Tag Archives: oligopoly

05.21.2013 | Monopolistic Competition: Marijuana Markets

As marijuana becomes increasingly legal, what kind of a market do we want?

At the moment, Colorado and Washington permit the production, sale and consumption of recreational marijuana and 18 states say the sale of marijuana for medical use is okay. But meanwhile, “federal law prohibits the cultivation, distribution and possession of marijuana.”

As a result, there are multiple marijuana markets in the United States. We even have marijuana arbitrageurs. Cheap in California and expensive in NY, the marijuana that is grown for medicinal use on the West coast can be sold in the East for a handsome profit.

Now, let’s take the next step. Assuming that marijuana becomes legal throughout the US, what needs to be resolved?

One concern is market structure and how to create monopolistic competition. With many sellers on the supply side and many buyers creating demand, monopolistic competition lets the market determine price and quantity. By contrast, if a less competitive oligopolistic market develops, several large firms would have disproportionate power. Targeting potentially heavy marijuana users, they could encourage excessive and unhealthy consumption.

A second issue is regulation. On the supply side, quality and safety need to be assured. Labeling needs to be accurate. For marijuana, we are not only talking about a smokable plant but also products like ice cream, candies, brownies and lozenges.

Finally, what about taxes? Colorado and Washington have been wrestling with the size of a sales tax. Too high and you could get a black market. Too low, and not enough revenue. Almost 2 weeks ago, the Colorado legislature approved an effective rate of 21.2%–more than the beer tax and less than cigarettes. Here are the specifics:

Colorado Marijuana Taxes (if approved by the governor and a popular vote)

Colorado Marijuana Taxes From Quartz (Taxes still have to be approved by governor and citizens)

Our bottom line? Because market structures create incentives for sellers and buyers, legislators can shape the impact of legalized marijuana.

Sources and Resources: The articles on marijuana markets are fascinating. The NY Times had this Op-Ed, Quartz focused on taxes (and the source of my cost data), this past econlife post links to some wonderful discussions, and here is a “Marijuana Arbitrage” podcast from NPR’s Planet Money. You might also want to see what the Congressional Research Service says about marijuana.

Posted by: adminEcon
Tags: Colorado, legalizing marijuana, monopolistic competition, oligopoly
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05.18.2013 | The Prisoners’ Dilemma: Outsourcing Factory Safety

Why do H&M and Gap disagree?

While European retailers like H&M (biggest Bangladesh garment buyer), Benetton, Marks & Spencer and Carrefour will act to together to elevate Bangladesh factory safety standards, US firms like Gap, Wal-Mart, J.C. Penney and Target are each acting alone. Why?

Sounds like retailers are facing the prisoners’ dilemma.

Picture for a moment 2 (guilty) suspects. Questioned by the police, each one can confess or remain silent. When one confesses and the other does not, the talker gets a less severe sentence. If both are silent, then they are released; if both confess, then they get equal jail time.

And therein lies the dilemma. Do you base your decision on what you think the other individual will do? The problem is that each one’s fate depends on what the other prisoner does. And, neither knows the other’s strategy.

An example of economic game theory, the prisoners’ dilemma involves strategizing against a second party that has the power to affect the consequences of your decisions. Whether looking at disarmament negotiations, Democrats and Republicans, or H&M and Gap, the basic strategic patterns are similar. John Nash won a Nobel Prize for his research about Game Theory.

So yes, retailers have compelling ethical incentives to elevate safety standards in Bangladesh. However, because an ethical strategy coincides with profit considerations, each one’s decision is all about competition and the prisoners’ dilemma.

Sources and Resources: This Washington Post article provides good background on how retailers disagree about elevating factory safety and here is the 6 page agreement that most US firms are not signing. For more on the prisoners’ dilemma at econlife, you might enjoy posts on OPEC, Congress, Ivy League schools and World Cup soccer. Please note that this post includes some excerpts from previous posts on the prisoners’ dilemma.

Posted by: adminEcon
Tags: game theory, oligopoly, outsourcing, prisoners' dilemma, Wal-Mart, worker safety
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02.24.2013 | Oligopoly: Competing For Stomach Share

For an oligopoly that sells food, competition is all about “stomach share.”

Our story starts with Yoplait…

More than a decade ago, General Mills made sure that yogurt would become a popular “health food.” No, it was not because so many dieters were eating it. Instead, General Mills fortified Yoplait with more sugar than its Lucky Charms cereal. As a result, and most crucially, it tasted great. Or, as its CEO said, “… don’t run around trying to sell stuff that doesn’t taste good.”

Sort of like Goldilocks and the 3 Bears, not too much, not too little, but just the right amount of sugar, salt and fat creates most consumers’ “bliss point.” A typical food oligopoly goal, the “bliss point” optimizes the consumer’s craving for that chip or or cereal without quickly creating satiety. As a result, we can eat lots of Doritos with Cherry Vanilla Dr. Pepper because both have ideal “bliss points.”

And that takes us to Howard Moskowitz.

A ”food engineer” famous for figuring out how Prego could compete with Ragu, Howard Moskowitz uses science to identify “bliss points.” With Prego, they needed a chunky sauce and none yet existed. Also though, many Prego sauces have more sugar than 2 Oreo cookies and close to 1/3 of the daily sodium recommended for an adult.

Finally, some CDC (Centers for Disease Control) stats in the following graph tell us who is consuming salt and sugar laden foods at fast food and pizza restaurants.

And that returns us to “stomach share.” Knowing its data, hiring its food engineers, and aiming for our “bliss point,” large firms called oligopolies compete against a few other large firms for the “stomach share” of millions of consumers.

Sources and Resources: A fascinating tale that conveys how a food oligopoly competes, this NY Times Magazine article is also about obesity. As a complement, this article from The Hill summarizes a recent CDC report on fast food consumption and here is the CDC report.

Posted by: julianfstr
Tags: competition, fast food, General Mills, oligopoly, product differentiation
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02.16.2013 | Oligopoly: A Ketchup Story

Called the “Ketchup Conundrum” by journalist Malcolm Gladwell, we have many mustards but only one ketchup.

Grey Poupon transformed the mustard market. Originally a delicacy in the gourmet section, Grey Poupon was selected over French’s in taste tests. However, a $1.49 8-ounce bottle of French’s was #1, Gulden’s next, and no one had heard of Grey Poupon. So Grey Poupon offered packets in airline meals, changed their bottle and, most appealingly, convinced us that an expensive “French” mustard ($3.99 for 8 ounces) could reflect our sophistication. True, it was made in Connecticut with Canadian ingredients but we did not know that. From there, other mustards appeared and the market multiplied.

Here is the 1988 Rolls Royce ad for Grey Poupon.

The ketchup story is very different from mustard. Using spaghetti sauces as the typical example, Gladwell explains that Prego entered the market by creating a chunky sauce. Their goal was to discover what people liked that the market leader lacked. Then advertise and you make your mark. For Heinz Ketchup, no one yet has uncovered the alternative that would make people switch.

Researching ketchup, I discovered that, “a typical five year old consumes sixty percent more ketchup than a 40 year old.” Probably impossible to quantify, still a 5 year’s old’s potential ketchup intake reflects Heinz’s clever decision to make its packaging kid-friendly. Once they created an E-Z squirt bottle that a little one could manipulate, ketchup consumption climbed by 12%. Currently, Heinz has 60% of the US ketchup market.

Ketchup is the perfect case study for oligopolistic competition. As a market leader with Hunt’s and Del Monte far behind, Heinz makes meaningful market entry tough, competes through product differentiation, and, as the E-Z squirt decision demonstrates, they still innovate. Around the world, depending on the country, their ketchup recipe varies. Heinz Canada tells us that their ketchup eaters prefer a sweeter version than US consumers who like their ketchup spicier.

Perhaps because 91% of all consumers use ketchup (a Mintel condiment study), Warren Buffett’s Berkshire Hathaway and a Brazilian private equity firm will be spending $28 billion to take Heinz private as its new owners. So yes, we have only one ketchup but will we have a new Heinz? Buffett says that its offices will remain in Pittsburgh.

Sources and Resources: As always, Malcolm Gladwell has written a wonderful article. His “Ketchup Conundrum” takes us to our taste buds, competition gurus, food history and my E-Z squirt quote. If you want more on a history of ketchup that starts in China, Slate has the story while for mustard history, in addition to the Gladwell piece, I went to an excerpt from The 2,000 Percent Solution and this NY Times article. For international ketchup preferences, here is the Heinz Canada link and here, Forbes tells more about the firm and its market share.

Posted by: adminEcon
Tags: competitive market structure, Grey Poupon Mustard, Heinz Ketchup, Malcolm Gladwell, oligopoly, Warren Buffett
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02.12.2013 | Oligopoly: Airline Mergers

A 1962 song said, “Breaking Up is Hard To Do.” Even more so, it is tough to get together and create an oligopoly.

When Continental and United merged during 2010, it took 14 months to solve their coffee problem.

The difficulties began when a 14 member beverage committee selected a light roast from Fresh Brew. Used to a potent Starbucks bean, Continental’s fliers objected to the watery blend while United’s customers, who had always been served the Fresh Brew, were delighted. Told about “howls of protest,” though, the beverage committee decided to re-assemble and start all over again. This time they chose a medium roast.

And that was just the coffee.

If the American/US Air merger is approved this week, they will have a monumental task. Yes, they immediately have to finalize the split in ownership, how to combine the two boards, which management will remain. They will have 2 employee cultures and procedures to combine and what about uniforms and dishes and airplane logos?

American just bought new dishes and airplanes. Perhaps intentionally, the dishes have no logo. But the planes are made of lightweight composite materials that require paint. It could be expensive if a merged airline is called American as has been predicted. Then, will US Airways planes get the same look? If so, larger planes like a 777 can cost as much as $200,000 to paint while the price tag is closer to $50,000 for smaller aircraft.

The coffee though, might not be a problem. American and US Airways both serve an arabica bean premium coffee and Nescafé Decaf.

Whenever we talk about an airline merger, it really is all about market structure. Deregulated in 1978, the industry no longer had government guaranteeing profits and controlling routes for interstate air travel. Instead, with the market taking over, luxury diminished, profits declined and new airlines appeared. Competition meant lower fares, disintegrating service and many more fliers.

Soon though, with profitability tough to achieve, the bankruptcies and mergers began. Or, as Richard Branson said, ”How do you become a millionaire? Start as a billionaire, and then buy an airline.” The result is consolidation. Now, with Southwest, Delta, United, and perhaps an American/US Airways combination dominating the industry, we have a more concentrated market structure through which airlines have more power over fares, routes and costs.

Sources and Resources: These articles on the American/US Air potential merger and on the US airline industry perfectly complement this 20 second interactive summary graphic on airline industry history. And here is my source on those dishes without logos. Finally, you might enjoy Neil Sedaka singing, “Breaking Up is Hard to Do.”

Posted by: adminEcon
Tags: airline mergers, American Airlines, oligopoly, United Airlines, US Airways
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