Estimating Market Power of U.S. Dairy Cooperatives in the Fluid Milk Market

Abstract

A structural econometric model of vertical relationships is adopted to identify pricing behavior in the supply chain for fluid milk in the United States. The model consists of a system of equations that allows estimation of oligopoly power of dairy co‐operatives and downstream firms, exploiting federal milk marketing order regulations to identify co‐operatives’ marginal cost. A key finding is that co‐operatives use their market power to raise the farm price of milk by almost 9% above marginal cost, resulting in an income transfer of more than $600 million per year in markets regulated by federal milk marketing orders.