Retail Prices for Milk by Fat Content: A New Theory and Empirical Test of Retailer Pricing Behavior

38 Pages Posted: 12 Jul 2009

See all articles by Tian Xia

Tian Xia

Kansas State University - Department of Agricultural Economics

Richard J. Sexton

University of California, Davis - Department of Agricultural and Resource Economics

Date Written: July 9, 2009

Abstract

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

Suggested Citation

Xia, Tian and Sexton, Richard J., Retail Prices for Milk by Fat Content: A New Theory and Empirical Test of Retailer Pricing Behavior (July 9, 2009). Available at SSRN: https://ssrn.com/abstract=1432151 or http://dx.doi.org/10.2139/ssrn.1432151

Tian Xia (Contact Author)

Kansas State University - Department of Agricultural Economics ( email )

Manhattan, KS 66506-4001
United States

Richard J. Sexton

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
327 Voorhies
Davis, CA 95616
United States
530-752-2219 (Phone)

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