Price Discrimination and EU Dairy Policy: An Economic Evaluation of Policy Options

In a period of market liberalization and multilateral trade negotiations, price discrimination for commodities with distinct markets provides additional policy options to support farm income. While both the USA and Canada have implemented price discrimination policies in their domestic dairy sector, so far the European Union (EU) has not. This paper evaluates the options of developing a price discrimination policy in the EU dairy sector. The analysis is based on an interregional model of the EU dairy sector, involving milk production, dairy processing, and consumption of ten dairy commodities in nine regions. The paper shows that a price discrimination policy that increases prices for commodities with more inelastic demand (fluid milk, soft dairy products) would generate income that can be redistributed to dairy farmers. The results suggest that, while such a price discrimination policy can be a WTO compatible way to support dairy farm income, the efficiency of the associated income transfers declines in the presence of significant supply response