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The dairy industry is one of the most important components in U.S. economy. Milk production added substantial value to the agricultural sector. In 2017, U.S. dairy farmers produced 38.1 billion dollars worth of milk. On the consumption side, Americans on average consume 244 pounds of dairy products in a year. Despite the significance of the U.S. dairy industry, several important economic issues in pricing and policy are not studied. With the improvement in data quality over the past decade, there is an emerging opportunity for empirical studies to analyze the U.S. dairy industry and provide economic insights to a more general scope. My dissertation provides empirical analysis to understand the pricing and policy issues for producers, retailers, and consumers in the U.S. dairy industry. Specifically, in the following three chapters I study the relationship between market power and farm-retail price transmission, the impact of environmental regulations on dairy farm management, and the relationship between price and perceived quality in consumer choice of cheese products. In the first chapter, I seek to understand the impact of market competitiveness on the degree of asymmetric price transmission and associated welfare implications. I estimate a kinked Almost Ideal Demand System for fluid milk products in 18 U.S. metropolitan areas. By conducting an asymmetric price transmission test, I find that cities with less competitive food retailing tend to exhibit asymmetric price transmission. The degree of price asymmetry and associated welfare loss are decreasing in the market competitiveness. The welfare analysis suggests that the welfare loss due to asymmetric price transmission is large in terms of the percentage of milk expenditures. The potential is for substantially higher future welfare loss given the ongoing consolidation in food retailing industry. In the second chapter, I quantify the impact of the Clean Water Act (CWA) on farm waste management practices of U.S. dairy concentrated animal feeding operations (CAFOs). A double-hurdle model is employed to examine how dairy farmers adjust their practices in response to the major policy revision of the CWA in 2003. Using the 2000 and 2010 Agricultural Resource Management Survey data, I find that CAFO farmers who follow the management standards of the nutrient management plan (NMP) required by the CWA are more likely to implement manure storage after the policy revision. There are, however, no significant changes in storage capacity for those who have already adopted. Furthermore, CAFOs that fail to comply with NMPs did not make significant changes in storage capacity, land application of manure, and manure removal. The results suggest a heterogenous and limited impact of the CWA on waste management practices of dairy CAFOs. In the third chapter, I examine how prices affect consumers' perception of quality and consequently their product choices using individual consumers' purchase records in the U.S. cheese market. I hypothesize that price affects product choices by two channels: (i) a "pure price" effect directly affecting the purchase cost, and (ii) a "perceived quality" effect affecting the perceived product quality. In the empirical analysis, I complement the traditional mixed logit model with the conditions of purchasing behavior and utilize the Nielsen consumer panel and retail scanner data of the U.S. cheese markets from 2012 to 2014. The results suggest a strong perceived quality effect. With a 10% increase in the price of a cheese product, the corresponding choice probability would on average decrease by 5.4%, which consists of a 13.0% decrease due to higher purchase cost and a 7.6% increase driven by higher perceived quality. For approximately 10% of the cheese products, the ratios of the perceived quality elasticity to the total price elasticity are greater than 3.69; on the lower end, the ratios are lower than 0.24 for another 10% of the products. Such a large value is indicative of a large heterogeneity of the price impact on perceived quality across products. In addition, the impact of price on perceived varies across different types of households. Finally, I find that the perceived quality effect decreases with repeat purchases. These findings have significant implications for retailers' marketing strategy, government policy, and analysis of product competition.
This dissertation constitutes two essays discussing the market power and price strategy in the dairy industry, which historically played an important role in the U.S. agriculture sector. The first essay focuses on a merger case in the dairy industry. On April 1, 2009, Foremost Farms USA (referred to as Foremost Farms), a Wisconsin-based dairy producers' cooperative, sold its consumer products division, which included two dairy processing plants, to Dean Foods, and these plants produced distinct brands of milk. The United States Department of Justice (DOJ) expressed concern that this acquisition would have substantial anticompetitive effects in certain markets. Consistent with this view, in July 2011, the DOJ issued a final order requesting that Dean Foods divest one of the newly acquired plants. This essay empirically examines whether DOJ's concern, as well as its policy action, are supported by the data. The results suggest that, except for two package sizes of milk, Dean Foods jointly priced the newly acquired brands of milk along with its pre-existing milk brands, and such cooperative price-setting behavior is consistent with an anticompetitive effect. However, the magnitudes of the percentage increases in price-cost markups due to joint pricing are sufficiently small, suggesting that anticompetitive effects should not be of concern. In case of the divestiture period, we find that a subset of the products from the divested brand went back to being priced separately from Dean Food's milk products as required by DOJ's order. However, the magnitudes of the percentage decreases in price-cost markups are sufficiently small, suggesting that divestiture effects are negligible. Consumers' perception of the marginal quality difference between organic and conventional products allow firms to charge a price premium associated with the perceived quality difference, the organic price premium. The organic price premium is effectively consumers' willingness to pay (WTP) for the organic attribute. The second essay addresses the question of how the quantity of media coverage on organic dairy issues impacts the organic price premium for milk. We first use a theoretical model to illustrate how media information may influence the organic price premium. Our subsequent empirical analysis suggests, on average, consumers are willing to pay $1.19/gallon more for the organic attribute of milk, which corresponds to 19.07% of the mean price per gallon of organic milk. Second, we find evidence that the quantity of newspaper coverage on organic dairy issues significantly increases WTP for the organic feature of milk, but this impact follows an inverted-U curve with a diminishing marginal effect. Interestingly, TV and Radio news coverage of similar issues are not found to have a significant effect on WTP, which may be partly driven by survey evidence suggesting that consumers' main reason for listening to radio or watching TV is to be entertained rather than to be informed.