From the viewpoint of the manager, a firm operating in an oligopoly setting is the most difficult variety of firm to manage. The key reason is that there are few firms in an oligopolistic market and the manager must consider the likely impact of her or his decisions on the decisions of other firms in the industry. Moreover, the actions of other firms will have a profound impact on the manager's optimal decisions. Demand for a firm's product in an oligopoly depends critically on how rivals respond to the firm's pricing decisions. The primary difficulty for the firm manager is determining whether or not rivals will match price changes. This discussion prompt encourages students to place themselves in the position of manager of a firm in an oligopolistic market to consider issues that may or may not lead firms to collude.
Recently, Hershey, Nestlé USA, and Mars were sued in the US federal courts by plaintiffs alleging that the three chocolate confectioners conspired to increase selling prices of popular chocolate products manufactured and distributed by these companies. The Court, considering the evidence as a whole, determined that the plaintiffs failed to develop a reasonable inference that the chocolate manufacturers more likely than not conspired to fix prices in the US chocolate market. Defendants in this case successfully pointed to a number of economic arguments which could plausibly explain parallel price increases among these firms. This discussion prompt asks you, as a manager of a firm similarly specializing in consumer snack item, to determine an appropriate course of action in the event that you assume that a major competitor may soon be increasing product prices.
DISCUSSION PROMPT
Assume that you are a product pricing manager at a large, multinational corporation which specializes in consumer snack items, including a range of chocolate bars. You have received information indicating that a competing firm is considering increasing its prices considerably, given the onset of hostilities in a geographical area that supplies the highest proportion of the world's total production of cocoa. Assume that you are sure that the firm has not discovered a technological process that would lower production costs otherwise, and also assume that you are not aware of any large-scale expansions in capacity which might otherwise heighten economies of scale or scope available to your competitor. In this environment, you must decide on a course of action regarding pricing, in the near and medium term. Determine whether it might be advisable for your firm to raise prices or to wait and see if your competitor does so. Present and justify your proposed actions using economic variables, as you state your conclusions to the firm's director of marketing, who has invited one of the firm's attorneys to sit in on your presentation.
TASKS
As the product pricing manager of multinational consumer snack items corporation, decide on a course of action regarding pricing in the near and medium term, to be presented to the director of marketing:
- Determine whether it might be advisable for your firm to raise prices or to wait to see if your competitor does so.
- Present and justify your proposed actions using economic variables.
- Highlight for the firm's attorneys how the economic variables you have presented prove that any price changes will not be construed as price fixing.