Milking Market Power: How Dairy Cooperatives Raise Rivals' Costs

Abstract

This paper examines how cooperative coordination shapes vertical competition in U.S. dairy markets. Large cooperatives both sell raw milk to independent processors and compete with them downstream, creating incentives to raise rivals' costs. Exploiting herd retirements under the Herd Retirement Program (HRP) as plausibly supply shocks, I estimate a structural model linking flexible demand curvature to supply conduct. The results show that cooperatives sustain the highest upstream margins and that HRP rounds raised input markups by 3-7%. Consequently, consumers faced higher retail prices due to 54% pass-through rate for processors. These findings show how cooperative coordination enabled a raising-rivals'-costs strategy that redistributed surplus upstream while raising prices on consumers. 

Keywords: Vertical Integration, Raising Rivals’ Costs, Antitrust, Demand Estimation, demand curvature

JEL Classification: K21, D43, L13, L41, Q13