Strategic pricing in a differentiated product oligopoly model: fluid milk in Boston |
| |
Authors: | Basak Canan Ronald W Cotterill |
| |
Institution: | University of Uludag, Faculty of Agriculture, Agricultural Economics, 16384 Gorukle-Bursa, Turkey;University of Connecticut, Food Marketing Policy Center, Agricultural and Resource Economics, 1376 Storrs Road, Unit 4021, Storrs, CT 06269-4021, USA |
| |
Abstract: | In an imperfectly competitive industry, differentiated products compete with each other with price rather than quantity as the strategic variable. Several previous studies have employed a generalized Nash–Bertrand model: Liang (1989) , Cotterill (1994) , Cotterill et al. (2000) , and Kinoshita et al. (2002) ; however, only Liang has explored the theoretical foundations of that model. This article generalizes the Liang two‐good model to three goods. A surprising and important result follows. Price‐conjectural variations do not exist in models with three or more goods. Price‐reaction functions, however, exist in multiple‐good models. We estimate them jointly with a brand‐level demand system to evaluate the total impact of a brand manager's price change on own quantity. In a differentiated product market, this is a useful addition to a partial demand elasticity approach, because a change in one brand's price typically engenders a price reaction by other brands that affects own quantity via substantial cross‐price elasticities among substitutes. Strategic pricing in the Boston fluid milk market was also influenced by the existence of a raw milk price support program, the Northeast Dairy Compact. We find that the advent of the Compact was a focal point event that crystallized a shift away from Nash–Bertrand to more cooperative pricing. If the downstream market is not competitive, one needs to consider strategic price reactions when designing and evaluating agricultural price programs. |
| |
Keywords: | C30 D21 D43 L13 L66 Q13 |
|
|