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Evaluating Generic Milk Promotion Effectiveness with an Imperfect-Competition Model

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Abstract:

Although raw milk is essentially a homogeneous input in the production of fluid milk and manufactured dairy products, in many countries the price received for fluid-milk usage is higher than the price received for manufactured-product usage. Such differences indicate that prices are not competitively determined. This certainly is the case in the U.S., where federal and state milk marketing order programs establish minimum Class I price differentials (premiums) for most milk marketed. There are also over-order fluid premium payments resulting from negotiations between cooperatives and fluid processors.

Changes in milk advertising expenditures should produce changes in milk prices as well as in milk demand. Thus, an advertising program's effectiveness should account for changes in both price and quantity; each should be treated as endogenous. Most studies of U.S. dairy markets assume either an exogenous fluid-milk price (Thompson, Eiler, and Forker 1976; Liu and Forker 1988, 1990; Ward and Dixon 1989; Blisard, Sun, and Blaylock 1991; Forker and Ward 1993) or an exogenous fluid (Class I) price differential (Kaiser, Streeter, and Liu 1988; Kaiser et al. 1994; Liu et al. 1990). No studies known to the authors have used a degree-of-competition measure or an endogenously determined fluid price differential in U.S. dairy models.

In the Japanese market, the assumption of an exogenous fluid price or premium is even less appropriate because milk prices are determined in individual negotiations between prefectural milk marketing boards (designated dairy cooperatives) and the processors they supply. The market power of prefectural boards and processors is crucial in milk price determination. In addition, because generic promotion expenditures are defrayed by assessments on milk marketings, assessment increases affect fluid-milk marketings, which in turn increase assessments. Promotion expenditures should therefore be treated as endogenous.

Using Japanese generic milk promotion data, we develop a framework for measuring the effectiveness of generic milk advertising incorporating the degree of market competition. Results assuming endogenously determined fluid premiums are then compared with a conventional model assuming an exogenous fluid premium.

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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