Retailer Motivation to Adjust Milk Prices: An Analysis Using Superelasticity of Demand

Abstract

ABSTRACTSuperelasticity of demand offers a quantitative measure of demand curvature which is an important consideration in firm pricing decisions. We derive superelasticity analytic formulations for logit and random coefficient logit (RCL) demand models that can be used to shed light on firm incentives to alter price, firm cost pass‐through, and market power potential. We use the RCL superelasticities that are obtained via simulated generalized method of moments (GMM) to examine retail market power potential in regards to the marketing of national and store‐brand milk in the U.S. Our findings show that elasticity of demand rises in price for both brands, with elasticity for store brand milk lagging behind that for national brand in magnitude. Similarly, elasticities for national brands tend to decrease faster when prices are on the decline. Such a condition suggests that retailers can identify a pricing position, possibly in relation to national brand prices, at which there is a low incentive to increase or reduce store brand prices. [JEL Codes: D22, L13.]