Vardges Hovhannisyan
Kyle W. Stiegert

The objective of the research in this study is to evaluate the pricing and market conduct of milk manufacturers and retailers. Using data from a U.S. Midwestern state, we estimate a random coefficient logit demand model (RCL) to empirically investigate a range of possible scenarios in the milk supply chain. These include vertical leader-follower model with underlying Bertrand-Nash pricing, models allowing for nonlinear pricing contracts, and collusion scenarios at various levels in the supply chain.
This study contributes to the literature in the following ways. First, it generalizes the RCL demand model via Box-Cox power transformation. While previous studies rely on ad hoc specified linear indirect utility, this procedure allows data to determine the functional form of utility. Power transformation parameters cannot be obtained analytically with product-level data, given that consumer choices are unobserved. We propose an algorithm to estimate the transformation and consumer heterogeneous taste parameters sequentially. The model is identified using annual variation in consumer demographics along with cross-sectional and time series variation in milk consumption. Finally, the milk choice set is allowed to vary across markets. It should be mentioned that jointly estimating the manufacturing sector, the vertical channel, and the retail sector will more likely yield reliable estimates of structural parameters vis-à-vis studies investigating food supply chain sectors in isolation.
Several key results are obtained from the research. First, the estimate of demand “superelasticity”suggests that retailers have incentives to adjust retail markups to enhance their market power. Next, supply selection bias associated with imposing restriction on the demand-side framework is shown to have formidable policy implications. Namely, empirical results from the general demand show that retailers are more powerful than they would appear otherwise. In the face of high concentration and a small presence of Wall-Mart in these markets this seems a plausible scenario.

Vardges Hovhannisyan
Brian W. Gould

The objective of our research is to investigate retailer market conduct in the sale of beverage milk using a structural model of consumer behavior and retailer profit maximization conditions that embrace a range of competitive scenarios. The study is based on an aggregate level analysis of retailer behavior with milk quantity sales used as its strategic variable.
We contribute to the literature by employing the Generalized Quadratic Almost Ideal Demand System (GQAIDS) to model demand for fluid milk. We derive the retailer optimality conditions that incorporate the slopes of inverse GQAIDS demand curves for the products under study. Our use of the GQAIDS specification is important given the fuller representation of consumer preferences by the GQAIDS demand as opposed the Linear Approximate Almost Ideal Demand Systems used in the literature. We apply our generalized structural model to study the retailer behavior in marketing national brand (NB) and private label (PL) milk.
The market in question is rather concentrated at the downstream level; however we find that the retailer behavior is not inconsistent with perfect competition. In addition, our results support the conjecture that retailers mainly use the national brand milk to assure some store traffic while utilizing private label brands for rent extraction.

Vardges Hovhannisyan
Kyle W. Stiegert

This manuscript studies the market conduct of the milk manufacturers and retail chains in a Midwestern state in the U.S. Following the menu approach we employ a random coefficient logit demand model to investigate several possible scenarios on the supply side. Demand estimates are obtained using both cross-sectional and time series variation in data. We also allow annual variation in consumer demographics which helps identify the coefficients of interaction between consumer demographics and product characteristics. To further enhance identification power we allow choice set of milk to vary across markets.
The results are most supportive of the conjecture that manufacturers behave competitively letting the retailers be the residual claimants. Later they may collect a part or full rents from the retailers through two-part tariffs.

Vardges Hovhannisyan
Brian W. Gould

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.

Vardges Hovhannisyan
Brian W. Gould

This article examines food demand structure and its dynamics for 11 commodities in urban China. The analysis is based on household-level
expenditure survey data for two cross-sectional surveys of Chinese households pertaining to food expenditure patterns during 1995 and 2003.
Pre-committed components of commodity demands, that are insensitive to economic variables, are explored.
We use the generalized quadratic almost ideal demand system (GQAIDS) for its empirical superiority to the generalized almost ideal demand
system (GAIDS), and estimate the associated parameters via full information maximum likelihood procedure (FIML) accounting for endogeneity
of total expenditures on food for home consumption (FAH). We also use quality-adjusted commodity unit values to control for quality differences
resulting from commodity aggregation and food choice. Furthermore, we derive GQAIDS elasticity formulas, and estimate income elasticities
without restrictions.
The results partially support the hypothesis that an average Chinese household has incorporated elements of Western diet (fine grains) into
traditional Chinese food diet over time. Moreover, the outcome of a simple test developed here points to possible preference changes for a majority
of food staples under study.

Vardges Hovhannisyan
Vasa Laszlo

Armenian milk marketing cooperatives provide several benefits, of which the
increased opportunity for milk marketing is valued most by member farmers.
During the cooperative action milk production has also increased due to seminars
on cattle feeding, artificial insemination, sanitation programs, and support
by cooperatives in feed procurement. Another benefit is that through pooling
products of specified grade or quality, marketing cooperatives are better able to
market milk to large-scale buyers than individual owners. Putting their efforts
together cooperatives can move to distant markets and thus expand their sales
opportunities. This is of paramount importance for those cooperatives that have
a sole buyer. In addition to milk marketing, almost all of the cooperatives expressed
desire to integrate themselves vertically in milk processing with the aim
of capturing greater share of the consumers’ food expenditures. It’s worth mentioning
that all managers stated the importance of seminars and educational
tools to the success of their organizations. However, in their self-assessment
lower ratings were noted in the areas of financial management, financial statement
analysis, strategic planning, and higher scores were stated for business decision-
making and cooperative principles. Our findings indicate that an opportunity
exists to reinforce managers’ knowledge in the areas of cooperative principles,
division of responsibility between managers and the Board, and financial
management. The results of the research come to advocate for continuing cooperative
business and extending their activities over other aspects of the agricultural
sphere (technical service, agricultural production, etc.), thus enabling
farmers to further integrate themselves in food marketing system and improve
their incomes.