H. Issue: The Elasticity of Demand for Fluid Milk Products

    Citing recent studies, Wellington et al identify the demand
coefficient for fluid milk as 3.1. This means that a ten percent
increase in price will result in a 3.1 decrease in demand.\85\
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    \85\ Wellington et al, 3/31/97 AC.
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    In response to this comment, Thomas Conway, Esq., former Counsel
and former Executive Director of the New York State Legislative
Commission Dairy Industry Development, submitted a study of ``Consumer
Response to the Unprecedented Rise in the Retail Price of Fluid Milk in
1989-1990'' (Consumer Response).\86\ This study focused on the actual
impact on consumption of a relatively large increase in retail milk
prices during late 1989 and early 1990.
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    \86\ New York State Legislative Commission of Dairy Industry
Development, August, 1990.
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    The study group was of four regions, including the Northeast.
During this time, the price of milk rose to $2.67 a gallon, a $0.34
increase. Directly contrary to the traditional analysis of the
elasticity of demand for milk, consumption actually increased rather
than decreased in two of the regions studied. In the Northeast, the
15.04 percent price increase in the Northeast was matched by lower
sales of only 0.98, or well below that expected based on any of the
demand coefficients identified above.
    The study concludes ``that other factors were more important than
price to the determination of consumer demand for fluid milk''.\87\
Other factors included growth in personal income, demographic factors,
advertising and increased concerns over health and nutrition.
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    \87\ Consumer Response at 11.
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    While this study is now dated, the Compact Commission accepts its
basic premise that analysis of the impact must account for the market
function as a whole, rather than focus upon a strict elasticity of
demand equation. Nonetheless, the Commission remains aware of the
importance of accounting for the direct impact on consumption that an
increase in retail prices may have.