Retail prices of milk in Kentucky and Tennessee are compared following the abolishment of Kentucky's Milk Marketing Law. Data and comparisons are also presented from the six adjacent states having no milk marketing law.Demand and Price Analysis,

Edwards, W.F.

Thompson, James F.

English

Research Papers in Economics

SOUTHERN JOURNAL  OF AGRICULTURAL  ECONOMICS  DECEMBER, 1989
THE RETAIL PRICE EFFECT OF THE KENTUCKY AND
TENNESSEE MILK MARKETING LAWS
W.F. Edwards and James F. Thompson
Abstract  tion depend largely upon the type of regulation
Retail prices of milk in Kentucky and Tennes-  imposed.
see are compared following the abolishment of  The  Kentucky  Milk  Marketing  Law  could
Kentucky's  Milk  Marketing  Law.  Data  and  best  be  described  as  legislation  designed  to
comparisons  are  also  presented  from the  six  regulate  trade  practices,  including a prohibi-
adjacent states having no milk marketing law.  tion of sales at prices below cost.  In 1981, the
authors were commissioned by the Kentucky
Keywords: milk,  prices,  retail  competition,  Department  of Agriculture  to  estimate  the
regulation.  impact of the Kentucky Law on the retail price
rThe abolishment of the Kentucky State Mik  of milk in Kentucky (Thompson and Edwards,
he abolishment of the Kentucky State Molk  1981).  A three-pronged  approach to the ques-
Marketing Lawin 1983/84 provided an opportu-  tion was used.  First, we  simply analyzed the
nity for the  authors  to test their  conclusions  law  as well as the composition of the commis-
from an earlier study concerning the effect of  si  charged  with enforcing the law,  to infer,
the State Milk Marketing  Law on retail prices  through common sense, whether or not prices
of milk. Results of both studies, as well as new  would  tend to  be  elevated  through  reduced
research questions raised in the second study,  competitionorthroughretailer-inhibitingregu
are summarized here.  lations.  Our conclusion from this analysis was
that the law would certainly inhibit a retailer's
THE INITIAL STUDY  pricing freedom and would likely reduce price
The market for milk and milk products in the  competition  in  the  market  as  well.  Further-
United States has a long history of federal and  more, the commission was composed mainly of
state  intervention.  Federal  intervention  has,  people having an economic  stake in the dairy
for the most part, influenced the farm price of  industry. There were no members of the com-
milk,  while state  intervention  has tended  to  mission whose backgrounds would lead them to
focus on the retail price  of milk. At the state  be concerned first and foremost with the inter-
level, the range of control measures has been  ests  of consumers  (Thompson  and  Edwards,
quite wide, encompassing, among other things,  1985).
(1)  prohibition of sales below cost, (2) specifica-  Second, a random sample of 87 store manag-
tion of minimum mark-ups,  (3) outright dicta-  ers was surveyed to either support or refute the
tion of prices, and (4) prohibition of predatory  working hypothesis that the law would tend to
practices.  A number  of studies have tried  to  inhibit retailers' pricing freedom. It was obvi-
assess the impact of state milk-marketing laws  ously the perception  of a large  proportion  of
on the retail price of milk (Bartlett; Masson and  retailers  that  the  Milk  Marketing  and  Anti-
DeBrock; Shaw et al.; Knutson). Results of the  monopoly Commission did, in practice, have the
studies have been varied, as one would expect,  power to set or strongly influence retail prices
but  the preponderance  of evidence  seems  to  of milk. Retailers also indicated that their free-
suggest that the state laws do indeed have the  dom  to make  and change prices for milk was
result of elevating retail prices above competi-  highly restricted by the commission. (The ques-
tive levels. Estimated magnitudes of the eleva-  tionnaire  and  summary  of responses  are re-
W.F. Edwards  is  a Professor,  Department  of Agricultural  Economics,  Texas  A&M University;  and James F.  Thompson is a
Professor, Department  of Economics  and Finance, Murray State University.
Copyright  1989, Southern Agricultural Economics Association.
211ported in Thompson and Edwards,  1981.)  TABLE  1. ADJUSTMENT  MULTIPLIERS  FOR
Third, a random sample was taken of retail  THE  PRICE DATA
milk prices from 144 grocery stores in Kentucky
and  five  adjacent  states-Tennessee,  West
Virginia, Ohio, Indiana, and Illinois. Kentucky  1982  Adjustment
and  Tennessee  had  virtually  identical  milkcwt  tiplier
marketing laws, while the other states had none  Kentucky  13.80  .996
(details ofthe sample construction are presented  Tennessee  13.90  .989
in Thompson and Edwards, 1981). Six products  NON-LAW STATES  (AVE)  13.70  1.004
were sampled:  SIX-STATE  AVERAGE  13.75
P1= price of whole milk in gallons,  Six-state  Average
P2 = price of two-percent milk in gallons,
P2 = price of tsi  or lowfat milk  in  gallons,  aSource: U.S.  Department  of Agriculture,  Statistical Reporting Serv-
P 3 = price of simor  low-atmilk in gallons,  ice, Crop Reporting Board. Prices  ReceivedbyFarmers:Livestock,
P4 = price of whole milk in half-gallons,  Dairy, and  Poultry, by State and United  States, 1978-82. Statistical
P5 = price  of two-percent  milk in half-gallons,  Bulletin No.  727.
and
P6= price of skim or low-fat milk in half-gallons.  one part due to the existence  of the state milk
The question then arose  as to whether any  marketing law and the other part due to those
observed  differences  in retail prices between  factors  mentioned above, which impinge upon
the law and non-law states could be wholly or  the farm price of milk. The multiplier then re-
partially explained by differences in farm-level  moves the effect  of the  second part from the
prices. The farm-level price is influenced by a  retail prices.
range of factors including transportation costs  After  determining  that the  adjusted retail
from  the  Minnesota-Wisconsin  market  area,  prices in Kentucky were not statistically differ-
production  cost  differentials,  over-order  pre-  ent from those  Tennessee, we regressed the
miums negotiated  by the  dairy cooperatives,  adjusted retail prices for the six milk products
and the utilization rate of Class I milk. A num-  n a dummy viable for law and dummy vari-
ber  of studies have  addressed  the  effects  of  ables for store type.  Results ofthe regressions
these  factors  upon  raw milk  prices  (Federal  for  the sx milk categories  surveyd  are pre-
Milk Marketing  Orders  and Price  Results;  Hall-  sented in Table 2. Our empirical evidence sug-
bert and King; Babb et al.),  and the empirical  gested that the retail price of milk was elevated
results vary considerably.  due to the state milk marketing law by $.16 to
Without  trying  to isolate  these  individual  $.21  for gallon containers and  $.06  to $.09  for
factors and estimate their magnitudes, we fol-  half-gallon  containers.  Coefficients  on  the
lowed  a  conservative  approach  and adjusted  dummy variable for law were all highly signifi-
the  sampled  retail  prices  for the  difference  cant,althoughcoefficientsofdeterminationwere
between the average prices received by farmers  not  impressively  high.  These results  suggest
in the two law states, Kentucky and Tennessee,  that  the  state  milk  marketing  laws  elevated
versus the six-state average.  This resulted in a  milk prices by some 5 to 11  percent.
small decrease  in the prices  of Kentucky and
Tennessee. We also adjusted the sampled retail  THE SECOND  STUDY
prices in the four non-law states, West Virginia,  In 1983,  circumstances fortuitously  permit-
Illinois, Indiana, and Ohio, in the same way, and  ted an assessment of the accuracy ofthe conclu-
this resulted in a small increase in the prices in  sions  of the  first  study.  The  Kentucky  Milk
the non-law states. Table 1 shows the average  Marketing  Law  became  inoperative  when  it
farm price  of milk in dollars  per cwt and the  was invalidated by the Franklin Circuit Court.
adjustment  multipliers  used.  The  Kentucky  Tennessee'slaw, on the other hand, remainedin
multiplier, for example, was calculated as 13.75/  effect, and the four non-law states remained as
13.80=.996  and was then multiplied  by every  they were.  In order to take advantage  of this
Kentucky retail price. Tennessee and the non-  opportunity, we conducted another price sur-
law states were handled  in a similar fashion.  vey, and in order to minimize managerial differ-
This  approach  in  effect  assumes  that  the  ences and other variations across stores, we re-
difference in retail prices between the law and  visited, to the extent possible,  the very same
non-law states can be broken into two parts-  stores that had been surveyed in 1981. Of the
1Store types included were (1) national/regional chains, (2) local chain supermarkets,  (3)  independent non-chain supermarkets, (4)
chain convenience  stores,  and (5) independent convenience  stores (typically  "mom-and-pop operations").
212TABLE  2.  REGRESSION  RESULTS  FOR 1981  DATAa
Coefficient  t  Adjusted
Dependent  Variable  of D  Statistic  n  R 2
P 1= Price, whole milk, gallons  .1667  5.37  144  .2772
P 2= Price, 2% milk, gallons  .1649  4.77  137  .2468
P 3= Price, low-fat milk, gallons  .2114  5.29  95  .3101
P 4= Price, whole milk, half-gallons  .0646  3.42  139  .2646
P 5= Price, 2%  milk, half-gallons  .0722  2.85  126  .2318
P 6= Price,  low-fat milk, half-gallons  .0857  3.62  105  .2980
aFunctional  Form: P,  = a +  D + j Sj  j =  1, .. ,  4, where  D =  1 for law state,  0 otherwise; and S  = dummy variables to control for store
type.
TABLE 3.  SUMMARY  OF MILK PRICE  SAMPLE  DATA
1981  SAMPLE  1986 SAMPLE  % CHANGE
Variable  MEAN  S.D.  n  MEAN  S.D.  n  IN MEANS
P 1 2.2120  .2122  144  2.1023  .2850  163  -4.959
ALL STATES  P 2 2.0712  .2260  137  1.9372  .3093  155  -6.470
(KY, TN,  IL  P 3 1.9360  .2259  95  1.7481  .3101  108  -9.706
IN, WV, OH)  P 4 1.2563  .1249  139  1.3145  .1589  158  4.633
P 5 1.2377  .1574  126  1.2536  .1616  151  1.285
P 6 1.2154  .1376  105  1.2395  .1850  111  1.983
P 1 2.2663  .1841  67  2.0915  .2922  89  -7.713
KENTUCKY  ONLY  P 2 2.1095  .2002  66  1.9146  .2870  83  -9.239
P 3 1.9967  .1767  45  1.7908  .2917  61  -10.312
P 4 1.2922  .0948  63  1.3439  .1578  85  4.001
P 5 1.2751  .1324  57  1.2915  .1465  82  1.286
P 6 1.2580  .1322  49  1.2914  .1923  59  2.655
P 1 2.2956  .1947  27  2.3488  .1702  26  2.317
TENNESSEE  ONLY  P 2 2.2083  .1840  23  2.2550  .1939  26  2.115
P 3 2.0665  .2025  17  1.9057  .2452  14  -7.781
P 4 1.2685  .1317  27  1.3512  .1224  26  6.520
P 5 1.2418  .1859  22  1.2873  .1513  22  3.644
P,  1.2274  .1456  19  1.2500  .1257  14  1.841
P 1 2.0942  .2089  50  1.9890  .2403  48  -5.023
OTHER STATES  P 2 1.9529  .2258  48  1.7985  .2782  46  -7.906
(IL, IN,  WV,  OH)  P 3 1.7861  .2214  33  1.6021  .3183  33  -10.302
P 4 1.2035  .1386  49  1.2411  .1570  47  3.124
P 5 1.1904  .1618  47  1.1719  .1643  47  -1.554
P 6 1.1530  .1192  37  1.1550  .1628  38  .173
original 144 stores in the 1981 sample, 84 were  ions  in the  non-law  states  appeared  to  drift
included in the 1986 sample, and 79 new stores  downward between  1981  and  1986 by 5 to 10
were added for a total of 163 stores in the 1986  percent  in  nominal  terms.  Gallon  prices  in
sample.  Summary  statistics  from  the  two  Kentucky, the state that converted from law to
samples are presented in Table 3 (these are raw  non-law status, fell most dramatically of all the
data without adjustments).  states between 1981 and 1986, falling by 7 to 10
With respect to gallon prices, the data gener-  percent  and  converging  somewhat  upon  the
ally  support  conclusions  that  would  be  pre-  gallon prices of other non-law  states, a result
dicted by economic theory. Milk prices for gal-  that would be  expected  if the  Kentucky Milk
213Marketing Law had artificially supported prices  our earlier findings, but we apparently under-
in 1981.  Tennessee,  on the other hand, had a  estimated the magnitude  of the impact of the
much different price pattern between the two  state milk marketing  laws  in elevating  retail
years. Two of the three  gallon prices actually  prices. In the second regression, the estimates
rose, in contrast to the other states, while the  for price elevation ranged from $.21, or 12 per-
third gallon price, P3 , did not fall as much as in  cent, for low-fat milk to $.38, or 20 percent, for
other states. These results support the hypothe-  two-percent milk in gallons, and all coefficients
sis that the milk marketing  laws in Kentucky  were statistically  significant.
and Tennessee did, in fact, elevate prices above  But the results for milk sold in half-gallons
levels that would exist without the law.  are inconclusive, as also suggested in Table 3.
The data for half-gallons seem to suggest that  What then explains the lack of a price response
the  Milk  Marketing  Laws  of Kentucky  and  in  half-gallons  to  the  abolishment  of  the
Tennessee may not have been very effective in  Kentucky Milk Marketing Law? It would seem
raising  retail  prices.  Half-gallon  prices  in  that one of the following  might be plausible:
Kentucky  actually  rose by 1 to 4 percent  be-
tween 1981 and  1986 while those of Tennessee  1. the milk  marketing  laws  in  Kentucky  and
rose by about 2 to 6.5 percent. In the absence of  Tennessee  had little  effect  on the price  of
artificial  price  elevation  due  to  the  milk  milk in half-gallons;
marketing  laws,  the  differences  in  price  2.  sufficient time had not elapsed before taking
movements  between  gallons  and half-gallons  the second sample to allow the prices of milk
would presumably be explained by differences  in half-gallons to react to the abolishment of
in demand and supply elasticities, but we had no  the Kentucky Law; and/or
quantity data broken down by container size to  3.  the interplay of demand and price elasticities
support an estimate of such elasticities.  for half-gallons  was  such that the  equilib-
Since the data of Table 3 do not control  for  rium price did not change very much.
differences in store type nor do they screen out  Without further research and the availability
differences  in  farm-level  prices,  we  ran  the  of quantity data on sales of milk by container
same regression on the 1986 sample that we ran  size, it is impossible to isolate the explanation
on  the  1981  sample  except  that  this  time  for the half-gallon results.
Kentucky was considered to be a non-law state,  In  summary,  we  believe  that  our  original
leaving Tennessee  as the only  law state.  We  study (Thompson and Edwards, 1981) underes-
also  adjusted  the  1986  data  with  the  same  timated the impact of the Kentucky Milk Mar-
multipliers we used earlier. Unfortunately, we  keting  Law  in elevating  the  price  of milk in
did not have 1986 average farm price data from  gallons and that this impact was on the order of
which to develop newmultipliers, but it is doubt-  12 percent to 20 percent. The latest study is in-
ful  that  the  multipliers  would  have  changed  conclusive with respect to half-gallons. Since it
much  anyway.  Results  of this regression  are  seems  safe to assume that by far the greatest
presented in Table 4.  quantity  of milk  moves  through  the  gallon
COMPATRISON  OFr  TH  TWO  market, it follows that milk prices in general do
CREUPARITS  N  CONCLUSIONS  tend to be elevated by the kind of milk market-
RESULTS  AND  CONCLUIONS  ing laws in effect in Tennessee and formerly in
Statistical results for milk sold in gallon con-  Kentucky. But are milk producers better off in
tainers seem to be consistent in direction with  the  longer  run as  a  result of the  state  milk
TABLE 4.  REGRESSION  RESULTS  FOR  1986 DATAa
Coefficient  t  Adjusted
Dependent  Variable  of D  Statistic  n  R2
P 1= Price, whole  milk, gallons  .2762  5.02  163  .1719
P 2= Price, 2%  milk, gallons  .3750  6.46  155  .2261
P 3= Price, low-fat milk, gallons  .2062  2.45  108  .1128
P 4= Price, whole milk, half-gallons  .0262  .81  158  .0952
P 5= Price, 2% milk, half-gallons  .0285  .81  151  .0977
P 6= Price, low-fat milk, half-gallons  .0152  .29  111  -.0023
aFunctional  Form: P = (x  +  PD +  tj Sjj = 1,  ..., 4,  where D  = 1  for law state, 0  otherwise; and Sj =  dummy variables to control for store type.
214marketing laws? This seems rather doubtful, as  rect and if our conclusion is correct, then the
stated by Masson and Debrock:  long-run  gainers  from  state  milk  marketing
... At the onset of regulation all firms benefit.  laws  such  as  those  we've  discussed  are  the
Over time, entry and non-price  competition  factor owners who enjoy the enhanced capital
drive profits back to [normal levels]. The next  values and the regulators who draw their in-
result is an enhanced capital value based on  come from administering  the regulation.  The
increased  transitory  returns  to  the  initial  long-run losers are consumers. Milk producers,
market participants.  However, regulation is  while enjoying a temporary benefit at the out-
retained to avoid the symmetric capital losses  set  of regulation,  nevertheless  are  left  in  a
that would  occur if markets  were deregu-  neutral position in the long run. And all taxpay-
lated. Thus, the  social  costs  continue while  ers are long-run losers because of the increased
there is no current gain to the firms (p. 261).  regulatory costs.
If the Masson and Debrock conclusion is cor-
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Pricing of Milk and Dairy Products.&quot;

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The Structural Effects of State Regulation of Retail Fluid Milk Prices.&quot;

THE RETAIL PRICE EFFECT OF THE KENTUCKY AND TENNESSEE MILK MARKETING LAWS

THE RETAIL PRICE EFFECT OF THE KENTUCKY AND TENNESSEE MILK MARKETING LAWS

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