Demand for Differentiated Milk Products: Implications for Price Competition

This article uses a discrete choice, random coefficients logit model for analyzing consumer behavior and retail price competition in the Boston fluid milk market. The problems of product dimensionality and consumer heterogeneity implied by imperfect substitution in markets with differentiated products were solved by applying the model of Berry, Levinhson and Pakes (1995). Empirical results show that private label milks have the highest markups in spite of lower prices, which may explain their rapid expansion, while low-fat and specialty milks such as organic and lactose-free are preferred by high income groups with no children.