Retail Competition in the Milk Market in a U.S. Midwestern City

The main goal of this manuscript is to explore the retailer conduct in the milk market in a U.S. Midwestern city, based upon a structural estimation of consumer milk demand and retailer optimality conditions. To model milk demand we rely upon the Almost Ideal Demand System, while allowing the retailer optimality conditions to cover a range of competitive scenarios from perfect competition to horizontal cartel. We employ a conjectural variation approach in the spirit of Newly Empirical Industrial Organization to study the competitive environment on the retail landscape. We find that the retail market in question is far from being competitive, with the two major retailers being engaged in an oligopolistic competition. Furthermore, the private label milk seems an important tool for some big players to extract rents from their competitors. The current study offers an idea of the competitive atmosphere in the retail sector of food marketing system. While we do not target direct estimates of retailer market power, this might serve an important first step to understand the nature of competition in a given market with only aggregate purchase quantity and price data