Three Essays on the Welfare Effects of Organic Milk Introduction

This study investigates the impact of organic milk introduction on consumer benefits employing two different demand approaches; multistage demand system approach and discrete choice approach. These two approaches with A.C. Nielsen Homescan data allow analyzing the dairy market at the various levels of the economy.;In the first essay, the aggregate demands for milk products at both brand level and commodity group level are analyzed adopting the multistage demand system approach. Expenditure functions are derived from the estimated demand equations to quantify the welfare changes. The welfare effect is decomposed into the variety effect and the price effect, where the former is the willingness-to-pay changes for having more options to choose and the latter is the amount of price changes in existing products due to enhanced competition. Unlike the previous demand studies on milk market, the elasticity results indicate that there is no evidence of substitutability between organic and conventional milk products when milk is categorized by both fat contents and organic claims. Rather, this study shows that milk products with similar fat content are substitutable to each other. The estimated variety effects indicate that consumers benefit significantly from the organic option as much as 8% of milk expenditure. The price effects show some evidence of cannibalization in this market over the period of analysis.;In the second essay, the same economic questions are answered in the discrete choice approach. Employing a mixed logit model and individual household level data, this essay considers not only the observed characteristics of product and household but also unobserved characteristics and tastes in the analysis. The variety effect is estimated for each individual household and, as a result, the entire distribution of the variety effects that can answer the question of which type of households benefit the most from the introduction of organic milk is presented. Both utility parameter estimates and the distribution of variety effects indicate that households with younger head, higher income and higher education benefit more from organic milk introduction than ones with older head and lower income and education.;The third essay extends the second essay with supply side study to analyze the price effect in a partial equilibrium framework. Counterfactual prices in the absence of organic milk are predicted by solving the first order conditions of firms. profit maximization under the assumption of Bertrand-Nash competition. The mean values of counterfactual prices based on the mixed logit analysis imply that firms decreased the prices of existing prices due to the enhanced competition in the market.