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Abstract

This study analyzes the factors that determine the demand for milk products and the consumer benefits from organic milk introduction. Estimating a structural model, the welfare effect is decomposed into two parts: the effect of having an additional product and the effect from the price changes in existing products due to the enhanced competition. In order to take heterogeneous tastes for different product characteristics into account, the unit of analysis is defined at the Universal Product Code (UPC) level and the demand is estimated for each household. The estimates from mixed logit demand approach indicate that households with younger head, higher income or higher education value more for the organic attribute. The distribution of estimated variety effect shows similar implications as the parameter estimates. The compensating variation and price effects indicate that the overall benefits take about 8 percent of the current expenditure and half of it is from increased competition in the market.

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