Demand for differentiated milk products: Implications for price competition

We apply the Berry, Levinsohn and Pakes (1995) model to scanner data from Boston supermarkets augmented with consumer characteristics data in order to analyze consumer choices and price competition in a differentiated fluid milk market. Milk characteristics include price, fat content, brand name and the organic and/or lactose-free nature of the product. Empirical results show that consumer valuation of fat decreases with income but increases with the number of children. Low-fat and specialty milks, such as organic and lactose-free milks, are preferred by high-income consumers with no children. Although all milks are price elastic at the individual brand level, the cross-price elasticities are quite low and negligible for specialty milks. Based on calculated Lerner indexes, private label milks have the highest percent markups despite their lower prices, while specialty milks have the lowest markups despite their higher prices, which attests to a greater degree of market power for conventional and particularly for private label milk.