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An Analysis of U.S. Dairy Policy Deregulation Using an Imperfect-Competition Model

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Since the General Agreement on Tariffs and Trade (GATT) was successfully reached in December 1993, it has been useful for the U.S. dairy industry to be proactive and consider the impact of deregulation of the U.S. dairy industry. There are three main federal programs that form the basis of U.S. dairy policy and will be affected by trade liberalization: the dairy price-support program, federal milk marketing orders, and import quotas. Domestic pressures also bring various programs into question, such as regional concerns over federal milk marketing orders and budgetary pressure on the dairy price-support program.

Most previous dairy-policy models (e.g., Kaiser, Streeter, and Liu 1988; Liu et al. 1990) have assumed an exogenous fluid differential because the dairy industry is regulated by federal milk marketing orders that obligate milk handlers to pay the minimum Class I (fluid) differential. However, the fluid differential actually is not exogenous because, in addition to the premiums associated with the federal minimum prices, there are over-order payments that result from negotiations between dairy cooperatives and processors (or manufacturers). Most previous models have not accounted for over-order payments. An imperfect-competition model with an endogenous fluid price differential is necessary for estimating how large the fluid price differential might be without existing regulations.

While imperfect-competition models of the Japanese milk market have been developed by Suzuki, Lenz, and Forker (1993) and by Suzuki et al. (1994), no imperfect-competition models have been developed for the U.S. milk market. In this chapter we present an imperfect-competition model with an endogenous fluid price differential to evaluate the market effects of deregulating the U.S. dairy industry. The usefulness of the model is demonstrated by comparing the results of dynamic simulations of this model with the results of a conventional exogenous fluid differential model.

Document Type: Research Article

Publication date: January 1, 2006

More about this publication?
  • New Empirical Industrial Organization and the Food System
    The new empirical industrial organization (NEIO) is a pioneering framework developed by economists to measure the degree of competitiveness of economic sectors. The primary contribution of NEIO is the generalization of perfect-competition and monopoly models to intermediate imperfect-competition models that can be empirically estimated. This framework has been applied to many sectors to provide policymakers dealing with antitrust issues with empirical evidence of market power throughout the marketing channel. This is the first book to provide a detailed, systematic overview of NEIO. The authors present a comprehensive synopsis of the theory and application of NEIO as well as selected case studies to the food sector.
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