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Strategic Pricing in a Differentiated Product Oligopoly Model: Fluid Milk in Boston

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  • Canan, Basak
  • Cotterill, Ronald W.

Abstract

In an imperfectly competitive industry, differentiated products compete with each other with price rather than quantity as the strategic variable. Several previous studies have employed a generalized Nash Bertrand model: Liang (1989), Cotterill (1994), Cotterill, Putsis and Dhar (2000), and Kinoshita, Suzuki, Kawamura, Watanabe and Kaiser (2001); however, only Liang has explored the theoretical foundations of that model. This paper generalizes the Liang two good model to three goods. A surprising and important result follows. Price conjectural variations do not exist in models with 3 or more goods. Price reaction functions, however, exist in multiple good models. We estimate them jointly with a brand level demand system to evaluate the total impact of a brand manager?s price change on own quantity. In a differentiated product market this is a useful addition to a partial demand elasticity approach because a change in one brand?s price typically engenders a price reaction by other brands which affects own quantity via substantial cross price elasticities among substitutes. Strategic pricing in the Boston fluid milk market was also influenced by the existence of a raw milk price support program, the Northeast Dairy Compact. We find that the advent of the Compact was a focal point event that crystallized a shift away from Nash Bertrand to more cooperative pricing. If the downstream market is not competitive one needs to consider strategic price reactions when designing and evaluating agricultural price programs. Key Words: oligopoly, price conjectural variations, brand level demand elasticities, focal point collusion

Suggested Citation

  • Canan, Basak & Cotterill, Ronald W., 2005. "Strategic Pricing in a Differentiated Product Oligopoly Model: Fluid Milk in Boston," Food Marketing Policy Center Research Reports 086, University of Connecticut, Department of Agricultural and Resource Economics, Charles J. Zwick Center for Food and Resource Policy.
  • Handle: RePEc:zwi:fpcrep:086
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    References listed on IDEAS

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    1. Cotterill, Ronald W & Putsis, William P, Jr & Dhar, Ravi, 2000. "Assessing the Competitive Interaction between Private Labels and National Brands," The Journal of Business, University of Chicago Press, vol. 73(1), pages 109-137, January.
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    9. Green, Geoffrey M. & Park, John L., 1998. "Retail Demand For Whole Vs. Low-Fat Milk: New Perspectives On Loss Leader Pricing," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20827, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Junko Kinoshita & Nobuhiro Suzuki & Harry M. Kaiser, 2002. "Explaining pricing conduct in a product-differentiated oligopolistic market: An empirical application of a price conjectural variations model," Agribusiness, John Wiley & Sons, Ltd., vol. 18(4), pages 427-436.
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    2. Mohammad Omrani & Mohammad Nabi Shahiki Tash & Ahmad Akbari, 2017. "Price Transmission in Iranian Wholesale-retail Meat Market: Implications for Market Power," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 594-601.
    3. Elena Lopez & Rigoberto A. Lopez, 2009. "Demand for differentiated milk products: implications for price competition," Agribusiness, John Wiley & Sons, Ltd., vol. 25(4), pages 453-465.
    4. Canning, Patrick, 2011. "A Revised and Expanded Food Dollar Series: A Better Understanding of Our Food Costs," Economic Research Report 262243, United States Department of Agriculture, Economic Research Service.
    5. Foxall, Gordon R. & Yan, Ji & Oliveira-Castro, Jorge M. & Wells, Victoria K., 2013. "Brand-related and situational influences on demand elasticity," Journal of Business Research, Elsevier, vol. 66(1), pages 73-81.
    6. Cotterill, Ronald W., 2012. "The Evolution of Quantitative Food Marketing Policy: A Public Perspective," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 41(1), pages 1-11, April.

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