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A Spatial-Equilibrium Model for Imperfectly Competitive Milk Markets

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Abstract:

Spatial-equilibrium models have been used frequently to analyze interregional competition problems in agriculture, including regional competition issues associated with the dairy industries in the United States (e.g., Chavas, Cox, and Jesse 1994; McDowell 1982; Yavuz et al. 1996) as well as in other countries such as Japan (e.g., Sasaki 1969; Kobayashi 1983; Hayashi 1984) (see also Judge and Takayama (1973)). Originally developed by Enke (1951) and Samuelson (1952) and then refined by Takayama and Judge (1964a, 1964b, 1971), spatial price equilibrium models have assumed that markets are either perfectly competitive or monopolistic. However, the structure of dairy markets in most countries is often neither. Therefore, a more plausible model for analyzing interregional milk movements would be an imperfect-competition spatial-equilibrium model.

The purpose of this chapter is to present a generalization of Takayama and Judge's (1964a, 1964b, 1971) spatial-equilibrium model that allows for the incorporation of any degree of market structure from perfect competition to monopoly. The usefulness of the model is demonstrated with an application to interregional milk movements in the Japanese dairy industry with solutions generated and compared for alternative scenarios regarding the degree of market competition.

Dairy policy in Japan features a quota system in the manufacturing-milk market to prevent excess milk production from occurring because of higher-than-competitive market prices. As a result, the Japanese dairy industry can be divided into three distinct markets: the fluid market, the manufacturing market within payment quotas, and the manufacturing market over payment quotas. Prices in the manufacturing markets are set by the government based on a deficiency payment program. For manufacturing milk sold within payment quotas, prefectural milk marketing boards (consignment milk sellers for farmers) receive deficiency payments equal to the difference between the guaranteed price and the standard transaction price for manufacturing milk. Both prices are determined by the national government. The guaranteed price is based on milk production costs while the standard transaction price is based on conditions in the dairy product market, and all buyers of manufacturing milk are required to pay the standard transaction price. To discourage excess production, over-payment quota manufacturing milk receives the lower standard transaction price. Payment quotas for the guaranteed price are given not to individual producers but to each prefectural milk marketing board. Individual producers are paid a prefecturewide uniform pooled price (weighted-average prices for milk sold in the fluid- and manufacturing-milk markets).

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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