Economics Department
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Economics Department |
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Oligopoly
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Most big airlines match price hikes
of late last week An across-the-board increase in airfares was matched by most major carriers, but the price rise remained in flux over the weekend and could fall apart today, carriers said.
Late last week, Continental Airlines increased its fares by $10 for all categories of one-way trips over 500 miles, and $5 for all categories of one-way flights less than 500 miles. Northwest Airlines was a lone holdout in not matching the price hike for restricted leisure fares. The increase in unrestricted business travel prices received less support: UAL Corp.'s United Airlines, US Airways Group Inc. and America West Airlines hadn't raised their prices as of late yesterday.
Typically, airlines post price rises over the weekend, when ticket sales are slow, to see if competitors will match. If one or more major network carriers don't go along, other carriers roll back prices.
In his weekly message to employees, Continental Chairman and Chief Executive Gordon M. Bethune said the fare hike was essentially a "fuel surcharge." Higher oil prices have cut into airline profitability, and contributed to a swoon in airline stocks.
Along with oil woes, airline unit revenues have been down from last year's record levels as well, and profits for the industry have been lower this year. Last week, Donald J. Carty, chairman and CEO of American Airlines and its parent, AMR Corp., blasted industry rivals for rushing to increase capacity, then cutting fares to fill empty seats. The strategy, Mr. Carty complained to a meeting of Wall Street analysts, was hurting the profitability of the industry.
United Airlines last week launched one move to increase earnings by cutting travel-agent commissions to 5% from 8%. American quickly matched, and others are expected to follow suit.
A spokesman for Continental said its price-increase initiative was unrelated to Mr. Carty's comments.
1) To what extent do you feel this article provides evidence of collusion in the US airline industry? (7 marks)
Big Brewers Find Price War Seems to
Have No End A costly second front has opened in the Beer Wars: price. A summer ritual in the beer business, discounting has in the past two years become a marketing tool for all seasons. That's great news for cost-conscious beer drinkers, of course, who are seeing 30packs of popular brands in some markets priced as low as $7.99. For the brewers, however, kicking the year-round discounting habit could be difficult. And it is already cutting into industry profits.
Anheuser-Busch Cos. and Miller Brewing Co. have always slugged it out with advertising and promotions, spending hundreds of millions of dollars a year to boost their brands.
Talking frogs and skimpily clad young women, however, haven't been able to revive Americans' interest in beer drinking. Per capita annual beer consumption has fallen since its 1981 peak of 24.6 gallons -- or about 262 12-ounce cans for every man, woman and child -- to 22.1 gallons in 1996. During those years, health awareness has cut into all kinds of booze consumption, rendering alcoholic beverages a mature business in which the best chance for growth is to take market share from a competitor.
Miller, a unit of Philip Morris Cos. and a distant No. 2 in beer to Anheuser, started a price war in early 1997 and was initially successful. Instead of raising prices before the summer, Miller "responded with an increase in discounting," says W. Randolph Baker, chief financial officer of Anheuser. "It wasn't just that they stepped up the summer discounting, but that they got progressively deeper as we went through each quarter of the year."
Anheuser didn't immediately follow, and Miller was able to seize almost two full points of market share, jumping from 20.6% of industry sales in the fourth quarter of 1996 to 22.4% in the second quarter of 1997. Anheuser's share fell during that same period to 43.8% from 46.6%, according to Beer Marketer's Insights Inc., a Nanuet, N.Y., consultant.
The move appears to have caught Anheuser off guard. It normally increases its prices during the first or second quarter and that made even worse its price comparison with Miller during early 1997.
But the Big Bud doesn't sleep for long. Anheuser responded with its own price cuts and quickly grabbed back lost sales; its market share soared to 47.5% for the fourth quarter of 1997, and Miller's was back to 20.9%.
"It's tough with pricing to maintain an offensive advantage because the competition will follow," says Scott Bussen, a Miller spokesman.
The bad news for brewers: While fighting over a few points of market share -- those relatively few beer drinkers who would rather switch brands than pay $1 a case more -- the industry had cut the price of nearly everyone's beer, even the drinkers who couldn't care less about price.
"We don't pay attention to price," says Victoria Oberman of Chicago, loading several cases of Budweiser and Bud Light into her sports utility vehicle at a Chicago supermarket. On this day, Ms. Oberman paid $10 a case -- typically 24 12-ounce cans or bottles -- with a free bag of ice thrown in with each case. But since she and her husband and their friends prefer Bud, Ms. Oberman says she would have paid more and wouldn't have switched to Miller for a lower price. The discounting has taken its toll on brewer profits. Anheuser's revenue per 31-gallon barrel fell to $90.58 in 1997 from $91.12 the prior year. Miller's revenue per barrel fell to $78.19 from $80.79 in 1996, according to Beer Marketer's Insights. Anheuser's revenue per barrel for the first quarter of 1998 was 2% lower than a year earlier, according to the company.
So far in 1998, Anheuser has been able to cut back on discounting in some cities and on some package sizes, hoping that Miller will pull back, too, and that customers will remain mostly loyal. In Boston, for instance, Miller's discount is 50 cents more per 30-pack than Anheuser's. But on 12-packs, they are priced the same. And in New York, Anheuser 30-packs cost $2.20 more than Miller. And 24-packs cost $1.70 more. But in the most competitive markets, including Houston and Southern California, Anheuser is discounting to keep its price equal to Miller's.
At the same time, both major brewers are spending more on advertising and promotion this year, which raises costs and further pinches profit margins. "They're spending more and charging less, which leads to shrinking margins," says Tom Pirko, a consultant at Bevmark LLC.
With Nos. 1 and 2 slugging it out, smaller brewers are getting hurt, too. Stroh Brewery Co. has seen its lower priced Old Style and Old Milwaukee brands suffer as Busch and Miller High Life are sold at comparable prices. Stroh decided to opt out of the price war.
"We've rationally decided to give up some market share to maintain profitability," says Mark Duchovic, vice president of corporate planning at Stroh. The company won't disclose its revenue-per-barrel figure, but Mr. Duchovic says the number has gone up by 1% because Stroh stayed out of the discounting. Coors Brewing Co. also is staying out of the fray. Its revenue per barrel rose to $88.54 last year from $86.91 in 1996.
All the discounting threatens to cheapen, in the consumer's mind, the value of these heavily advertised brands. It makes beer more of a commodity, says Robert Weinberg, an independent beer consultant in St. Louis. And that prompts some drinkers to "trade up" to a higher-priced beer.
That's helping to increase sales of Corona-brewed by Mexico's Grupo Modelo SA, which is partly owned by Anheuser-Busch -- and Heineken, brewed by Heineken NV of Amsterdam. Milton Byrd, who works for the Chicago Transit Authority, strolls past the discounted stuff at a liquor superstore and picks up two cases of Heineken for $20.99 each. He buys Heineken, and only Heineken, and only two cases at a time, even when he sees it discounted to as low as $17.98. "If Heineken isn't there, I do without," he says.
2) Use game theory to explain both the short run gains to Miller from discounting and the ultimate no-win solution. Use the game theory model to explain why once Miller began the price war, it was rational for Anheuser to follow. What would 'supergame' theory have to say about the advisability of Miller's decision? (9 marks)
3) How successful does non-price competition seem to be in the US brewing industry? (7 marks) 4) Assuming Miller to be rational, what might have caused them to initiate the price war, in spite of the game-theoretical problems that you have highlighted? (6 marks)
5) How might the level of competition be measured in an oligopolistic market? (3 marks)
6) Why do firms in oligopolistic markets often collude? (5 marks)
7) Why do such collusive agreements generally break down? (5 marks)
8) Using the kinked demand curve theory, explain why prices might tend to be stable in oligopoly markets. What criticisms have been made of this model? (7 marks)
9) To what extent do you feel that oligopoly markets are more desirable than monopoly? (11 marks) |