Milk Supply Control, Market Power, and Retail Pricing in the U.S. Fluid Milk Markets

Abstract

This research analyzes the U.S. fluid milk industry dynamics in light of a herd retirement (HR) program implemented by the Cooperatives Working Together (CWT) in the period of 2003 to 2010, which led to an antitrust lawsuit filed by buyers of fluid milk and other fresh milk products at the retail level against CWT dairy cooperatives and a large settlement. Presuming that they had a Capper-Volstead Act immunity, CWT cooperatives acted in a cartel-like manner to decrease milk supply to increase and stabilize milk prices received by dairy farmers. The HR program may have modestly increased seller market power of dairy farmers reflected in the increased farm sector shares in the retail fluid whole milk prices in the majority of the analyzed cities in the HR period. In contrast, seller market power of fluid milk retailers decreased in these cities, as reflected in the increased cost pass-throughs, decreased fixed absolute markups, and decreased farm-to-retail margins. The cost of milk used in fluid milk manufacturing increased at a higher rate than retail fluid whole milk prices in these cities and fluid milk retailers were able to pass only a portion of the farm milk price increase on their buyers. Nevertheless, in the HR period, buyers of fluid whole milk at the retail level paid higher prices in all analyzed cities, except for Cincinnati and Seattle.