Estimating Market Power in Iranian Dairy Processing Industry with Dynamic Imperfect Competition Model

The purpose of this study was to investigate dairy processors market power in Iran. For this purpose, the dynamic imperfect competition model, in which processors are allowed to exert market power in both downstream (selling dairy products) and upstream (buying raw milk from dairy farmers) was applied. Market power parameters, dairy products demand, and raw milk supply elasticities were jointly estimated in a system of equations including market margin, dairy demand, and raw milk supply equations by none linear estimation technique. Data for the period 1992 to 2012 on the industry level were used for estimating an empirical version of the model. The result indicated that conjectural elasticities values were a departure from zero, which reflected non-competitive behavior in dairy market and in raw milk market specifically. Among three dairy products including pasteurized milk, yogurt, and cheese, the conjectural elasticity was the highest for the pasteurized market and the lowest for yogurt . The result suggests that dairy industries processors exercise marketing power in the downstream and upstream market in the dairy products supply chain. Therefore, policymakers must make appropriate policy for facilitating entrance conditions for new dairy processors and improve farmers’ marketing cooperative so as to have more competitive raw milk price.