The Impact of Regulatory Change on Retail Pricing: The New York State Milk Price Gouging Law

Pricing of retail milk in much of the United States has become a complicated entanglement of federal regulations, consolidation of the processing industry, market power of supermarkets, and, in some geographic areas, state pricing policies (Johnson 1985, Hendrickson et al. 2001, Cotterill 2006). State laws often attempt to protect farmers from retailer loss-leader pricing; current laws in Maine and Pennsylvania, for example, set minimum retail prices. Other state laws attempt to protect consumers from high prices. One example is New York State's (NYS's) milk price gouging law, which was passed in 1991.Several studies have examined the effect of implementation of New York's law on farm-to-retail price spreads and farm price transmission. Romain, Doyon, and Frigon (2002) and Bolotova and Novakovic (2012) both found evidence of symmetric price transmission after the law was implemented. Other studies of the price gouging law have documented its effect on consumers through lower retail prices, which improve consumer welfare (Cotterill 2006, Rabinowitz 2012).While government regulation is designed to correct market imperfections, it can yield results that are less than perfectly competitive. Despite increased consumer welfare, concern developed with the NYS milk price gouging law regarding retailers' ability to potentially engage in tacit collusion. And as a result, the application of the law was changed in November 2008. To date, no one has empirically studied the effect of this significant regulatory change on the retail price of milk in New York. In this study, we determine how the retail price of milk available in the product space has changed since the law's revision.We empirically examine retail prices available to consumers in their choice set of regular white milk and how those prices have changed in response to the change in regulatory practice. Our focus is the Syracuse, New York, Scantrack market, and we use supermarket scanner data for 2007 through 2012. Using a regression discontinuity (RD) design, we use a quasi-experimental analysis to estimate the causal effect of the change in policy on the prices available to retail milk consumers. RD has been used to measure policy and program effects in labor economics, political economy, health, crime, and the environment (e.g., Davis 2008, Bento et al. forthcoming).The New York State Milk Price Gouging LawJune 1991 was a time in NYS when farm prices suffered large drops and retail prices declined only minimally. To provide both farmers and consumers with relief from the growing price differential, the NYS legislature passed a retail regulation known as the milk price gouging law.1 The regulation was designed to prohibit sales of fluid milk at prices deemed to be "unconscionably excessive." Enforcement of the law was undertaken by the NYS Department of Agriculture and Markets (DAM), which adopted a threshold price of 200 percent of the federally announced monthly farm price for milk plus an approximated cooperative over-order premium.2 DAM used the federally announced Class I price in New York City and Syracuse to calculate threshold prices for two geographic areas: (i) metro New York, including Long Island, New York City, and parts of the lower Hudson valley; and (ii) upstate New York, which covered the rest of the state. Each month, the threshold price was announced and retailers responded by setting prices accordingly. However, the threshold was not a maximum price and was targeted only at supermarkets (including supercenters) even though it was perceived by many as a price ceiling that applied to all retailers of milk. In fact, the law was designed to allow retailers to sell milk for more than 200 percent of the farm price if invoicing and other justifications proved that their processor wholesale prices and in-store costs were particularly high.In addition, retailers only have to price their cheapest regular white milk products according to the threshold. …