This case occurs where the processors are perfectly competitive sellers in their product market.
One would have a strong prior that such a structure would characterise the dairy processing
sectors in most countries. In this situation the price of milk is a given (demand for the raw material
is perfectly elastic) and the quantity of the raw material processed is determined solely by the
supply behaviour of farmers (see Helmberger (1964) and Figure 1).
Figure 1: Equilibrium for a processor who is a perfectly competitive seller in his product
market
This result has important implications for empirical analysis that can be illustrated by assuming a
simple Cobb-Douglas profit function:
log( ) = log(pmzw) = a0 + ay ∖o⅛py ')+aw log(w) + ak log(ŋ + am log(m) (11)
9The result that ( yc∕ m)=( y/ pm)∕( m/ pm) is derived in Deaton and Muellbauer (1980).
11
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