Measuring Market Behavior in the Dairy Products Industry Using the Profit-Oriented Function

Document Type : Research Article

Author

• H. Shahbazi

Agricultural Economics Department, Sayyed Jamaleddin Asadabadi University, Asadabad, Hamedan, Iran

https://doi.org/10.22067/jead.2023.80560.1175

Abstract

Introduction
The market and the conditions governing it, especially the food industry, are always important issues for policymakers, decision makers and planners in the public and private sectors. Because market conditions are important in terms of the level of competition or monopoly on access to goods from the point of view of government decision-makers and the price from the point of view of production and private sector suppliers. In addition, both access and price factors greatly impact the amount of consumption and, consequently, the level of consumer’s welfare. Dairy products, especially milk and cheese, from the consumer's point of view, in addition to being good for health, from the point of view of agricultural producers, it is a strategic product, and from the point of view of government decision-makers, it is a factor in changing the level of social welfare. Of course, the market behavior has an important effect on the price and the motivation to produce and finally consume milk and cheese. However, factors such as encouraging consumption through public advertising can have a great effect on consumption motivation (Shahbazi, 2015). But the lack of competitive conditions in the production of products can reduce the consumption of milk and cheese and, as a result, create lost welfare for consumers and society. In other words, having a large share of the milk market by a small number of companies and production companies has made the market of dairy products a monopoly market and the existence of a monopoly in the market is considered one of the most important factors that cause lost welfare for consumers. (Gisser, 1982; Shahbazi, et al., 2009).
 
Materials and Methods
In this research, an attempt has been made to provide a structural framework for examining the performance of the dairy industry, especially milk and cheese (in terms of measuring the level of competition or monopoly). Based on the theory of NEIO, it is possible to quantify firms' market behavior in the absence of marginal cost data. The choice of demand model is of key importance in this type of analysis, since modeling a firm’s market behavior relies on correct representation of consumer preferences (Hovhannisyan & Bozic, 2013). In explaining consumer behavior, the functions selected for demand should be compatible with consumer theory, satisfy its theoretical characteristics, be easy to estimate, and have high predictive power. If, as the research shows, there is a non-linear relationship between demand and income, using a linear expenditure model will lead to an error and provide incorrect parameters. Recently, discrete choice demand models, such as the Logit specification, have increased in popularity in applied industrial organization research (Werden & Froeb, 1994). The random coefficient logit demand model is of particular interest, which allows for product differentiation and consumer heterogeneity. Finally, in this study, like some leading studies in the field of estimating the demand function of goods such as Hovhannisyan and Bozic (2013), uses an inverse demand system to create a structural framework of market behavior. In this approach, prices are endogenous. To model the inverse demand function and supply function, Leunberger's profit function approach (Luenberger, 1992) is used. Also, using the CV approach based on the study of Hovhannisyan & Bozic (2013), the amount of markup due to the existence of market power at the retail level is estimated for the years 2015-2021 in 7 selected provinces.
Results and Discussion
The choice of demand specification may significantly affect the estimation of structural coefficients. Therefore, several demand determination tests are performed using the Bewley likelihood ratio test (Bewley, 1986). The results show that there are quadratic utility effects in inverse demand functions. By using this feature, it is shown that the regional heterogeneity, i.e., , is the same as the lagged quantity, i.e., , the lagged price, i.e.,  and non-linear time effects, i.e., , are significant effects regarding the demand for milk and cheese. But seasonality, i.e., , has a negligible effect on the market for milk and cheese. The final demand relationship is estimated based on the results of the tests of various constraints on the model. The estimation of the complete model is done using the FIML method. Based on Hovhannisyan and Gould (2012), the constraint is applied. The estimation results indicate the presence of nonlinearity effects (effects) in utility function. Also, regional heterogeneity ( ), and the lagged quantity ( ), lagged price ( ) and nonlinear time effects ( ) have essential effects on milk and cheese demand. The results show that in the case of the milk industry, retailers have received the most mark up in B1 brand milk (milk produced by Iranian Dairy Industries Co.-IDIC) during the studied years. In such a way that on average they have received a markup equal to 4.8%, while this markup for milk produced by other brands is equal to 3.9%. Regarding the cheese industry, retailers receive a higher price markup for B2 cheese compared to cheese produced by competing companies of IDIC, averaging at 4.0%. However, the price markup for cheese produced by IDIC is only slightly lower, averaging at 3.9%. Also, the results show that there is a lot of regional heterogeneity among the provinces of the country (the studied provinces) in the dairy products industry that the variation in the degree of advancement of dairy industries across various provinces may be regarded as the foremost contributing factor. So that the surcharge at the retail level is different in different provinces. The price increase in B1 brand milk has changed from 3.3% in East Azarbaijan province to 7% in Razavi Khorasan province. But the retailers have received markup for milk produced by other brands, i.e. B2, from 3% in West Azarbaijan province to 6.9% in Isfahan province. In the case of cheese, the surcharge received by competing companies of IDIC has changed from 2% in Fars province to 6.5% in East Azarbaijan province. However, the retailers have received additional price from 1.5% in East Azarbaijan province to 6.7% in Fars province for the cheese produced in IDIC.
 
Conclusion
As anticipated, the market dynamics have exerted a significant influence on pricing, thereby shaping the incentives for milk and cheese production and, ultimately, consumption. The lack of competitive conditions in the production of milk and cheese (which has been mentioned in some studies such as Shahbazi et al., 2009 and Shahbazi & Faryadras, 2018 can reduce the consumption of milk and cheese and in the result of creating lost welfare for consumers and society. In other words, the possession of a large share of the milk market by a small number of companies (especially IDIC) and production companies makes the milk market a monopoly market, and the existence of a monopoly in the market is considered one of the most important factors that cause lost welfare for consumers. One of the processes that create competition is the development of the industry in terms of increasing the number of production companies by encouraging people to create dairy companies by providing incentive facilities from the government. Planning and investing in product advertising, especially in brands with a small market size, can help increase competition and transparency in the market. Acknowledging regional disparities in the branding and marketing of milk and cheese commodities is a crucial factor that demands attention. Additionally, factoring in market share dynamics and evolving consumer presumptions can provide valuable insights for making informed decisions regarding production and management strategies.

Keywords

• Conjectural variation
• Market behavior
• Markup
• Market power
• Profit function

Main Subjects

• Marketing and Trade of Agriculture Production

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