The Impact of the New York State Milk Price Gouging Law on the Price-Transmission Process and Supermarket Pricing Strategies in the Fluid Whole Milk Market

Abstract

The paper analyzes the effect of the New York State Milk Price Gouging Law 200% rule (June 1991-October 2008) on the nature of price-transmission process and supermarket pricing strategies in the fluid whole milk market. This rule established that the retail prices of fluid milk products were not to exceed 200% of the Class I fluid milk prices that milk processors paid to dairy farmers. The enforcement of this law significantly affected the nature of the Class I fluid milk price transmission process and the whole milk pricing strategies of supermarkets in the five largest cities in New York State: New York City, Albany, Syracuse, Buffalo and Rochester. During the pre-law period, supermarkets used the retail price-stabilization strategy; a presence of the asymmetric Class I fluid milk price transmission process was evidence of this type of pricing strategy. In contrast, supermarkets used the retail profit stabilization strategy during the law period, which was reflected in the symmetric response of retail prices and marketing margins to increases and decreases in the Class I fluid milk prices. The analyzed design of retail milk price control actually created an institutional environment that facilitated cooperative conduct of supermarkets acting in an oligopolistic market environment, which caused a shift away from the retail price stabilization strategy in the pre-law period to the retail profit stabilization strategy in the law period.