Demand Analysis of Fluid Milk with Different Attributes

Abstract

I. Introduction This study analyzes demand for fluid milk at various levels of the industry. Adopting the multi-stage demand system approach and refined segmentation, we estimate price elasticities at both brand level and commodity group level and provide several policy implications. Consumer responsiveness to price changes measured at various levels provides important economic implications to firms that formulate pricing strategy, and to policymakers who regulate the market and public health through taxation. For the last decades, U.S. fluid milk market has experienced drastic changes as consumers’ perception of the quality of milk changes. First, consumer preference for milk fat has changed. Until the mid-60s, consumers valued whole milk more than reduced fat or low fat milk because they regarded milk with less fat as what was left when the cream was extracted from raw milk to produce butter and cheese. As the concern for cholesterol arose in 1960s, however, consumer taste for milk has moved to lower fat milk. As a result, consumption of lower fat milk started increasing and the amount of lower fat milk sales became larger than that of whole milk by the end of 1980s. In addition, substitutes such as soy milk and rice milk became available in the market, and the consumption of those products has been on the rise. More recently, consumer concerns have moved to issues related to environment, genetically modified organisms and animal welfare (Alviola and Capps 2010). As a result, sales of organic milk increased (Dimitri and Venezia, 2007) since mid-90s while overall consumption milk remained relatively constant over the same period (USDA, Food Availability Data System). Previous research on demand for fluid milk has made important contributions to the understanding of the changes in the market. Cornick et al. (1994) examined socio-economic factors affecting expenditures of skim milk, reduced-fat milk and whole milk. Gould (1996)