Using Models of Market Structures to Understand the Dairy Industry Restructuring Act’s Impact on Fonterra’s Domestic and International Activity

The dairy industry is a cornerstone of New Zealand’s economy. Within this sector, Fonterra processes over three-quarters of all the milk production and also serves as the nation's leading exporter. However, this dominance does not go without regulation. The Dairy Industry Restructuring Act 2001 (DIRA) was implemented to pursue two conflicting objectives: enabling Fonterra to be competitive on the international market while protecting domestic consumers from excessive prices. This research paper analyses and evaluates the effectiveness of DIRA in achieving these objectives through the application of three microeconomic market structures: monopoly, Cournot duopoly, and threat of entry. The findings support that a monopoly would provide Fonterra with sufficient profit to fund international expansion but would be at the expense of domestic consumers. On the contrary, a Cournot duopoly would hinder Fonterra’s global competitiveness but generate better prices for domestic consumers. Finally, the threat of entry model emerges as the most balanced outcome, as it preserves Fonterra’s capacity to compete internationally while incentivising lower prices to deter new entrants. In combination, these findings illustrate how DIRA has shaped a regulatory equilibrium within the dairy industry in New Zealand and why DIRA has opted to create the market structure with the threat of entry.