A Structural Model of the Analysis of Retail Market Power: The Case of Fluid Milk

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Abstract

We derive a structural model of firm behavior that is composed of the Generalized Quadratic Almost Ideal Demand System to represent both consumers’ milk preferences and firm profit maximization conditions that allow for a range of competitive scenarios. The importance of this specification is found in its fuller representation of consumer preferences, as opposed to the Linear Approximate Almost Ideal Demand System used in previous analyses. We apply this structural framework to investigate retailer conduct in the sale of beverage milk in a U.S. market using product-level data. Our Lerner Index estimates show that retailers are not perfectly competitive. However, this deviation is small.

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