Strategic pricing in a differentiated product oligopoly model: fluid milk in Boston

Basak Canan and Ronald Cotterill ()

Agricultural Economics, 2006, vol. 35, issue 1, 27-33

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.

Date: 2006
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https://doi.org/10.1111/j.1574-0862.2006.00136.x

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Working Paper: Strategic Pricing in a Differentiated Product Oligopoly Model: Fluid Milk in Boston (2005)
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