Shinn-Shyr Wang, associate researcher with FSRG, received the American Agricultural Economics Association's Outstanding Doctoral Dissertation Award in June 2005, for his dissertation, "Strategic Behavior under Asset Value Maximization: An Empirical Assessment of the U.S. Retail Margarine and Butter Markets."

The award is given in "recognition of development of professional excellence by persons writing doctoral theses in agricultural, natural resource, or rural economics." The abstract follows. To learn more about the research,
contact Shinn-Shyr at <swang17@wisc.edu>.

Strategic Pricing Behavior under Asset Value Maximization:
An Empirical Assessment of the U.S. Retail Margarine and Butter Markets

by Shinn-Shyr Wang

Abstract: The purpose of the research in this dissertation is to develop a comprehensive theoretical and empirical assessment of firm strategic behavior under financial market uncertainty. A general theoretical model of market value maximization (MVM) was constructed using a traditional capital asset pricing format. The firm chooses pricing and advertising strategies in a differentiated retail product market. Testable hypotheses generated from the theoretical structure were evaluated for models of the U.S. margarine and butter using 4-week interval scanner data from 1998 to 2002.

The model of profit maximization was rejected in favor of the MVM structure, and we concluded that financial market uncertainty plays an important role in the pricing behavior of firms in this industry. The theoretical predictions suggest that MVM firms are likely to spend more attention to product differentiation than strict profit maximizers, which can lead to less elastic brand level demand, greater barriers to entry, and higher Lerner indexes. The result also suggests that models of pure profit maximization may be largely misspecified.

The Vuong and Wald tests suggest the best fitted market structure is the conjectural variations model in which each brand operates non-collusively in prices and the leading brands collude in advertising. We estimate the price and advertising elasticities of demand and investigate the degree of market power in this industry. The collusive advertising outcome is striking, yet consistent with recent theoretical research on dynamic games. It appears the firms in this market, through their long-term relationships, market presence, and dominant brands have found a way to avoid cannibalizing each other's sales through overly aggressive advertising. We also compared the results of our best fitted model to that of a commonly presumed market structure: Bertrand pricing and advertising. The results indicated fairly large differences in measured outcomes of elasticities and Lerner indexes of market power. This underscores the importance of getting the market structure correct before proceeding with subsequent empirical analysis.