Why improving agrifood quality is difficult in China: Evidence from dairy industry

•We build an agrifood quality-adjusted cost function and estimate its elasticity.•We examine why improving quality is more difficult in China dairy industry.•Diseconomies of scale exist in quality production of raw milk.•Economies of scale exist in the quantity production of raw milk.•Large-scale centralized producers have less incentive to increase raw milk quality.

The issue of economy of scale exists both in terms of the quantity of agricultural production and also in its quality aspect. From the perspective of production cost, we build an agrifood quality-cost function and its elasticity estimation model and then empirically estimate this model in China's dairy industry. Analysis of survey data, estimation results of raw milk quality-cost elasticity and quantity-cost elasticity indicate that, in current factors market and under current policy environment, an economy of scale for raw milk quality does not exist and the economic incentive to improve raw milk quality is not enough. In contrast, raw milk quantity exhibits an economy of scale, and increasing the production scale is profitable. This provides a theoretical basis for explaining why improving raw milk quality is much more difficult than increasing quantity. Accordingly, in order to fundamentally improve the overall level of quality of raw milk, changing the status of diseconomy of scale should be the primary strategy.