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Abstract
The European Commission has launched the so-called “milk package”
in October 2012 that allows Member States to require compulsory written contracts
between milk producers and investor-owned processors. We argue that compulsory
contracts have anticompetitive effects when they are exclusive in the sense that they
comprise the obligation to supply to the contractor only. The objective of this paper
is to set up a game theoretic model to analyze imperfect competition on the raw milk
market that may result from entry deterring effects of exclusive contracts between
dairy producers and processors. Building on the antitrust literature, the model incorporates
the specific characteristics of the milk market and considers the risk attitude
of milk producers and uncertainty of a rival dairy’s market entry. Under certain combinations
of probability of the rival’s market entry and risk aversion of the producer,
an incumbent can deter market entry by offering an exclusive contract.