Sunday, April 29, 2007

Milk in Bags

I've recently become accustomed to buying my milk in plastic bags instead of cardboard cartons. This mainly is because of the price. Two litres in bags runs me $3.19, while two litres in carton is $4.79 at the Loblaws down the street. Obviously, the packaging can't account for that kinda price differential.

Presumably, milk in cartons is a superior product (if only slightly) to milk in bags. From my personal experience, the latter is more prone to spillage, requires extra work (placing it in jugs), and bags are less sturdy than cartons.

My initial thought would be price discrimination. People who don't pay close attention to their grocery budgets hit up the milk in cartons, with the supermarkets and dairy producers collecting the surplus.

However, as any student of economics would tell you, market power is a necessary condition for price discrimination (of the third degree.) Given the reach of the Competition Bureau and whatnot, there can't be a cartel or a monopoly in the milk industry?

Well, I suspect there is. In Newfoundland, there are only two producers of milk. In Ottawa, there seem to be three. Not only that, but the government has a quota system for milk. Anyone who wants to produce needs to purchase a license from an established producer.

Bam, barriers to entry. Bam, oligopoly. Tossing in the fact that transport costs for milk are high (heavy, can't be compressed, refrigerated) and all the prerequisites are in place.

I'm not saying dairy companies are unethical. It's just they've got one excellent position, brought upon my prehistoric laws, which they use to full advantage.

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