Duopoly Competition in Supermarket Industry: The Case of Seattle-Tacoma Milk Market

The Seattle-Tacoma consumers have been paying higher prices for fresh milk than consumers in other Western states of United States. For instance, the retail price for whole milk averaged $3.27/gallon during the period of April 1999- April 2003 in Seattle-Tacoma, while it did not go beyond $2.86/gallon in most of the large metropolitan areas in Western U.S, during the same period (Carman and Sexton, 2006). In addition, retail prices in Seattle-Tacoma do not respond similarly to farm price increases and decreases. Supermarkets are prompt to pass on to consumers any increase in farm price, while they do not pass or lag behind when farm price decreases. The present study attempts to analyze the pricing conduct of supermarket chains in a duopoly setting using a structural model of consumers and firms behavior. In this paper, we examine the pricing conduct of two supermarket chains using retail supermarket-level data on sales and prices from Seattle-Tacoma market area