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Abstract
We use a New Empirical Industrial Organisation (NEIO) approach to estimate industry marketing
margins for several Australian dairy products. Our model allows for differences in input- and outputmarket
conjectural elasticities under the assumption of a fixed proportions production technology. Other
assumptions on the production technology include the use of a single agricultural input to produce
multiple outputs, and substitutability between agricultural and non-agricultural inputs. Two alternative
methods are used to decompose the price of manufacturing milk into the prices of components used to
produce different manufacturing milk products. We estimate margins equations for carton milk, wholemilk
powder (WMP), butter, cheese and skim-milk powder (SMP) using state-level data. Nonlinear least
squares is used to impose a number of inequality constraints implied by economic theory. The results
suggest that, in price-deregulated markets, only three market intermediaries possess market power: carton
milk retailers possess market power in output markets; carton milk processors possess market power in
both input and output markets; and butter processors possess market power in input markets.