Metin Cakir

A structural econometric model of vertical relationships is adopted to identify pricing behavior in the supply chain for fluid milk in the United States. The model consists of a system of equations that allows estimation of oligopoly power of dairy co‐operatives and downstream firms, exploiting federal milk marketing order regulations to identify co‐operatives’ marginal cost. A key finding is that co‐operatives use their market power to raise the farm price of milk by almost 9% above marginal cost, resulting in an income transfer of more than $600 million per year in markets regulated by federal milk marketing orders.

We estimate a dairy demand system to evaluate generic dairy advertising in the US, 1990–2005. Previous empirical studies of generic dairy advertising focus only on the market of the advertised good, ignoring potential spill‐over and feedback effects. We specify an LA/AIDS model of dairy demand, which allows consistent estimation of cross‐price and cross‐advertising effects across dairy product markets, and is flexible and satisfies the axioms of consumer theory. We use the non‐linear 3SLS estimator to address endogenous prices and serial correlation, and conduct bootstrapping to generate empirical distributions of elasticity estimates. Results suggest that cross‐market effects are economically and statistically important. Thus, econometric dairy demand models that ignore cross‐advertising and cross‐price effects are mis‐specified. Previous work that ignores substitution between fluid milk and cheese overstates producers' returns to generic advertising for either product.