Markups and Markdowns in the French Dairy Market

Separately measuring firm buyer and seller power is important for policy-making, but challenging. In this paper, we suggest a new methodology to do so and apply it to French dairy processors. These firms exert buyer power when purchasing raw milk, and seller power when marketing dairy products. The analysis is based on plant-level data on dairy firms, with observations on prices and quantities of raw-milk input by origin and output by product from 2003 to 2018. We rely on a production function approach to estimate total margins. The existence of a commodity, (i) substitutable as an input or as an output, and (ii) exchanged on global markets where firms are price-takers, allows us to separately estimate firm-origin markdowns and firm-product markups. We show this methodology can also be useful in other contexts, with more limited data. Markdown estimates imply that dairy firms on average purchase raw milk at a price 16% below its marginal contribution to their profits, while markup estimates indicate that firms sell dairy products at a price exceeding their marginal costs by 41%. Our results show substantial variations in buyer and seller power exploitation across firms, products, and time. We analyze how shocks to local farmer costs and international commodity prices pass through the supply chain. Processors partially absorb such shocks by adjusting markups and markdowns, thus smoothing variations in farmer revenues. It further implies that 65% of subsidies are currently diverted from farmers due to processor buyer power. A price floor on raw milk could be an alternative welfare-improving policy.