Effectiveness with an Imperfect Competition Model

Although raw milk is essentially a homoge-neous input in the production of fluid milk and manufactured dairy products, in many countries the price received for fluid milk usage is higher than the price received for manufactured prod-uct usage. Such differences indicate that prices are not competitively determined. This cer-tainly is the case in the United States, where federal and state milk marketing order pro-grams establish minimum Class I price differentials (premiums) for most milk mar-keted. There are also over-order fluid premium payments resulting from negotiations between cooperatives and fluid processors. Changes in milk advertising expenditures should produce changes in milk prices as well as in milk demand. Thus, an advertising program's effectiveness should account for changes in both price and quantity; each should be treated as endogenous. Most studies of U.S. dairy markets either assume an exogenous flui