Question

Laundry detergent and bags of ice—products of industries that seem pretty mundane, maybe even boring. Hardly! Both have been the center of clandestine meetings and secret deals worthy of a spy novel. In France, between 1997 and 2004, the top four laundry detergent producers (Proctor & Gamble, Henkel, Unilever, and Colgate-Palmolive) controlled about 90 percent of the French soap market. Officials from the soap firms were meeting secretly, in out-of-the-way, small cafés around Paris. Their goals: Stamp out competition and set prices.

Around the same time, the top five Midwest ice makers (Home City Ice, Lang Ice, Tinley Ice, Sisler’s Dairy, and Products of Ohio) had similar goals in mind when they secretly agreed to divide up the bagged ice market.

If both groups could meet their goals, it would enable each to act as though they were a single firm—in essence, a monopoly—and enjoy monopoly-size profits. The problem? In many parts of the world, including the European Union and the United States, it is illegal for firms to divide up markets and set prices collaboratively.

These two cases provide examples of markets that are characterized neither as perfect competition nor monopoly. Instead, these firms are competing in market structures that lie between the extremes of monopoly and perfect competition. Discuss the market conditions based on the above scenario. (8 marks)

Q2. It’s no secret that small businesses play a vital role in the US economy. However, most non-employer small businesses average just $44,000 a year in annual revenue, with many of these companies earning $25,000 or less. While various factors can affect a business’ revenue potential, one of the most important is the pricing strategy utilized by its owners.

Good pricing strategy helps you determine the price point at which you can maximize profits on sales of your products or services. When setting prices, a business owner needs to consider a wide range of factors including production and distribution costs, competitor offerings, positioning strategies and the business’ target customer base.

While customers won’t purchase goods that are priced too high, your company won’t succeed if it prices goods too low to cover all of the business’ costs. Along with product, place and promotion, price can have a profound effect on the success of your small business.

Here are some of the various strategies that businesses implement when setting prices on their products and services. Analyze pricing strategies. (7 marks)

Answer 1

Q1) The market scenario given in this case is that of a 'collusion by oligopoly'.

An Oligopoly is a market with two or more firms (but the number of firms is less) selling homogenous products and having market control. In an oligopoly, the firms are independent of one another.

When rival firms make an agreement to corner other firms to reduce competition by price fixing or other means, then the firms are said to be in collusion. Collusion is illegal.

Collusion in oligopoly is the case where firms in an oligopolistic competition make an agreement to reduce competition by unfair means. The detergent and ice firms are in an oligopoly practicing collusion which is illegal in the given case. The market conditions for an 'oligopoly-collusion' based on the case study are-

1) Few and Firms

Firms in an oligopolistic competition are few in number and large in size.

2) Homogenous Products

The firms in an oligopoly produce homogenous or similar products like in this case of detergent and ice.

3) Barriers to Entry

Not all firms can easily enter an oligopolistic market. There are restrictions to the entry of other firms unlike other markets.

4) Price Fixing

In order to maximize profits, oligopolistic firms can enter collusion and fix prices. Not all collisions are illegal but some like given in the question are illegal.

These were the main conditions of a 'collusion in oligopoly' market.