Review of Industrial Organization 17: 177–191, 2000.
© 2000 Kluwer Academic Publishers. Printed in the Netherlands.
Market Power in the Cheese Industry: Further
WILLARD F. MUELLER and BRUCE W. MARION
University of Wisconsin-Madison, Department of Agricultural and Applied Economics, 427 Lorch
St., Madison, WI 53706, U.S.A.
Abstract. The recent public disclosure of proprietary information provides insights into the pricing
conduct and performance of leading cheese marketers. Most important, the evidence supports the
hypotheses that following its acquisition by Philip Morris in 1988, Kraft became particularly ag-
gressive strategically,both by selling on the NCE to drive bulk cheese prices lower and by increasing
the selling prices and gross proﬁt margins on their ﬁnished cheese. The result was signiﬁcantly higher
prices to consumers and lower prices to suppliers of bulk cheese, as Kraft’s gross proﬁt margins rose
from an estimated $880 million in 1989 to $1020 million in 1991.
Key words: Cheese prices, Kraft, market manipulation, market power, National Cheese Exchange,
This article supplements an article appearing in the April 1997 issue of this Review
(Mueller et al., 1997, pp. 145–170). That article examined the pricing conduct and
performance of the National Cheese Exchange (NCE), a privately owned and op-
erated cash auction market in Green Bay, Wisconsin. Traders, representing cheese
manufacturers and marketers, met brieﬂy each Friday to buy and sell carlots of
bulk cheese to one another. Although NCE sales represented about 0.2 percent
of all cheese made in the U.S. during 1988–1993, the prices established on the
Exchange were used as the reference prices in formula pricing practically all bulk
cheese sold by cheese companies.
Our earlier paper concluded that the NCE was not an effectively competitive
price discovery mechanism, and that it facilitated market manipulation (Mueller
and Marion, 1997). The main beneﬁciaries of the situation appeared to be Kraft
General Foods, Inc., and those cheese marketers with coincident interests in the
level of NCE prices. The NCE was shut down in May 1997, and today bulk cheese
is traded in a cash auction market as well as a futures market on the Chicago
This paper presents an extension of our earlier analysis. It examines trading
motives, selling prices of ﬁnished cheeses, and the gross proﬁt margins of lead-
ing cheese marketers. The analysis also examines the impact of higher selling