Market power and policy in the United States dairy industry

This dissertation provides economic analyses of the interaction between market power and government policy in the U.S. dairy industry. In the first essay, I investigate revealed political market power reflected in the pattern of price discrimination by end-use that is the hallmark of milk marketing orders. This essay shows that the pattern of prices that would maximize producer profits, if producers operated a cartel with monopoly power, is far above actual government-set price differentials between milk used for fluid products and milk used for manufactured products. The pattern of actual price differentials is consistent with political welfare weights for producers that are small relative to the weights that would yield maximum producer profits. These results suggest that while milk producers have more political power than do raw milk buyers, their political power is small relative to full monopoly power in setting prices.; The second essay tests for existence of bilateral market power between raw milk buyers and sellers by investigating reactions of market participants to the price regulations of milk marketing orders. I specify a fixed-effects fluid milk pricing equation that allows a test for oligopsony power of milk bottlers given the oligopoly power of dairy cooperatives. The test results, based on monthly data for 10 years across 30 cities, indicate actual prices respond to minimum prices and therefore milk bottlers and dairy cooperatives both have market power. This implies that minimum price policy has contributed to raise producer profits by raising the bargained prices.; In third essay, building on the developments in essay 2, I develop a practical indicator of relative bargaining power. I define the relative bargaining power of buyers as the ratio of the difference between the actual bargained price and minimum price to the difference between the upper bound for price bargaining and minimum price. The estimation results, based on a reduced form of the pricing, indicate that the relative bargaining power of dairy cooperatives in regional raw milk markets is significant, but small compared to the bargaining power of milk bottlers.