Retail Prices for Milk by Fat Content: A New Theory and Empirical Test of Retailer Pricing Behavior
38 Pages Posted: 12 Jul 2009
Date Written: July 9, 2009
We study a heretofore unexamined type of product differentiation, horizontally differentiated products with differential costs, and apply the analysis to retail pricing of fluid milk products. We develop the theory for three market structures, perfect competition, monopoly, and oligopoly for the four horizontally differentiated fluid milk products (skim, 1%, 2%, and whole milk) typically offered by U.S. food retailers. The theoretical models yield unique predictions for the relationship among prices of the four milk products and the impacts of butterfat and nonfat milk costs on prices, depending upon the form of retail competition. An empirical analysis of retail milk pricing for four major cities in California enables tests to be conducted of which form of behavior best characterizes grocery retailing in these cities.
Keywords: horizontal differentiation, differential costs, milk, retailing
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