966*-30.393*3.738-5.488* 0.4870.1180.0151.5442.3910.952 Price-1.946*5.119*-2.29810.510*-0.352-1.251* (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 13.626*-0.812*1.4804.785*12.245*-9.977* (0.008)(0.282)(1.427)(0.081)(2.548)(4.893) Retail chain222.102*10.691-65.046-23.327-4.6015.993 (0.067)(8.236)(35.785)(22.013)(9.614)(3.500)

21. ProductManufacturerRetail ChainFat ContentLogit Own-Price ElasticityMixed Logit Own PriceElasticity 1Bareman's Dairy2Skim-0.92-1.13 2Bareman's Dairy2Low-0.88-1.09 3Bareman's Dairy2Reduced-0.90-1.11 4Bareman's Dairy2Whole-0.92-1.13 5Dean Foods Co1Skim-1.17-1.44 6Dean Foods Co3Skim-2.44-3.01 7Dean Foods Co1Low-1.08-1.32 8Dean Foods Co3Low-1.04-1.27 9Dean Foods Co1Reduced-1.12-1.38 10Dean Foods Co3Reduced-2.47-3.04 11Dean Foods Co1Whole-1.15-1.42 12Dean Foods Co3Whole-2.47-3.03 13Johnson & Johnson1Skim-2.93-3.60 14Johnson & Johnson3Skim-2.76-3.39 15Johnson & Johnson1Low-2.89-3.56 16Johnson & Johnson3Low-2.74-3.37 17Johnson & Johnson1Reduced-2.94-3.62 18Johnson & Johnson3Reduced-2.76-3.40 19Johnson & Johnson1Whole-2.89-3.55 20Johnson & Johnson3Whole-2.74-3.37 21Private Label1Skim-0.87-1.07 22Private Label2Skim-0.79-0.97 23Private Label3Skim-0.78-0.96 24Private Label1Low-0.85-1.05 25Private Label3Low-0.79-0.97 26Private Label1Reduced-0.86-1.05 27Private Label2Reduced-0.80-0.98 28Private Label3Reduced-0.79-0.97 29Private Label1Whole-0.87-1.07 30Private Label2Whole-0.81-0.99 31Private Label3Whole-0.78-0.96 32Organic Valley1Skim-2.74-3.37 33Organic Valley3Skim-2.52-3.10 34Organic Valley1Low-2.74-3.37 35Organic Valley1Reduced-2.74-3.37 36Organic Valley3Reduced-2.52-3.10 37Organic Valley1Whole-2.74-3.37 38Organic Valley3Whole-2.52-3.10

22. Retail Market Power (Lerner Index) ProductManufacturerRetail ChainFat Content Lerner Index (%) 1Bareman's Dairy2Skim0.640 2Bareman's Dairy2Low0.639 3Bareman's Dairy2Reduced0.639 4Bareman's Dairy2Whole0.639 5Dean Foods Co1Skim0.645 6Dean Foods Co3Skim0.656 7Dean Foods Co1Low0.666 8Dean Foods Co3Low0.675 9Dean Foods Co1Reduced0.693 10Dean Foods Co3Reduced0.709 11Dean Foods Co1Whole0.711 12Dean Foods Co3Whole0.723 13Johnson & Johnson1Skim0.731 14Johnson & Johnson3Skim0.752 15Johnson & Johnson1Low0.754 16Johnson & Johnson3Low0.763 17Johnson & Johnson1Reduced0.765 18Johnson & Johnson3Reduced0.789 19Johnson & Johnson1Whole0.785 20Johnson & Johnson3Whole0.813 21Private Label1Skim0.787 22Private Label2Skim0.783 23Private Label3Skim0.805 24Private Label1Low0.785 25Private Label3Low0.809 26Private Label1Reduced0.789 27Private Label2Reduced0.785 28Private Label3Reduced0.807 29Private Label1Whole0.788 30Private Label2Whole0.784 31Private Label3Whole0.807 32Organic Valley1Skim0.804 33Organic Valley3Skim0.806 34Organic Valley1Low0.803 35Organic Valley1Reduced0.800 36Organic Valley3Reduced0.801 37Organic Valley1Whole0.800 38Organic Valley3Whole0.801

23. 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

24. Questions ? ?