Dissecting the holy cow: investigating structural change in the price elasticity of demand for Swedish milk

Sammanfattning: Using data from the Swedish Board of Agriculture (Jordbruksverket), we investigate if there has been a structural break in the price elasticity of demand for Swedish milk. The aim is to attempt to answer the research question if opening up a market affects the price elasticity of demand for goods of cultural importance. The results of previous studies estimating the price elasticity of demand for milk indicate an inelastic price elasticity of demand for milk in Sweden. However, demand studies tend to assume the elasticities to be constant over long periods of time. We hypothesise that Swedish consumers do not have the same attitudes towards milk as they used to. This may manifest as a change in the estimated elasticities. Due to the complexity of describing aggregate consumer demand, Deaton & Meulbauer's Almost Ideal Demand System is used to estimate the price elasticity for milk during 1967-2014. Using this method, a structural break at the hypothesised break time of 1995 is tested for by using a Chow test. The results indicate a significant structural break in 1995 and the two subsequent years, which we believe is due to Sweden becoming a member of the EU. The reasons for the structural break are complex and may depend on existing cultural elements and market factors in Sweden. Although the presence of autocorrelation is noted in parts of the data, we view the observed structural break as an indication that our hypothesised result is reasonable.