The effect of the elimination of federal milk marketing orders on farm-level markets: A laboratory experiment

Experimental markets are used to simulate U.S. dairy market conditions and the effect of the elimination of Federal Milk Marketing Orders. The experimental task is a simple 2 x 2 matrix laboratory game that is computer assisted. The treatments are oligopsony and regulation. Perishability is represented by advance production decision with no carryover and is kept constant across the experiments. Sellers make production decisions and receive a pool price, while buyers make a price (bid) and quantity decision. Experimental results indicate that, in the absence of regulation, buyers are successful in reducing market price and in capturing a larger share of market surplus than a perfectly competitive solution predicts. Regulation reduced the market power of buyers and the price fluctuation of raw milk, in an oligopsonistic market, and does not reduce the overall price efficiency of the market.