The Structural Effects of State Regulation of Retail Fluid Milk Prices: A Reply

Abstract

mistakenly includes 4 regulated markets from New Jersey, a state with abnormally low prices. Once New Jersey is properly classified, no significant difference can be found between deregulated and unregulated groups with respect to any of the dependent variables, suggesting that the distinction between these two groups is unwarranted. Even if proper empirical support for claim (b) had been found, it would still lack theoretical support. M-D's theoretical model implies the short-run deregulated price may lie above or below the long-run unregulated level, not necessarily below it as the authors infer. Because their model implies nothing about the effect of regulation on plant capacity, and because excess (i.e., unexhausted economies of scale, as they use the term) is not something capable of being accumulated and later when released, there is no basis for the hypothesis that deregulation causes prices to fall to levels below even an unregulated market as capacity built up during regulation is utilized (p. 259). Finally, I identify and correct a number of other unexplained omissions and data errors. In combination with the exclusion of North Dakota and misclassification of New Jersey, M-D's other omissions so severely deplete their sample size that more than half of the few remaining regulated markets are located in Pennsylvania alone. This fact cannot be deduced by readers, since M-D provide little description of their markets. They report only that the United States was separated into nine regions, one of which contains New Jersey (p. 257). Clearly, any results derived from their data set must be dominated by that form of regulation peculiar to Pennsylvania and, for this reason alone, should be interpreted with caution.