Visa Case - Create and answer a case study similar to the Visa Case (Chapters 7, 9, 10, 13) - Cases Available under Assignments tab on Blackboard that discusses network effects, consumer lock-in and cooperative relations (collusion?) between companies. When does cooperation stifle innovation and lead to anticompetitive outcomes? George Valiquette
FINAL PAPER
Introduction
I wanted to examine a famous duopoly of Coca-Cola Company and Pepsi Corporation.
The Coca-Cola Company is a multinational beverage corporation and manufacturer, retailer and marketer of non-alcoholic beverage concentrates and syrups. Coca-Cola currently offers more than 500 brands in over 200 countries or territories and serves over 1.7 billion servings each day. The company operates a franchised distribution system dating from 1889 where The Coca-Cola Company only produces syrup concentrate which is then sold to various bottlers throughout the world who hold an exclusive territory. The Coca-Cola Company owns its anchor bottler in North America, Coca-Cola Refreshments. Based on Interbrand's best global brand 2011, Coca-Cola was the most valuable brand. Coca-Cola Company trades on the New York Stock Exchange under symbol: KO.
Pepsi Incorporation is a multinational corporation with interests in the manufacturing, marketing and distribution of grain-based snack foods, beverages, and other products. As of 2009, 19 of PepsiCo’s product lines generated retail sales of more than $1 billion each, and the company’s products were distributed across more than 200 countries, resulting in annual net revenues of $43.3 billion. Based on revenue, PepsiCo is the second largest food and beverage business in the world. The company’s beverage distribution and bottling is conducted by PepsiCo as well as by licensed bottlers in certain regions. Pepsi Corporation trades on the New York Stock Exchange under symbol: PEP.
Anticompetitive Practices
Coke and Pepsi together with their associated bottlers capture over 70% of the market, forming a duopoly. Unlike the Visa and MasterCard case, Coke and Pepsi are fierce competitors. They engaged in fierce competition for many years known in the industry as “Coke Wars”.
Both Coke and Pepsi have been involved in many lawsuits in relation to its allegedly monopolistic and discriminatory practices. In 2000, PepsiCo filed an Antitrust suit against Coca-Cola. PepsiCo had accused Coke of violating antitrust laws by barring its independent distributors from selling Pepsi products. The case was eventually dismissed. The judge felt that Pepsi could get its product to restaurant chains and other outlets by using different distributors.
In 2005, European Unions investigation revealed that Cokes business methods stifled competition. The European Commission found that Coke used its power to stifle competition through a series of sales agreements. Commission required that businesses selling Coke products would also have to sell less recognizable competitors products. In addition, where Coke supplies a free-branded fridge to retailers with no other means of cooling drinks, 20 percent of its shelf space must be given over to products from other companies. The Commissions decision benefits consumers by improving competition in the markets for carbonated soft drinks in Europe. Consumers are able to choose from a larger variety of soft drinks at competitive prices.
In another case, Mexico’s Federal Competition Commission fined the Coca-Cola system $13 million for monopolistic practices. Coke controls more than 70 percent of the soft drinks market in Mexico. Mexico is the second largest market for Coca-Cola, after United States. In 2002, Coca-Cola company felt threatened by a new entry into the market by a new Peruvian company called “Big Cola”. Big Cola has captured 5% of the Mexican market and Coca-Cola Company decided to kill its competitor by unleashing and aggressive and illegal marketing effort. Coke provided incentives for shop owners to remove competing brands and threatened to punish them if they didn’t. It was found that Coke’s sales force would order shop owners to remove Big Cola or else loose all promotional gifts and offers and eventually loose their coolers and be cut off from renewing supplies with Coke. When Federal Competition Commission conducted their field investigation they visited various shops and found that Big Cola was either not available or was placed at the back of the shop, away from Coca-Cola fridges at the front.
Barriers to Entry
Entry into the market is extremely difficult and nearly impossible. Both Pepsi and Coke deal with similar suppliers and buyers. Entry into the industry would involve developing new operations both bottling and production which is extremely difficult. Pepsi and Coke already control over 70% of the market which means that they generate huge profits and could spend substantial amount on advertisements. It would be very difficult to overcome the tremendous marketing muscle and marketing presence of Coke, Pepsi and a few other competitors. Coke and Pepsi have established brand names that are more than a century old. Bottling business requires substantial amount of capital investment, which prevents companies from entering the industry.
Coke and Pepsi have personal relationships with their retail channels and would be able to defend their positions effectively through discounting and other tactics. Existing bottlers had exclusive territories in which to distribute their products. Regulatory approval of intrabrand exclusive territories, via the Soft Drink Interbrand Competition Act of 1890, ratified this strategy, making it impossible for new bottlers to get started in any region where an existing bottler operated.
Network Effects and Consumer Lock-In
First I would like to discuss consumer lock-in in soft drink industry. The soft drink industry sells to consumers through five principal channels: food stores, convenience and gas, fountain, vending, and mass merchandisers.
Supermarkets are principal customer for soft drinks makers. The stores count on soft drinks to generate consumer traffic, so they need Coke and Pepsi products. It would be hard for a supermarket to work with another unknown network for supplying soft drinks. Coke and Pepsi products are established brands and stores know that they generate customers attention, unlike the other less known networks. Supermarkets don’t have much of a bargaining power with Coke and Pepsi. They could possibly get cheaper products from another network that is less recognizable, but that would hurt stores profits. The only power that supermarket has is the control over premium shelf space, which could be allocated to either Coke or Pepsi products. This power does give them some control over soft drink profitability. Consumers expect to pay less through this channel, so prices are lower, resulting in lower profitability for Pepsi and Coke.
National mass merchandising chains such as Wal-Mart have much more bargaining power and are not locked-in. These stores do carry both Coke and Pepsi products, but they could negotiate more effectively due to their scale and magnitude of their contracts. Mass merchandisers like Wal-Mart have a lot more money to spend and they can easily switch to another network without having too big of a hit on their profits. Because, mass merchandisers are not locked-in as much as other customers, they are less profitable for soft drink makers.
Fountain sales are the least profitable channel for Pepsi and Coke. Buyers at major fast food chains only need to stock the products of one manufacturer, so they could negotiate the optimal pricing. However, major fast food chains are locked-in with one or another network, because Pepsi and Coke are the two most recognizable brands. Getting with another network means lower sales for fast food chains.
Vending is the most profitable channel for soft drink industry. Essentially there are no buyers to bargain with at these locations, where Coke and Pepsi bottlers could sell directly to consumers through machines owned by them. Property owners are paid a sales commission on Coke and Pepsi products sold through machines on their property, so their incentives aligned with those of the soft drink makers, and prices remain high. The property owners are locked in and so as consumers. If property owner chooses a less recognizable network even though it could be a cheaper network, he would loose money. Less customers would buy soft drinks from these unknown producers.
The final channels are convenience stores and gas stations. Soft drink producers generate relatively high profits through these channels. Convenience stores and gas stations want to work with Coke and Pepsi networks, because they would attract more customers due to brand recognition. Convenience stores and gas stations are locked in with Pepsi and Coke networks.
Many of Pepsi Corporations customers enjoy network complementarities by working with Pepsi network. For example, customers like supermarkets can order other products from PepsiCo besides soft drinks. PepsiCo product variety includes: Lays Chips, Gatorade, Tropicana juice, Doritos Chips, Lipton Teas, Quaker Products, Cheetos Chips, Ruffles, Tostitos Chips, Fritos Chips and others. Customers get discount from Network provider such as Pepsi for using their network. It is cheaper for a supermarket to order different varieties of food and soft drink products from a same network, because they receive discounts from this network. In addition, different products are usually delivered to the store at the same time by the same network. This minimizes transportation costs that supermarket would otherwise not have if they choose different network providers.
Customers also enjoy direct network externalities by working with either Coke or Pepsi network. For example, when stores like Meijer, Kroger, Wal-Mart and Target join one network in the same town such as Coke-Cola network they minimize their costs. It is cheaper for a Network provider to deliver large quantities of products to the same locations versus delivering small quantities. These costs savings can be passed to customers as incentives to join that network.
Conclusions
I have learned many new things about oligopolies and duopolies from Visa and MasterCard Case and Coca-Cola and Pepsi case. At first, I learned that oligopolies restrict competition unfairly, retard innovation, charge rent and price products higher than they could have in perfect competition free market with multiple participants.
I also learned that competition does not necessarily translate either to variety or to lower prices. Many consumers are turned off by too much choice. Lower prices sometimes deter competition and new entrants. It is also easier to adopt a single worldwide or industry-wide standard in an oligopolistic environment. Standards are known to decrease prices by cutting down on research and development expenditures. Only firms with dominant market share have both incentive and capabilities to invest in R&D and marketing.
Economist magazine says that “ The story of America’s export cartel’s suggests that when firms decide to co-operate, rather than compete, they do not always have price increases in mind. Sometimes, they get together simply in order to cut costs, which can be benefit to consumers.”
I also learned from examination of Coke and Pepsi Case that market concentration leads to price wars, to the great benefit of consumer. Soft drink market is ruled by two firms; Pepsi and Coke. The market has been a scene for ferocious price competition for decades.
In his recently published tome "The Free-Market Innovation Machine - Analyzing the Growth Miracle of Capitalism", William Baumol of Princeton University, concurs. He daringly argues that productive innovation is at its most prolific and qualitative in oligopolistic markets. Because firms in an oligopoly characteristically charge above-equilibrium (i.e., high) prices - the only way to compete is through product differentiation. This is achieved by constant innovation - and by incessant advertising.
1. Soft drink industry sells its products through five principal channels. Which one of the channels is the most profitable for soft drink industry ?
A. Supermarkets
B. Convenience stores and gas stations
C. Fountain drinks
D. Vending machines
E. Mass merchandisers
2. Coke and Pepsi together with their associated bottlers capture what percentage of overall soft drink market ?
A. Over 70%
B. 25%
C. 42%
D. None of the above
3. In 2005, European Union’s investigation revealed that Cokes business methods stifled competition. What was the outcome of the investigation ?
A. European Union ordered Coca-Cola to pay $100 million in penalties.
B. European Union ordered Coca-Cola to stop its operations in several countries and leave the market in those countries.
C. European Union required that businesses selling Coke's products would also sell less recognizable competitor's products.
D. European Union did not do anything and let Coke practice the same business methods.
4. Which country represents the second largest market for Coca-Cola Corporation ?
A. Spain
B. Russia
C. England
D. Mexico
5. Some Oligopolies cause which of the following ?
A. Retard innovation
B. Restrict competition
C. Price products higher then they could in perfect competition
D. All of the above
Answers.
D. Vending is the most profitable channel for soft drink industry.
A. Coke and Pepsi together capture over 70% of the overall market for soft drinks.
C. European Union required that businesses selling Coke's products would also sell less recognizable competitor's products.
D. Mexico is the second largest market for Coca-Cola. Coca-Cola captures 70% of the soft drink market in Mexico.
D. All of the above is the correct answer.
Case Summaries
Case 1 by Anthony Christofaro. Government policies- Price ceilings, price floors, excise taxes, and the economic effects of prohibition (alcohol, drugs, kidneys, etc). This case talks about the history of prohibition in our country. The case talks about effects of prohibition on federal, state and local taxes. The case also talks about the, federal, state and local governments that are permitting liquor sales to raise tax revenues.
Case 2 by Thaddeus Bogardus. Supply and Demand. This case talks about the laws of supply and demand. It also presents some real world problems dealing with supply and demand of tablet computers, wine, gasoline, water and energy.
Case 3 by Anya DeVoss. Using regression analysis to derive a demand curve, also t-stats, R-squared, F-stat, adjusted R-square. This case talks about regression analysis and how it is used to estimate demand. The case talks about different software tools that can be used to run regression analysis such as Microsoft Excel. The case presents some good examples on how to perform regression analysis.
Case 4 by Amy Kitzman. Monopoly. This case defines a monopoly and talks about the sources of monopoly power. The case also presents real examples of monopolies.
Case 5 by Dan Kreitl. Monopolistic Competition. This case defines monopolistic competition and talks about characteristics of monopolistic competition.
November 15th
Good article on Apple Corporation being accused of anti-competitive practices in India. They are being accused of curbing customers choice by limiting the availability of IPhones and IPads in India to a limited number of service providers.
For a long time Visa and MasterCard imposed anti-competitive restrictions that hurt consumers and merchants. In 2010 Department of Justice found Visa and MasterCard guilty of anti-competitive restrictions that they imposed on merchants. "These anti-competitive practices have gone untouched for decades" said Jennifer Hatcher, vise president of government regulations, at the Food Marketing Institute. The main goal of DOJ was to force price competition among card issuers. The new law enables merchants to offer consumers discounts between cards. This will for the first time ever force the card issuers to compete on cost.
This weeks article in SmartMoney magazine talks about Visa wanting to move into cell phone payment market. Domestically Visa will start off in heavy-volume stores, like Starbucks and Mcdonalds. Those merchants are looking for quicker transactions and dont have to give receipts. There are still issues and concerns with mobile payments. In order to make mobile payments universal, Visa would have to replace every terminal. In addition, your cellphone might breakdown or your battery might die. Visa thinks that allowing people to access their cash by using plastic or mobile phones or the Internet will give them choices. Recently Federal Reserve capped the amount that debit carb issuers (Banks) can charge merchants. The Banks want to recoup the revenue by pressuring Visa to trim what it charges them, says Jason Kupferberg, a senior analyst at Jefferies. Visa tryes to recoup their revenues by introducing new innovative payment methods.
Source: J. Alex Tarquinio. SmartMoney Magazine. October 26th, 2011rc
Good article on Federal Trade Commission approving a settlement with Intel Corporation that resolves charges the company illegally stifled competition in the market for computer chips.
Under the settlement Intel will be prohibited from:
conditioning benefits to computer makers in exchange for their promise to buy chips from Intel exclusively or to refuse to buy chips from others; and
retaliating against computer makers if they do business with non-Intel suppliers by withholding benefits from them.
Visa and MasterCard are the two largest general purpose card networks. They both combine for over 75% of all purchases made with general purpose cards in the U.S.
Visa and MasterCard have adopted and maintained possible anticompetitive rules and policies that increase an entrant’s cost of developing cardholder and merchant bases. By virtue of their dominant market shares and the difficulty of entry into the highly-concentrated network market, Visa and MasterCard together have potential power to injure competition in that market. Visa and MasterCard relationship hurt consumers by reducing competitive investments in the innovation, development, and marketing of improved network products and services and by restraining the competitiveness of smaller networks. Reference (Visa and MasterCard Case).
Visa’s member banks own and participate in the governance of MasterCard and MasterCard’s member banks own and participate in the governance of Visa. This overlapping ownership and governance structure has become known in the industry as duality.
Visa and MasterCard adopted rules and regulations that restrict the ability of all member banks to do business with American Express, Discover/Novus, or any other network that the controlling banks deem to be “competitive”. The most important thing about this is that Visa and MasterCard do not apply those rules to one another.
Visa and Master Card compete in general purpose card market. General purpose cards are divided into two categories:
Credit cards- such as Visa, MasterCard, American Express and Discover. Those cards usually permit cardholder to either pay all charges within a set period after a monthly bill is generated or pay only a portion of the charges within that time period and pay the remainder in monthly installments, including interest.
Charge cards- such as American Express Green Card. Those cards require the cardholder to pay all charges within a set period after a monthly bill is rendered.
Competition in general purpose card market occurs at two levels:
Level one: Visa and MasterCard compete with companies like American Express, Discover and Japan Credit Bureau in an upstream market.
Level two: Individual Visa and MasterCard member banks compete with each other and with American Express, Discover/Novus, Diners Club, and JCB in two downstream markets:
Card-issuing market- This is the market for issuing general purpose cards to consumers.
Card-acceptance market- The market for providing the services that enable merchants to accept general purpose cards for the purchase of goods or services.
Card issuers compete for cardholders with respect to interest rates, annual cardholder fees, payment terms and conditions, card enhancements, and customer service. Entities that provide card acceptance services to merchants compete with respect to their fees and the quality of service they provide. This competition among Visa and MasterCard member banks in the card-issuing market and the card-acceptance market is not a substitute for, and does not replace, competition at the network level. Competition at the downstream levels thus cannot protect consumers from the anticompetitive effects of the exercise of market power by general purpose card networks. Competition among card issuers does, however, ensure that if network competition is vigorous, the benefits of that competition will be passed on to consumers.
September 21st
Some key terms:
A monopoly is a situation where a single firm serves an entire market for a good for which there are no close substitutes.
Monopoly power comes from different sources. Economies of scale- exist whenever long-run average costs decline as output increases. Diseconomies of scale-exist whenever long-run average costs increase as output increases. Economies of scope is another source of monopoly power. They exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms. Cost complementarities exist in a multiproduct cost function when the marginal cost of producing one output is reduced when the output of another product is increased; that is, when an increase in the output of product 2 decreases the marginal cost of producing output 1. Multiproduct firms that enjoy cost complementarities tend to have lower marginal costs than firms producing a single product. Patents and Other Legal Barriers also create monopoly power for some companies. Governments grant rights or patents to certain companies to create products. This prevents other companies from entering the market and creates monopoly.
Oligopoly is a market structure in which there are only a few firms, each of which is large relative to the total industry. An oligopoly composed of only two firms is called duopoly. A firm operating in an oligopoly setting is the most difficult to manage. The key reason is that there are few firms in an oligopolistic market and the manger must consider the likely impact of her of his decisions on the decisions of other firms in the industry.
George Valiquette
FINAL PAPER
Introduction
I wanted to examine a famous duopoly of Coca-Cola Company and Pepsi Corporation.
The Coca-Cola Company is a multinational beverage corporation and manufacturer, retailer and marketer of non-alcoholic beverage concentrates and syrups. Coca-Cola currently offers more than 500 brands in over 200 countries or territories and serves over 1.7 billion servings each day. The company operates a franchised distribution system dating from 1889 where The Coca-Cola Company only produces syrup concentrate which is then sold to various bottlers throughout the world who hold an exclusive territory. The Coca-Cola Company owns its anchor bottler in North America, Coca-Cola Refreshments. Based on Interbrand's best global brand 2011, Coca-Cola was the most valuable brand. Coca-Cola Company trades on the New York Stock Exchange under symbol: KO.
Pepsi Incorporation is a multinational corporation with interests in the manufacturing, marketing and distribution of grain-based snack foods, beverages, and other products. As of 2009, 19 of PepsiCo’s product lines generated retail sales of more than $1 billion each, and the company’s products were distributed across more than 200 countries, resulting in annual net revenues of $43.3 billion. Based on revenue, PepsiCo is the second largest food and beverage business in the world. The company’s beverage distribution and bottling is conducted by PepsiCo as well as by licensed bottlers in certain regions. Pepsi Corporation trades on the New York Stock Exchange under symbol: PEP.
Anticompetitive Practices
Coke and Pepsi together with their associated bottlers capture over 70% of the market, forming a duopoly. Unlike the Visa and MasterCard case, Coke and Pepsi are fierce competitors. They engaged in fierce competition for many years known in the industry as “Coke Wars”.
Both Coke and Pepsi have been involved in many lawsuits in relation to its allegedly monopolistic and discriminatory practices. In 2000, PepsiCo filed an Antitrust suit against Coca-Cola. PepsiCo had accused Coke of violating antitrust laws by barring its independent distributors from selling Pepsi products. The case was eventually dismissed. The judge felt that Pepsi could get its product to restaurant chains and other outlets by using different distributors.
In 2005, European Unions investigation revealed that Cokes business methods stifled competition. The European Commission found that Coke used its power to stifle competition through a series of sales agreements. Commission required that businesses selling Coke products would also have to sell less recognizable competitors products. In addition, where Coke supplies a free-branded fridge to retailers with no other means of cooling drinks, 20 percent of its shelf space must be given over to products from other companies. The Commissions decision benefits consumers by improving competition in the markets for carbonated soft drinks in Europe. Consumers are able to choose from a larger variety of soft drinks at competitive prices.
In another case, Mexico’s Federal Competition Commission fined the Coca-Cola system $13 million for monopolistic practices. Coke controls more than 70 percent of the soft drinks market in Mexico. Mexico is the second largest market for Coca-Cola, after United States. In 2002, Coca-Cola company felt threatened by a new entry into the market by a new Peruvian company called “Big Cola”. Big Cola has captured 5% of the Mexican market and Coca-Cola Company decided to kill its competitor by unleashing and aggressive and illegal marketing effort. Coke provided incentives for shop owners to remove competing brands and threatened to punish them if they didn’t. It was found that Coke’s sales force would order shop owners to remove Big Cola or else loose all promotional gifts and offers and eventually loose their coolers and be cut off from renewing supplies with Coke. When Federal Competition Commission conducted their field investigation they visited various shops and found that Big Cola was either not available or was placed at the back of the shop, away from Coca-Cola fridges at the front.
Barriers to Entry
Entry into the market is extremely difficult and nearly impossible. Both Pepsi and Coke deal with similar suppliers and buyers. Entry into the industry would involve developing new operations both bottling and production which is extremely difficult. Pepsi and Coke already control over 70% of the market which means that they generate huge profits and could spend substantial amount on advertisements. It would be very difficult to overcome the tremendous marketing muscle and marketing presence of Coke, Pepsi and a few other competitors. Coke and Pepsi have established brand names that are more than a century old. Bottling business requires substantial amount of capital investment, which prevents companies from entering the industry.
Coke and Pepsi have personal relationships with their retail channels and would be able to defend their positions effectively through discounting and other tactics. Existing bottlers had exclusive territories in which to distribute their products. Regulatory approval of intrabrand exclusive territories, via the Soft Drink Interbrand Competition Act of 1890, ratified this strategy, making it impossible for new bottlers to get started in any region where an existing bottler operated.
Network Effects and Consumer Lock-In
First I would like to discuss consumer lock-in in soft drink industry. The soft drink industry sells to consumers through five principal channels: food stores, convenience and gas, fountain, vending, and mass merchandisers.
Supermarkets are principal customer for soft drinks makers. The stores count on soft drinks to generate consumer traffic, so they need Coke and Pepsi products. It would be hard for a supermarket to work with another unknown network for supplying soft drinks. Coke and Pepsi products are established brands and stores know that they generate customers attention, unlike the other less known networks. Supermarkets don’t have much of a bargaining power with Coke and Pepsi. They could possibly get cheaper products from another network that is less recognizable, but that would hurt stores profits. The only power that supermarket has is the control over premium shelf space, which could be allocated to either Coke or Pepsi products. This power does give them some control over soft drink profitability. Consumers expect to pay less through this channel, so prices are lower, resulting in lower profitability for Pepsi and Coke.
National mass merchandising chains such as Wal-Mart have much more bargaining power and are not locked-in. These stores do carry both Coke and Pepsi products, but they could negotiate more effectively due to their scale and magnitude of their contracts. Mass merchandisers like Wal-Mart have a lot more money to spend and they can easily switch to another network without having too big of a hit on their profits. Because, mass merchandisers are not locked-in as much as other customers, they are less profitable for soft drink makers.
Fountain sales are the least profitable channel for Pepsi and Coke. Buyers at major fast food chains only need to stock the products of one manufacturer, so they could negotiate the optimal pricing. However, major fast food chains are locked-in with one or another network, because Pepsi and Coke are the two most recognizable brands. Getting with another network means lower sales for fast food chains.
Vending is the most profitable channel for soft drink industry. Essentially there are no buyers to bargain with at these locations, where Coke and Pepsi bottlers could sell directly to consumers through machines owned by them. Property owners are paid a sales commission on Coke and Pepsi products sold through machines on their property, so their incentives aligned with those of the soft drink makers, and prices remain high. The property owners are locked in and so as consumers. If property owner chooses a less recognizable network even though it could be a cheaper network, he would loose money. Less customers would buy soft drinks from these unknown producers.
The final channels are convenience stores and gas stations. Soft drink producers generate relatively high profits through these channels. Convenience stores and gas stations want to work with Coke and Pepsi networks, because they would attract more customers due to brand recognition. Convenience stores and gas stations are locked in with Pepsi and Coke networks.
Many of Pepsi Corporations customers enjoy network complementarities by working with Pepsi network. For example, customers like supermarkets can order other products from PepsiCo besides soft drinks. PepsiCo product variety includes: Lays Chips, Gatorade, Tropicana juice, Doritos Chips, Lipton Teas, Quaker Products, Cheetos Chips, Ruffles, Tostitos Chips, Fritos Chips and others. Customers get discount from Network provider such as Pepsi for using their network. It is cheaper for a supermarket to order different varieties of food and soft drink products from a same network, because they receive discounts from this network. In addition, different products are usually delivered to the store at the same time by the same network. This minimizes transportation costs that supermarket would otherwise not have if they choose different network providers.
Customers also enjoy direct network externalities by working with either Coke or Pepsi network. For example, when stores like Meijer, Kroger, Wal-Mart and Target join one network in the same town such as Coke-Cola network they minimize their costs. It is cheaper for a Network provider to deliver large quantities of products to the same locations versus delivering small quantities. These costs savings can be passed to customers as incentives to join that network.
Conclusions
I have learned many new things about oligopolies and duopolies from Visa and MasterCard Case and Coca-Cola and Pepsi case. At first, I learned that oligopolies restrict competition unfairly, retard innovation, charge rent and price products higher than they could have in perfect competition free market with multiple participants.
I also learned that competition does not necessarily translate either to variety or to lower prices. Many consumers are turned off by too much choice. Lower prices sometimes deter competition and new entrants. It is also easier to adopt a single worldwide or industry-wide standard in an oligopolistic environment. Standards are known to decrease prices by cutting down on research and development expenditures. Only firms with dominant market share have both incentive and capabilities to invest in R&D and marketing.
Economist magazine says that “ The story of America’s export cartel’s suggests that when firms decide to co-operate, rather than compete, they do not always have price increases in mind. Sometimes, they get together simply in order to cut costs, which can be benefit to consumers.”
I also learned from examination of Coke and Pepsi Case that market concentration leads to price wars, to the great benefit of consumer. Soft drink market is ruled by two firms; Pepsi and Coke. The market has been a scene for ferocious price competition for decades.
In his recently published tome "The Free-Market Innovation Machine - Analyzing the Growth Miracle of Capitalism", William Baumol of Princeton University, concurs. He daringly argues that productive innovation is at its most prolific and qualitative in oligopolistic markets. Because firms in an oligopoly characteristically charge above-equilibrium (i.e., high) prices - the only way to compete is through product differentiation. This is achieved by constant innovation - and by incessant advertising.
Bibliography
“The Benefits of Oligopolies “. Sam Vaknin. Retrieved from http://samvak.tripod.com/pp159.html
Baye, Michael R. (2010). Managerial Economics and Business Strategy. New York, NY. McGraw-Hill/Irwin.
Gasoline & Automotive Service Dealers of America. Retrieved from
http://gasda.org/2010/11/doj-finds-visa-mastercard-guilty-of-violating-the-sherman-act/
Coke and Pepsi article. July 3rd, 2011. Retrieved from www.econlife.com/econoBlog/
Coca-Cola Company. Retrieved from www.wikepedia.org/wiki/The_Coca-Cola_Company
Pepsi-Cola Company. Retrieved from www.wikepedia.org/wike/PepsiCo
Coke and Pepsi case. University of Berkley. Retrieved from http://faculty.haas.berkeley.edu/meghan/299/Case_analysis_Coke_Pepsi2.pdf
U.S. Judge Dismisses PepsiCo's Antitrust Suit Against Coca-Cola.
Los Angeles Times, September 20, 2000. Retrieved from http://articles.latimes.com/2000/sep/20/business/fi-23832
Coca-Cola Anticompetitive practices. Retrieved from http://killercoke.org/crimes_mexico.php
Questions
1. Soft drink industry sells its products through five principal channels. Which one of the channels is the most profitable for soft drink industry ?
A. Supermarkets
B. Convenience stores and gas stations
C. Fountain drinks
D. Vending machines
E. Mass merchandisers
2. Coke and Pepsi together with their associated bottlers capture what percentage of overall soft drink market ?
A. Over 70%
B. 25%
C. 42%
D. None of the above
3. In 2005, European Union’s investigation revealed that Cokes business methods stifled competition. What was the outcome of the investigation ?
A. European Union ordered Coca-Cola to pay $100 million in penalties.
B. European Union ordered Coca-Cola to stop its operations in several countries and leave the market in those countries.
C. European Union required that businesses selling Coke's products would also sell less recognizable competitor's products.
D. European Union did not do anything and let Coke practice the same business methods.
4. Which country represents the second largest market for Coca-Cola Corporation ?
A. Spain
B. Russia
C. England
D. Mexico
5. Some Oligopolies cause which of the following ?
A. Retard innovation
B. Restrict competition
C. Price products higher then they could in perfect competition
D. All of the above
Answers.
Case Summaries
Case 1 by Anthony Christofaro. Government policies- Price ceilings, price floors, excise taxes, and the economic effects of prohibition (alcohol, drugs, kidneys, etc). This case talks about the history of prohibition in our country. The case talks about effects of prohibition on federal, state and local taxes. The case also talks about the, federal, state and local governments that are permitting liquor sales to raise tax revenues.
Case 2 by Thaddeus Bogardus. Supply and Demand. This case talks about the laws of supply and demand. It also presents some real world problems dealing with supply and demand of tablet computers, wine, gasoline, water and energy.
Case 3 by Anya DeVoss. Using regression analysis to derive a demand curve, also t-stats, R-squared, F-stat, adjusted R-square. This case talks about regression analysis and how it is used to estimate demand. The case talks about different software tools that can be used to run regression analysis such as Microsoft Excel. The case presents some good examples on how to perform regression analysis.
Case 4 by Amy Kitzman. Monopoly. This case defines a monopoly and talks about the sources of monopoly power. The case also presents real examples of monopolies.
Case 5 by Dan Kreitl. Monopolistic Competition. This case defines monopolistic competition and talks about characteristics of monopolistic competition.
November 15th
Good article on Apple Corporation being accused of anti-competitive practices in India. They are being accused of curbing customers choice by limiting the availability of IPhones and IPads in India to a limited number of service providers.
http://ibnlive.in.com/news/apple-accused-of-anticompetitive-practices-in-india/161136-11.html
November 6th
For a long time Visa and MasterCard imposed anti-competitive restrictions that hurt consumers and merchants. In 2010 Department of Justice found Visa and MasterCard guilty of anti-competitive restrictions that they imposed on merchants. "These anti-competitive practices have gone untouched for decades" said Jennifer Hatcher, vise president of government regulations, at the Food Marketing Institute. The main goal of DOJ was to force price competition among card issuers. The new law enables merchants to offer consumers discounts between cards. This will for the first time ever force the card issuers to compete on cost.
Source: Gasoline & Automotive Service Dealers of America
http://gasda.org/2010/11/doj-finds-visa-mastercard-guilty-of-violating-the-sherman-act/
October 27th
This weeks article in SmartMoney magazine talks about Visa wanting to move into cell phone payment market. Domestically Visa will start off in heavy-volume stores, like Starbucks and Mcdonalds. Those merchants are looking for quicker transactions and dont have to give receipts. There are still issues and concerns with mobile payments. In order to make mobile payments universal, Visa would have to replace every terminal. In addition, your cellphone might breakdown or your battery might die. Visa thinks that allowing people to access their cash by using plastic or mobile phones or the Internet will give them choices. Recently Federal Reserve capped the amount that debit carb issuers (Banks) can charge merchants. The Banks want to recoup the revenue by pressuring Visa to trim what it charges them, says Jason Kupferberg, a senior analyst at Jefferies. Visa tryes to recoup their revenues by introducing new innovative payment methods.
Source: J. Alex Tarquinio. SmartMoney Magazine. October 26th, 2011rc
http://www.smartmoney.com/invest/stocks/ceo-interview-visa-1318019760040/?link=sm_newsreel
October 20th
Some of the famous duopolies out there.
www.econlife.com/econoBlog/
October 11th
Good article on FedEx and UPS fighting to stop DHL's acquisition of Airborne due to anticompetitive activities.
http://www.marketwatch.com/story/fedex-and-ups-expected-to-fight-dhl-airborne-merger
October 6th
Good article on Federal Trade Commission approving a settlement with Intel Corporation that resolves charges the company illegally stifled competition in the market for computer chips.
Under the settlement Intel will be prohibited from:
http://www.ftc.gov/opa/2010/08/intel.shtm
September 27th.
Summary of Visa and MasterCard Case.
Visa and MasterCard are the two largest general purpose card networks. They both combine for over 75% of all purchases made with general purpose cards in the U.S.
Visa and MasterCard have adopted and maintained possible anticompetitive rules and policies that increase an entrant’s cost of developing cardholder and merchant bases. By virtue of their dominant market shares and the difficulty of entry into the highly-concentrated network market, Visa and MasterCard together have potential power to injure competition in that market. Visa and MasterCard relationship hurt consumers by reducing competitive investments in the innovation, development, and marketing of improved network products and services and by restraining the competitiveness of smaller networks. Reference (Visa and MasterCard Case).
Visa’s member banks own and participate in the governance of MasterCard and MasterCard’s member banks own and participate in the governance of Visa. This overlapping ownership and governance structure has become known in the industry as duality.
Visa and MasterCard adopted rules and regulations that restrict the ability of all member banks to do business with American Express, Discover/Novus, or any other network that the controlling banks deem to be “competitive”. The most important thing about this is that Visa and MasterCard do not apply those rules to one another.
Visa and Master Card compete in general purpose card market. General purpose cards are divided into two categories:
Credit cards- such as Visa, MasterCard, American Express and Discover. Those cards usually permit cardholder to either pay all charges within a set period after a monthly bill is generated or pay only a portion of the charges within that time period and pay the remainder in monthly installments, including interest.
Charge cards- such as American Express Green Card. Those cards require the cardholder to pay all charges within a set period after a monthly bill is rendered.
Competition in general purpose card market occurs at two levels:
Level one: Visa and MasterCard compete with companies like American Express, Discover and Japan Credit Bureau in an upstream market.
Level two: Individual Visa and MasterCard member banks compete with each other and with American Express, Discover/Novus, Diners Club, and JCB in two downstream markets:
Card-issuing market- This is the market for issuing general purpose cards to consumers.
Card-acceptance market- The market for providing the services that enable merchants to accept general purpose cards for the purchase of goods or services.
Card issuers compete for cardholders with respect to interest rates, annual cardholder fees, payment terms and conditions, card enhancements, and customer service. Entities that provide card acceptance services to merchants compete with respect to their fees and the quality of service they provide. This competition among Visa and MasterCard member banks in the card-issuing market and the card-acceptance market is not a substitute for, and does not replace, competition at the network level. Competition at the downstream levels thus cannot protect consumers from the anticompetitive effects of the exercise of market power by general purpose card networks. Competition among card issuers does, however, ensure that if network competition is vigorous, the benefits of that competition will be passed on to consumers.
September 21st
Some key terms:
A monopoly is a situation where a single firm serves an entire market for a good for which there are no close substitutes.
Monopoly power comes from different sources. Economies of scale- exist whenever long-run average costs decline as output increases. Diseconomies of scale-exist whenever long-run average costs increase as output increases. Economies of scope is another source of monopoly power. They exist when the total cost of producing two products within the same firm is lower than when the products are produced by separate firms. Cost complementarities exist in a multiproduct cost function when the marginal cost of producing one output is reduced when the output of another product is increased; that is, when an increase in the output of product 2 decreases the marginal cost of producing output 1. Multiproduct firms that enjoy cost complementarities tend to have lower marginal costs than firms producing a single product. Patents and Other Legal Barriers also create monopoly power for some companies. Governments grant rights or patents to certain companies to create products. This prevents other companies from entering the market and creates monopoly.
Oligopoly is a market structure in which there are only a few firms, each of which is large relative to the total industry. An oligopoly composed of only two firms is called duopoly. A firm operating in an oligopoly setting is the most difficult to manage. The key reason is that there are few firms in an oligopolistic market and the manger must consider the likely impact of her of his decisions on the decisions of other firms in the industry.