Price Discrimination Analysis of Butter in the German Market

PRICE DISCRIMINATION ANALYSIS OF BUTTER
IN THE GERMAN MARKET

ACHMAD FADILLAH

GRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2015

STATEMENT OF THESIS, SOURCE OF INFORMATION
AND COPYRIGHT*
I hereby declare that thesis titled Price Discrimination Analysis of Butter
in the German Market, was independently composed by me under the advisory
committee supervision and has not been submitted to any other universities.
Source of information derived or quoted from works published and unpublished
from other writers have been mentioned in the text and listed in the bibliography
at the end of this thesis.
I hereby assign the copyright of my thesis to the Bogor Agricultural
University.

Bogor, May 2015
Achmad Fadillah
H451110221

* Copyright transfer due to the collaborative research work with other parties
outside the Bogor Agricultural University should be based on a related
agreement.

SUMMARY
ACHMAD FADILLAH. Price Discrimination Analysis of Butter in the German
Market. Supervised by RITA NURMALINA, AMZUL RIFIN, and STEPHAN
VON CRAMON-TAUBADEL.
Germany is the largest producers of butter among other countries in the
EU. The trend of butter production in Germany increase steadily during 2010 –
2013. In 2013, butter production in Germany reach to 491 460 tons and German’s
butter production amounted to 25% of the EU butter production. So, Germany has
an advantage in butter production compared with other countries in the EU. The
advantage in butter production and stock availability of butter strongly supports
the development of food industry in Germany.
However, there were fluctuations in the average price of butter in

Germany during 1999-2010 and it was occurred from year to year. Fluctuation of
butter prices can affects business risk, the competition of butter producers, and
economic surplus of consumers in the German butter market. One of the strategies
which can be done by producers and retailers to survive in the competition is
establish right price strategy, such implement price discrimination strategy. Price
discrimination strategy aims to get consumer surplus, to increase profits, and to
face business competition.
The main objective of the study is to analyze butter price discrimination in
German market. In detail, objectives of this study are: first, to analyze the
necessary conditions (market power, different demand elasticity, and preventing
arbitrage) of occurrence in price discrimination of butter products in the German
market through structure analysis, second, to analyze demand function of butter
products based on types of retail store in Germany, third, to analyze price
discrimination of butter products based on regions in Germany, and fourth, to
analyze price difference of butter products across types of retail store in Germany.
The result shows that the three necessary conditions (market power,
different demand elasticity, and preventing arbitrage) for the occurrence of butter
price discrimination in the German retail market are fulfilled. The butter industry
in Germany has an HHI value of 1 635 and the four-firm concentration ratio
(CR4) index reached 71%, which indicates that the German butter industry has

either a moderate level of market concentration and an oligopoly market structure
with some dominant firms. The oligopoly butter market structure in Germany is
dominated by four producers of butter, are: Irish Dairy Board, Campina,
Sachsenmilch, and Arla Foods. Market power in an oligopoly is also greatly
influenced by some main producers who also produce private label products.
We can conclude that the three demand curves (hypermarket, supermarket
and discounter) have a negative slope or downward shape (progressive decrease
from the upper left to the lower right). This condition is in accordance with the
theory of demand that price and quantity have the opposite relationship. The slope
of the demand function in the hypermarket is -3.701, -2.883 in the supermarket,
and -5.517 in the discounter (largest value of discounter indicates that it is the
most elastic of the retail stores).

We also can conclude that on the demand side, butter consumption is not
discriminating along the demand curve (price and quantity) across regions in
Germany. On the supply side, producers and retailers are not discriminating in
regards to butter prices across regions in Germany. The mean price of butter in
Germany, throughout different regions, remained relatively similar at a range of
between € 5.02/kg - € 5.20/kg between 2005 and 2010.
Based on semi – log model regression, the price of butter sold at a DM

store is approximately 27% higher than the same butter sold at a supermarket
store. Prices are approximately 8% lower at a discounter, on average, than the
same product at a supermarket store, while butter sold at a hypermarket store is
approximately 1.75% lower than the same butter sold at a supermarket store, on
average. In other words, there is evidence of butter price difference across types of
retail store in Germany.
One of managerial implications which can be suggested for butter retailers
and producers based on the results of this study is implemention of pricing
strategy according to different consumers’ demand elasticity to increase their
profits in the market. In addition, butter producers and retailers can apply
branding strategy through selling various types and brands to different consumers
based on different demand elasticity.
Recommendation for further research, are: to analyze the discrimination of
price in the retail market, which focus in different products or commodities and
different locations (markets, countries, etc.) to further support these research
results. Future studies might also examine the characteristics of consumers and
consumer perspective in relation to price discrimination in retail stores. And study
of the occurrence of the welfare effect with regard to price discrimination could
also being an interesting complement to this study.
Key words: price discrimination, butter, semi and double logarithm model, the

German market

RINGKASAN
ACHMAD FADILLAH. Analsis Diskriminasi Harga Mentega di Pasar Jerman.
Dibimbing oleh RITA NURMALINA, AMZUL RIFIN, dan STEPHAN VON
CRAMON-TAUBADEL.
Jerman adalah produsen mentega terbesar diantara negara-negara lain di
Uni Eropa. Kecenderungan tren produksi mentega di Jerman terus meningkat
selama 2010 - 2013. Pada tahun 2013, produksi mentega di Jerman mencapai 491
460 ton dan produksi mentega Jerman mencapai 25% dari total produksi mentega
Uni Eropa. Sehingga, Jerman memiliki keunggulan dalam produksi mentega
dibandingkan dengan negara-negara lain di Uni Eropa. Keunggulan dalam
produksi mentega dan ketersedian stok mentega sangat mendukung
perkembangan industri pangan di Jerman.
Namun, terdapat fluktuasi harga rata-rata mentega di Jerman selama tahun
1999-2010 yang tejadi dari tahun ke tahun. Fluktuasi harga mentega ini dapat
mempengaruhi resiko bisnis, kompetisi antar produsen mentega, dan surplus
ekonomi dari konsumen pada pasar mentega Jerman. Salah satu strategi yang
dapat dilakukan oleh produsen dan pelaku ritel untuk dapat bertahan dalam
kompetisi tersebut adalah dengan menerapkan strategi harga yang tepat, seperti

menerapkan strategi diskriminasi harga. Strategi diskriminasi harga bertujuan
untuk mendapatkan surplus konsumen, untuk meningkatkan keuntungan, dan
untuk menghadapi persaingan bisnis.
Tujuan utama dari studi ini adalah untuk menganalisis diskriminasi harga
mentega di pasar Jerman. Secara rinci, tujuan dari studi ini adalah: pertama, untuk
menganalisis kondisi-kondisi yang harus dipenuhi (kekuatan pasar, perbedaan
elastisitas permintaan, dan pencegahan arbitrase) agar diskriminasi harga produk
mentega di pasar Jerman dapat terjadi melalui analisis struktur, kedua, untuk
menganalisis fungsi permintaan produk mentega berdasarkan jenis pasar ritel di
Jerman, ketiga, untuk menganalisis diskriminasi harga produk mentega
berdasarkan wilayah di Jerman, dan keempat, untuk menganalisis diferensiasi
harga produk mentega diantara tipe pasar ritel di Jerman.
Hasil studi menunjukkan bahwa ketiga syarat kondisi terjadinya
diskriminasi harga mentega di pasar ritel Jerman semuanya terpenuhi, yaitu:
adanya kekuatan pasar, perbedaan dalam elastisitas permintaan, dan pencegahan
arbitrase. Industri mentega di Jerman memiliki nilai HHI 1 635 dan indeks rasio
konsentrasi empat perusahaan (CR4) mencapai 71% yang mengindikasikan bahwa
industri mentega Jerman memiliki konsentrasi pasar dengan tingkat moderat dan
struktur pasar bersifat oligopoli dengan beberapa perusahaan yang dominan.
Struktur pasar oligopoli mentega di Jerman didominasi oleh empat produsen

mentega, yaitu: Irish Dairy Board, Campina, Sachsenmilch, dan Arla Foods.
Kekuatan pasar dalam oligopoli juga sangat besar dipengaruhi oleh beberapa
produsen utama yang juga memproduksi produk private label.
Kita dapat menyimpulkan bahwa ketiga kurva permintaan (hypermarket,
supermarket, dan discounter) memiliki kemiringan kurva negatif atau berbentuk
menurun ke bawah (penurunan progresif dari kiri atas ke kanan bawah). Kondisi
ini sesuai dengan teori permintaan bahwa harga dan kuantitas memiliki hubungan
yang berlawanan. Kemiringan kurva dari fungsi permintaan di hypermarket

adalah -3.701, -2.883 di supermarket, dan -5.517 di discounter (nilai terbesar ini
menunjukkan bahwa discounter paling elastis dibandingkan dengan tipe toko ritel
yang lain).
Kita juga dapat menyimpulkan bahwa pada sisi permintaan, konsumsi
mentega tidak mengalami diskriminasi sepanjang kurva permintaan (harga dan
kuantitas) antar wilayah di Jerman. Pada sisi suplai, produsen dan pelaku ritel
tidak melakukan diskriminasi harga mentega berdasarkan wilayah di Jerman.
Harga rata-rata mentega di Jerman, diseluruh wilayah yang berbeda, relatif sama
pada rentang harga € 5.02/kg - € 5.20/kg antara 2005 sampai 2010.
Berdasarkan regresi model semi-log, harga mentega yang dijual di toko
DM sekitar 27% lebih tinggi dari mentega yang sama yang dijual di supermarket.

Harga mentega di discounter sekitar 8% lebih rendah secara rata-rata
dibandingkan dengan produk yang sama di supermarket, sedangkan mentega yang
dijual di hypermarket secara rata-rata lebih rendah sekitar 1.75% dari mentega
yang sama yang dijual di supermarket. Dengan kata lain, terdapat bukti adanya
diferensiasi harga mentega antar tipe toko ritel di Jerman.
Salah satu implikasi manajerial yang dapat disarankan untuk pelaku ritel
dan produsen mentega berdasarkan hasil penelitian ini adalah menerapkan strategi
harga berdasarkan perbedaan elastisitas permintaan konsumen untuk
meningkatkan keuntungan mereka di pasar. Selain itu, produsen dan pelaku ritel
mentega dapat menerapkan strategi branding dengan menjual berbagai tipe dan
merek mentega untuk konsumen yang berbeda berdasarkan perbedaan elastisitas
permintaan.
Rekomendasi untuk studi lebih lanjut, adalah: menganalisis diskriminasi
harga di pasar ritel, yang berfokus pada produk atau komoditas dan lokasi yang
berbeda (pasar, negara, dan lainnya) untuk mendukung hasil penelitian ini.
Penelitian selanjutnya dapat juga menguji karakteristik konsumen dan perspektif
konsumen terkait dengan diskriminasi harga di pasar ritel. Dan penelitian
mengenai adanya pengaruh kesejahteraan yang berkaitan dengan diskriminasi
harga juga dapat menjadi komplemen yang menarik untuk penelitian ini.
Kata kunci: diskriminasi harga, mentega, model logaritma semi dan ganda, pasar

Jerman

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PRICE DISCRIMINATION ANALYSIS OF BUTTER
IN THE GERMAN MARKET

ACHMAD FADILLAH

Thesis
as one of requirements to obtain a degree of
Magister Sains
in

the Study Program of Agribusiness

GRADUATE SCHOOL
BOGOR AGRICULTURAL UNIVERSITY
BOGOR
2015

Examiner Commission on Affairs of Master Thesis Examination:
Dr Ir Anna Fariyanti, MSi

Thesis Tittle
Name
Registration Number

: Price Discrimination Analysis of Butter in the German
Market
: Achmad Fadillah
: H451110221

Approved

Advisory Committee,

Prof Dr Ir Rita Nurmalina, MS
Chairman

Dr Amzul Rifin, SP, MA
Member

Prof Dr Stephan von Cramon-Taubadel
Member

Agreed

Coordinator of Major Agribusiness

Dean of Graduate School

Prof Dr Ir Rita Nurmalina, MS

Dr Ir Dahrul Syah, MScAgr

Examination Date: 22 April 2015

Submission Date:

ACKNOWLEDGMENT
First of all, praise to Allah the Almighty for all His blessings on all stages
of this research process. Having the opportunity to study in Georg-August
University Göttingen, Germany gave me one of the most precious experiences in
my life. I feel grateful to finally finish my thesis with all the efforts and supports I
received from all parties.
I would like to express my deepest appreciation to my 1st supervisor Prof.
Dr. Ir. Rita Nurmalina, MS who was abundantly helpful and offered invaluable
assistance, guidance and full support. It also gives me great pleasure in
acknowledging the support and help of Dr. Amzul Rifin, SP, MA, as my 2nd
supervisor. Moreover, my gratitude goes to my supervisors in Georg-August
Universität Göttingen, Germany, Prof. Dr. Stephan v. Cramon-Taubadel, for his
guidance and his help provide the data.
I would like to thank both Georg-August Universität Göttingen, Germany
and Bogor Agricultural University, Indonesia, which played a big role in assisting
and giving me the opportunity to partake in the joint degree master program in
Sustainable International Agriculture. The program was initiated and advised by
Prof. Dr. Stephan v. Cramon-Taubadel and Grete Thinggaard-ter Meulen, M.Sc
from Germany and Dr. Ir. Nunung Kusnadi, MS, Dr. Ir. Suharno, M.ADev, Dr. Ir.
Andriyono Kilat Adhi, and Prof. Dr. Ir. Rita Nurmalina, MS from Indonesia. My
scholarships was provided by the Indonesian Planning and Cooperation of Foreign
Affairs (BPKLN) and the Directorate General of Higher Education (DIKTI),
Indonesian Ministry of Education, DAAD, the German Federal Foreign Office,
and International Office of Georg-August Universität Göttingen.
My deepest gratitude goes to my lovely parents and family who always
supported and encouraged me with their dedication during my study. Finally, I am
indebted to my many friends and colleagues who supported and gave me
invaluable relationships. They consist of all Indonesians in SIA program 2012
(Göttinger Zwölf), SIA program 2011 and 2013, MSA-IPB, Göttingen Indonesian
Student Community (PPI Göttingen), KALAM Göttingen, all proofreaders, and
all my new international friends in Germany.

Bogor, May 2015
Achmad Fadillah

v

CONTENTS
LIST OF TABLES ................................................................................................ vii
LIST OF FIGURES .............................................................................................. vii
LIST OF APPENDICES ...................................................................................... viii
1 INTRODUCTION ............................................................................................... 1
Background ...................................................................................................... 1
Problem Statement ........................................................................................... 4
Objectives of the Study .................................................................................... 5
Benefits of Study.............................................................................................. 6
Scope and Limitation of the Study................................................................... 6
2 LITERATURE REVIEW..................................................................................... 7
The Types of Price Discrimination in Empirical Studies ................................ 7
The Types of Data that can be Used for Price Discrimination Analysis ......... 8
Implementation of Pricing Strategy in Retailing ............................................. 8
Characteristics of Consumers and Pricing Strategy ......................................... 9
Evidence of Price Discrimination in Retailing Based on Empirical Studies . 10
3 THEORETICAL FRAMEWORK ..................................................................... 12
The Definition of Price Discrimination ......................................................... 12
The Types of Price Discrimination ................................................................ 13
Relationship Between Price Discrimination and Agricultural Markets ......... 15
The Nature of Price Discrimination and Its Result (SCP Analysis) .............. 16
Necessary Condition - Structure ............................................................ 17
How to Identify Price Discrimination – Conduct ................................... 18
The Results of Price Discrimination – Performance............................... 20
The Concept of Price Difference of Products ................................................ 21
Operational Framework ................................................................................. 23
4 RESEARCH METHODOLOGY ....................................................................... 24
The Research Location................................................................................... 24
Data Types and Sources ................................................................................. 24
Methods of Analysis ...................................................................................... 26
Descriptive Analysis ............................................................................... 26
Model of Price Elasticity ........................................................................ 28
Model of Price Difference ...................................................................... 28
Model of Price Discrimination................................................................ 29
Goodness of Fit Test of Models ..................................................................... 30
Economic Criteria ................................................................................... 30
Statistical Criteria.................................................................................... 30
Econometric Criteria ............................................................................... 31
5 OVERVIEW OF BUTTER MARKET IN GERMANY ................................... 32
The EU Dairy Market Policy Related to Butter Market ................................ 32
Development of EU Market Price of Butter .................................................. 34
Butter Exports and Import in Germany ......................................................... 34
Overview of Butter Market in Germany ........................................................ 36

vi

6 RESULT AND DISCUSSION ........................................................................... 39
The Necessary Conditions of Occurrence Butter Price Discrimination
in the German Retail Market (The Structure Analysis).................................. 39
Market Power .......................................................................................... 39
Different Price Elasticity of Demand ...................................................... 42
Prevent Arbitage ...................................................................................... 44
How Butter Price Discrimination Occurs in The German Retail Market
(The Conduct Analysis) .................................................................................. 45
Verbally ................................................................................................... 45
Graphically .............................................................................................. 48
Mathematically ........................................................................................ 53
The Results of Price Discrimination Related to Price and Demand
Quantity of Butter (The Performance Analysis) ............................................ 54
Butter Price and Demand Condition Across German Regions ...................... 55
Butter Price Condition in the German Retail Market in 2005-2010 .............. 57
7 CONCLUSION AND RECOMMENDATION ................................................. 60
Conclusion ...................................................................................................... 60
Recommendation ............................................................................................ 60
REFERENCES ...................................................................................................... 61
APPENDICES ....................................................................................................... 67
BIOGRAPHY ........................................................................................................ 84

vii

LIST OF TABLES
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

The EU dairy products production in 2010-2013 (in 1 000 tons).................. 2
The EU balance sheet of butter in 2010-2013 (in 1 000 tons) ....................... 2
The EU butter production across country 2010-2013 (in tons) ..................... 3
Summary of butter price data in the German retail market 2005-2010
(in €/kg) ........................................................................................................ 5
Summary table of some previous empirical studies .................................... 11
Butter type and percentage of purchases 2005-2010 ................................... 25
Levels of competition and the HHI ............................................................. 27
Levels of competition and the CR4 (in %) .................................................. 27
Alternative hypotheses for t-test .................................................................. 30
Identification framework for autocorrelation .............................................. 31
Export import butter ((HS code 0405) in Germany (2009-2013) ................ 36
The German retail market business types in 2011 ....................................... 37
Quantity of sales and market share of top ten butter producers and
private label products in Germany 2010 ...................................................... 40
List of four largest producers of butter in Germany 2010 ........................... 41
Classified quantile group of butter brands by mean price 2010 .................. 42
Quantile’s representative brand based on mean price 2010 ........................ 43
Butter brands, price, and demand in hypermarket store .............................. 46
Butter brands, price, and demand in supermarket store............................... 47
Butter brands, price, and demand in discounter store .................................. 47
Demand function estimation of butter based on the types of retail
store.............................................................................................................. 53
Transaction data of natural butter across German regions 2005-2010 ........ 55
Regression results of butter demand across regions in Germany
2005-2010 .................................................................................................... 56
Summary of butter price by retail store type (per kg) ................................. 57
Price differential regression results with supermarket retail store
type and year 2005 as baseline of model ..................................................... 59
LIST OF FIGURES

1
2
3
4
5
6

Milk production of the largest producers of milk in the world
2000-2012 (in tons)........................................................................................ 1
Comparative historical overview of wholesale and retail price of butter
in Germany 1999-2010 ................................................................................. 4
Second degree price discrimination ............................................................. 13
Third degree price discrimination................................................................ 14
Graphical presentation of price discrimination............................................ 19
Comparing the results of perfect competition, monopoly, and price
discrimination .............................................................................................. 20

viii

7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23

Operational framework ................................................................................ 23
Comparative overview for EU intervention price and butter market
price in Germany 1994-2014 ....................................................................... 33
The EU intervention stocks of butter ........................................................... 33
Main butter exporters in 2012 ...................................................................... 35
Main butter importers in 2012...................................................................... 35
Deutsche markenbutter in foil-wrapped bars ............................................... 36
Per capita butter consumption trends in Germany ....................................... 37
Top five gains of German private label products value share during
2010- 2011 ................................................................................................... 39
Quantile group of butter brands 2010 .......................................................... 43
Demand curve of representative brands ....................................................... 44
Butter demand schedule graph by individual retail stores ........................... 49
Grouping brands based on different demand curve slopes in
hypermarket store ......................................................................................... 50
Grouping brands based on different demand curve slopes in
supermarket store ......................................................................................... 51
Grouping brands based on different demand curve slopes in
discounter store ............................................................................................ 52
Data distribution of butter price and butter demand quantity
across regions in Germany ........................................................................... 56
Mean price box plot graph of butter across regions in Germany
2005-2010 .................................................................................................... 57
Price box plot graph of butter across retail store types in Germany
2005-2010 .................................................................................................... 59

LIST OF APPENDICES
1
2
3
4
5
6
7
8

Post estimate model test (econometric criteria) for types of retail
store price difference analysis ...................................................................... 66
Post estimate model test (econometric criteria) for region analysis ............ 68
Post estimate model test (econometric criteria) for types of retail store
demand function analysis ............................................................................. 71
Regression results of butter demand across regions in Germany
2005-2010 .................................................................................................... 77
Butter price across regions in Germany 2005-2010 (in €/kg) ...................... 78
Butter price across retail store type 2005-2010 (in €/kg) ............................. 78
Price differential regression results with supermarket retail store type as
baseline of model ..................................... Error! Bookmark not defined.79
Quantity of sales and market share of butter producers and private
label 2010 ................................................. Error! Bookmark not defined.81

1

1 INTRODUCTION
Background
Butter production is closely associated with the upstream subsystem of the
milk agribusiness. Milk is a raw material of butter production. It can be said that
the production of butter is strongly influenced by the production of milk. Based on
FAO (2014) and DairyCo (2014), the world’s milk production increased steadily
during 2000-2012 from 492.9 million tons to 625.8 million tons. In 2012, the
largest global milk producer was the EU (151 million tons), followed by USA
(90.9 million tons), India (54 million tons), and China (37.8 million tons). Figure
1 presents the graph of milk production of the largest milk producers in the world
between 2000 and 2012.
160,000,000
140,000,000

Production (tons)

120,000,000
100,000,000
80,000,000
60,000,000
40,000,000
20,000,000

United States of America
Russian Federation
France
Turkey

India
Germany
New Zealand
European Union (EU)

China
Brazil
United Kingdom

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

0

Year

Figure 1 Milk production of the largest producers of milk in the world 2000-2012
Source: FAOSTAT (2014) and DairyCo (2014)

Butter is a leading commodity for some countries in the EU. Based on
Figure 1, the EU as the largest milk producer in the world, opens up great
opportunities for the EU member countries to increasingly develop the dairy
processing industry. Several major dairy products from the EU which became the
leading products with large production, are: butter, cheese, cream, condensed
milk, etc. The dairy product production data during the last two years is shown in
Table 1.

2

Table 1 The EU dairy products production in 2010-2013 (in 1 000 tons)
Product
2010
2011
2012
2013
Liquid milk
31 838
31 802
31 720
30 848
Cheese
8 455
8 442
8 661
8 716
Yogurt and other products
8 222
8 193
8 121
8 029
Cream
2 429
2 418
2 505
2 552
Butter
1 859
1 894
1 940
1 959
Whey powder
1 695
1 673
1 756
2 105
Skimmed Milk Powder (SMP)
1 059
1 190
1 218
1 174
Condensed milk
956
946
1 005
567
Whole Milk Powder (WMP)
769
755
741
760
Casein and caseinates
105
109
90
90
Source: CLAL.it (2014)

Based on Table 1, we can see that butter as one of the dairy products ranks
the top five in the EU dairy product production during 2010-2012. In 2013, butter
ranked sixth in the top dairy products in EU with quite large production reached to
1 959 thousand tons (CLAL, 2014). The butter production is aimed to fulfill the
food industries and the household consumers’ needs. On the producer side, the
butter production is closely associated with downstream subsystem of
agribusiness, especially with food agribusiness system, such as chocolate,
confectionery, baking, backery, and ice cream manufacturing industries.
On the consumer side, butter has been regarded as pleasure products in the
European culture. Butter remains a main option for the European consumers who
wish healthy spreads foods. It is also associated with butter consumers’ behaviour
in the EU. Their consumption for butter has increased over the last four years.
Based on the data of CLAL (2014), domestic consumption of butter in the EU
increased steadily during 2010-2013. Consumption of butter in the EU has
increased from 1 934 thousand tons in 2010 to 2 033 thousand tons in 2013 (see
Table 2).
Table 2 The EU balance sheet of butter in 2010-2013 (in 1 000 tons)
Data
2010
2011
2012
2013
Opening Stocks
103
24
31
25
Production
1 859
1 894
1 940
1 959
Imports
40
47
55
42
Exports
156
126
127
128
Domestic consumption
1 934
1 982
2 031
2 033
Final Stocks
24
31
25
11
Source: CLAL.it (2014)

Based on Table 2, final stocks of butter in the EU in 2010-2013 had
positive value (surplus), which indicates the availability of butter in the EU during
the last four years. The value of the EU butter exports has also greater than the
import value of that (there were trade surplus of butter) between 2010 and 2013.

3

These indicate that butter is one of the leading international trade commodities in
the EU.
In the regional aspect of butter production country, Germany is the largest
butter producer in the EU-28, with a total production of 491 460 tons in 2013,
followed by France, the United Kingdom, Ireland, Netherlands, Italy, and others
(CLAL, 2014). Table 3 shows the complete data of the EU butter production of
butter in 2010-2013.
Table 3 The EU butter production across country 2010-2013 (in tons)
Country
2010
2011
2012
2013
Germany
449 240
473 820
488 780
491 460
France
408 238
428 512
420 59
402 426
United Kingdom
118 600
127 800
140 200
167 100
Ireland
137 830
145 910
145 010
152 100
Netherlands
133 400
129 000
133 200
136 500
Italy
94 520
89 250
93 700
94 760
Finland
54 330
51 090
51 510
53 140
Belgium
81 370
59 170
58 390
45 320
Denmark
34 200
37 200
38 500
42 800
Spain
37 739
41 837
37 426
40 078
Austria
33 182
34 403
34 952
34 510
Portugal
26 440
27 630
28 211
25 579
Sweden
23 619
21 372
21 937
21 611
Greece
1 304
1 002
884
760
Source: CLAL.it (2014)

As we can see on Table 3, Germany, where it consistently led in butter
production during 2010-2013, has advantage in butter production compared with
other countries in the EU. The trend of butter production in Germany also
increased steadily during the last few years. In 2013, German’s butter production
amounted to 25 % of the EU butter.
Based on Figure 2 below, we can see that there was similar butter price
trend in the wholesale and retail during 1999-2010, which indicates that butter
price in retail followed butter price in wholesale. We can also see that the average
butter price fluctuated in the German wholesale and retail store during 1999-2010.
The highest price (peak price) of butter occurred between 2007 and 2008 was due
to the global crisis, which affected the food price. Figure 2 shows the average
price of butter throughout the year, so we could not see the variations in the price
of butter. Actually, the average price in Figure 2 hides a lot of heterogeneity or
variation in butter price.

4

Figure 2 Comparative historical overview of wholesale and retail price of butter
in Germany 1999-2010
Source: Butter-und Käse-Börse e.V. Kempten, processed by CLAL (2011)

Problem Statement
Germany as the largest butter producer has advantage in butter production
compared with other countries in the EU-28. The trend of butter production in
Germany also increased steadily during 2010-2013. The advantage in butter
production, stock availability, and stable price of butter strongly supports the
development of food industry in Germany.
However, there were fluctuations in the average price of butter in Germany
during 1999-2010 and it was occurred from year to year (see Figure 2).
Fluctuation of butter prices can affects business risk, the competition of butter
producers, and economic surplus of consumers in the German butter market.
German’s butter producers not only compete with domestic producers, but also
compete with producers from outside Germany, especially with producers from
other EU member countries (Ireland, Denmark, Netherland, etc.). One of the
strategies which can be done by producers and retailers to survive in the
competition is establish right price strategy, such implement price discrimination
strategy. Price discrimination strategy aims to get consumer surplus, to increase
profits and to face business competition.
Policy and regulation related to butter price determination and butter
production can also affects conditions of competition in the German butter
industry. Furthermore, the industrial condition of butter in Germany associated
with the determination of the butter price and the competition among butter
producers is interested to be examined, as well as, the consumer behaviour of
butter in the German retail market related to fluctuation of average price.
To analyze the competition among producers and to examine the
consumer behavior of butter product, a more detailed data about the variation of
butter price is required. Based on data of butter price from IRI (2013), we can see

5

that at any given time there is a great deal of variation around the average butter
prices. For example, we can examine butter price data during 2005-2010 more
closely and more detail. Tabel 4 summaries data of butter price in German retail
market at any given weeks (randomly selected every year) can be observed to see
its variation. On the first week of May in 2008, there are 105 varibilities in butter
price.
Table 4 Summary of butter price data in the German retail market 2005-2010
(in €/kg)
Number of
Year
Selected weeka
Maximum
Minimum
Mean
unique
values
rd

2005 3 week,
September
nd
2006 2 week, August
th

2007 4 week, May
st
2008 1 week, May
nd

a

2009 2 week, March
st
2010 1 week, December

88

9.96

0.8

4.62910

85

9.96

0.8

4.61779

74

9.96

1.0

4.62799

105

13.16

1.0

5.79997

95

9.96

0.8

5.35780

85

13.16

0.8

6.02658

) Randomly selected using Microsoft Excel
Source: Author’s elaboration with data from IRI (2013)

Based on Table 4, we can see evidence of variation in the price of butter
(see unique price value column). Further, it is interesting to analyze the casuse of
the variation of butter price and whether the price discrimination could be
possibly occurred. Analysis of butter prices will be associated with the
competition among producers in German butter industry and the consumers’
behavior in the German retail market.
Objectives of the Study
The main objective of this study is to analyze whether there is evidence of
price discrimination in the butter market in Germany. In detail, objectives of this
study are:
1. To analyze the necessary conditions (market power, different demand
elasticity, and preventing arbitrage) of occurrence in price discrimination
of butter products in the German market through structure analysis.
2. To analyze demand function of butter products based on types of retail
store in Germany.
3. To analyze price discrimination of butter products based on regions in
Germany.
4. To analyze price difference of butter products across types of retail store
in Germany.

6

Benefits of the Study
This study provides information about conditions of competition in the
industry and consumer behavior in the market. This information will be beneficial
for policy makers, producers, retailers, researchers, students, and expertise
concerned in the industry structure and marketing research. The benefits of this
study can be classified as follow:
1. For the policy makers, producers, and retailers this study is expected to
provide input to formulate marketing strategies. This study also can be
reference and consideration for policy makers in setting appropriate
strategic policy related to create fair competition in the industry. At last,
this research provides reference and consideration for producers and
retailers to implement appropriate managerial strategies and to increase
their profits.
2. For the authors, this study is useful to improve the analytical capabilities
about the condition of competition in the industry and consumer behavior
in the market with qualitative and quantitative approaches. This study is
also useful to enhance the knowledge and experience as well as to apply
the theories that have been acquired in the lecture on the actual condition.
3. For readers or other researchers, this study provides the information and
knowledge about price discrimination related to industry competition and
consumer behavior in the market that can be applied in other research for
different commodities or other locations with different market structures.
This study is expected to be a reference to conduct in-depth research or
further studies for other researchers.
Scope and Limitation of the Study
The scope of this study is to analyze the heterogeneity and discrimination
of butter price in the German market. Butter price data used in this study focus on
scanner data in the retail market store during 2005-2010. These retail scanner data
of butter price are used to analyze price and demand condition across regions and
across types of retail store in the German market. The limitation of this study is
only focused on using variable price of the goods, without using other variables
such as production cost of product, competitor price, income, price of substitute
goods, and price of complementary goods. It is based on the assumption that in
the butter market the demand curve moves only along the curve influenced by the
price of the goods without being influenced by other variables which may shift the
demand curve.

7

2 LITERATURE REVIEW
Prior to the discussion and further analysis regarding price discrimination
on the butter market, we will discuss previous research and empirical studies
related to this topic. The purpose of considering previous research and empirical
studies is to determine the progress of any research that is related to price
discrimination in various cases. Thus, we can perform a comparative and
complementary study to the previous research. In addition, prior empirical studies
also help in understanding the theories, concepts, and applications for future price
discrimination studies.
Research and empirical studies related to price discrimination have been
done on various commodities or products, with various types of data being used,
as well as in varying locations and scopes of research. These previous studies can
thus be compared based on the purpose of the research, the analysis method, and
the obtained results. A review of several previous studies regarding the price
discrimination, price elasticity, consumers demand, etc. will follow regarding the
study of butter price discrimination in the German retail market. A summary table
of previous empirical studies are used for the literature review of this study and
can be seen in Table 7.
The Types of Price Discrimination in Empirical Studies
As previously explained in the theoretical framework section, price
discrimination can be divided into several types. One of these categories is the
division of price discrimination by Pigou (1920), which are: “first-degree price
discrimination, second-degree price discrimination, and third-degree price
discrimination.”
This categorization has been applied in several empirical studies about
various types of price discrimination, such as the Bt cotton seed price
discrimination research conducted by Acquaye & Traxler (2007). Third-degree
price discrimination was discovered in relation to the Bt cotton seed in this study.
The monopolist of the Bt cotton seed charges lower prices in (small and elastic)
foreign markets than they charge in (large and inelastic) domestic markets. Based
on Falck-Zepeda et al. (2000), as cited in Acquaye & Traxler (2007), the laws and
enforcement of intellectual property rights (IPR) have provided innovate firms of
agricultural inputs (fertilizer, seed, pesticide, etc.) with a level of monopoly power
in the market. There are two reasons for which a monopolist can price
discriminate in the Bt cotton sector. First, there are restricting possibilities for
spatial arbitrage (geographic area) because cotton varieties on the highlands only
affects small agro climatic. Second, seed monopolists such as Monsanto, can
effectively segment the market through the use of a technology contract which
states that farmers cannot resell their products (Acquaye & Traxler, 2007).
Another example, based on research conducted by Cuellar & Brunamonti
(2014) found that price discrimination in the retail channel is one example of firstdegree discrimination of price, where consumers differ in their price elasticity of
demand depending on variances each retail channel. From a firms’ perspective,
price discrimination is generally associated with monopolistic or oligopolistic
industries.

8

The Types of Data that can be Used for Price Discrimination Analysis
Analysis and research related to price discrimination can be accomplished
by using various types and sources of data. Source data can be obtained from
journals, previous empirical studies, report from companies or governments,
surveys, and retail scanners (i.e., IRIs data, Nielsen’s data, etc.). Acquaye &
Traxler (2007) used the data from previous empirical studies which were
conducted by Hubbleet et al. (2000) to analyze the potential for price
discrimination in Bt cotton seed throughout the states of Alabama, Georgia, North
Carolina and South Carolina.
Meanwhile, most of the other empirical studies related to price
discrimination are from retail sales data scanners at selling locations. The data
used can be obtained from a single source or a combination of data from various
sources. Liu and Shen (2012) use retail scanner data from A.C. Nielsen in the U.S.
market to examine how soft drinks product differentiation affects the changes
within the products price schedule of private label and national brands.
Another instance of combined data is the works of Cuellar & Brunamonti
(2014), Cataluña (2004), and Cotterill (1986) which all use data from two or more
sources. The data used in the study conducted by Cuellar & Brunamonti (2014) is
scanner data from retail purchases of wine in three retail channels: drug stores,
grocery stores, and liquor stores. The data was obtained from the Information
Resources Incorporate (IRI) and the Nielsen systems, with the research being
conducted in the U.S. between the years 2007 and 2010. IRI panel data is
collected on a weekly basis through the use of electronic scanners at the store
level and also contains information relating to relevant panel promotional activity.
Cataluña (2004) used a combination of data from INFORES, S.A. retailer panel
data and the IRI panel data to analyze markets in Spain. Cotterill (1986) used a
data combination from the Vermont retail grocers association and personal
extensive survey of grocery prices throughout the state’s supermarkets.
Meanwhile, Hoch et al. (1995) conducted a study in the Chicago
metropolitan area using a combination of data from three sources. The
combination of data are store–level (retail) scanner data from the DFF
(Dominick’s Finer Foods), chain and market-level promotional activity data from
the IRI, and store trading area data from Marketing Metrics.
Implementation of Pricing Strategy in Retailing
Cataluña (2004) states that pricing strategy can be implemented through
the store level, the chain level, or the product category level. Price strategy which
implement different pricing at the store level has become increasingly important
for retailers (Yague, 1995; Gilbert and Jackaria, 2002; as cited in Cataluña, 2004).
Hoch et al. (1995) state that the retailers can implement customized pricing at the
store level. Additionally, retailers and manufacturers can establish cooperation
programs on products that are in stores.
Rondan (2002), as cited in Cataluña (2004), states that stores have
different prices so that price elasticity can be measured for each store based on
products, variety, and services. Bolton (1989) found a relationship between price
elasticity amongst promotional variables (coupons, display activity, and price
activity), market characteristics and brand performance. Studies relating to price

9

sensitivity or elasticity are very important in retail policy, examples could include
a form of promotion, price determination, and pricing of private label brands.
Cataluña (2004) also states that measuring the price elasticity for each
store is important and fundamental in considering many aspects, such as retailer
policies, effective promotional, product pricing, and determining the distributors.
For instance, Hoch et al. (1995) suggests that price discounts are better applied
lightly in more price sensitive (elastic) stores and more aggressively in less
sensitive (inelastic) stores. Hoch also references a pricing strategy in which
temporarily lowering pricing can stimulate product sales for retailers and
manufacturers. Cataluña (2004) found that to get greater sales retailers and
manufacturers need more market promotion activities. Furthermore, Montgomery
(1997) states that micro marketing strategies such as promotional activity and
price discounts effectively increase the profits in the retail market.
Retail pricing strategy can also be analyzed based on geographical
considerations. Cataluña (2004) found that there is a statistical difference between
price discounts and promotional selling in the Nielsen market area. Promotional
activity in the central-east region of Spain is much lower than in the rest of the
Spain. Barcelona and the northeast region, however, have a greater sales
percentage that include discount of price. This is in line with Shankar and
Krishnamurthi (1996), who found that a retail store in the market with high
competition has more different pricing than a retail store in the market with low
competition.
Characteristics of Consumers and Pricing Strategy
Hoch et al. (1995) define micro marketing activity as a policy that is
applied by retailers based on characteristics of consumers and the competitive
environment. Montgomery (1997) also defines micro marketing activity as a
variation of the marketing mix in the retail market which is determined
considering consumer response.
For instance, in the wine market case, the retail channel stores can be
divided into three types: drug stores, grocery stores and liquor stores. Drug store
consumers buy wine products as an unplanned purchase, while initially shopping
with the intent of buying other products. Bucklin and Lattin (1991), as cited in
Cuellar & Brunamonti (2014), indicate that drug store consumers have a relatively
high price