The Structural Effects of State Regulation of Retail Fluid Milk Prices

Abstract

E CONOMISTS have long recognized the desirable qualities of a competitive market. The milk industry, although it might appear to be a prototype competitive market, is far from competitive. This is due in part to locational factors and in part to a vast network of federal and state governmental regulations and controls. Over 95% of raw milk sales to processing plants are regulated, and in 1972 about a quarter of all wholesale and retail sales of fluid milk products, the concern of this paper, were regulated (USDA, 1972). As a result of increased interest in regulation in general, economists have become increasingly concerned with milk regulation. I Furthermore, some states have recently dropped wholesale and retail price regulation. The implications of these various government controls are important to both consumers and public policy makers. Some studies have found that state retail price regulation leads to higher prices.2 Economic theory also predicts that insulation from price competition may have significant effects on the number of participants and the efficiency of production in an industry. The previous studies have failed to consider the structural implications of wholesale and retail price regulation. This paper notes the announced and implied objectives of state retail fluid milk price regulation. Application of the Chamberlinian monopolistic competition model will aid in heuristically contrasting unregulated and regulated equilibria. Empirically, a simultaneous equations model will be used to study the effects of regulation upon both the performance and structure of the fluid milk industry. Further, an estimate of the social cost of regulation will be deduced from the empirical results. Finally, the implications for public policy will be presented.