UNIT_052.qxd
24/6/08
52
5:30 pm
Page 1
the cartel because they could sell their diamonds onto the
open market at a higher price than they could sell to the
Central Selling Organisation. The CSO had costs such as
maintaining a stockpile of diamonds which it recovered
through paying lower prices for diamonds from producers. It
also attempted to regulate fluctuations in price in the market
which would sometimes have given other producers an
opportunity to sell at a higher price.
(c) (i) In a period of rising demand, it would be difficult to
persuade non-cartel producers to remain in the cartel
because they can sell all their production at a high price.
(ii) The issue of ‘blood diamonds’ was causing De Beers
increasing problems. It did not want a product which is
associated with love, romance, weddings and special
occasions to be tainted with negative images of war. To
control the market before 2000, it needed to buy up these
diamonds. Once the cartel was dismantled, it was no longer
obliged to buy them and hence could project a ‘clean’ image
to customers about buying De Beers diamonds. In the long
term, it gambled that sales and profits would increase
without the need to buy blood diamonds.
Oligopoly
Question 1
(a) Oligopolistic markets share a number of characteristics.
First, there are only a few large firms in the market. In the
market for chewing gum, there are two dominant
manufacturers, Wrigley and Cadbury Schweppes. The rest of
the market is split up between much smaller producers. In
the US market, for example, the two largest manufacturers
have nearly 80 per cent of the market between them.
Second, barriers to entry tend to be high. In this case, the
main barrier to entry is marketing and distribution. Wrigley
and Cadbury Schweppes have control of the main
distribution channels in most world markets, making it
difficult for competing firms to get their products on the
shelves of retailers. This control is reinforced through
advertising which creates a demand for their products from
consumers.
Third, competition in oligopolistic markets tends to take the
form of non-price competition. In the data, it gives two
examples of non-price competition. One is buying up other
manufacturers to gain market share. Instead of attempting to
gain market share through lowering prices in the US market,
Cadbury chose to buy up the US number two manufacturer
Adams in 2003. The other example of non-price competition
given is product development. Cadbury Schweppes hopes to
gain market share by producing new products which will
appeal to consumers.
Fourth, firms are interdependent. The actions of Wrigley
have a direct impact on Cadbury Schweppes and vice versa.
For example, if a new product from Cadbury Schweppes
sells well, it is likely to take sales away from Wrigley.
Data question
1. The UK national daily newspaper market is dominated by
7 newspaper companies - Trinity Mirror, News International,
Express Newspapers, Telegraph Group, Independent
Newspapers, Pearson and Guardian Newspapers.
Barriers to entry are very high. No national newspaper has
had a successful launch since the Independent in 1986. The
main problem for any new entrant is gaining a high enough
circulation to cover costs. There is strong brand loyalty to
existing newspapers and any newspaper which is threatened
by a new entrant is likely to take retaliatory action, such as
price cuts.
Newspapers are non-homogeneous. They are carefully
positioned in different segments of the market using a mix of
news, gossip, sport, competitions and free gifts to tempt
customers.
Firms in the newspaper market are interdependent. Market
share gained by one firm tends to be market share lost by
another firm. For example, some of the extra 40 000 readers
for The Independent and 60 000 readers for The Times when
both adopted the tabloid format came at the expense of The
Guardian which saw its circulation fall by 6.3 per cent.
2. In 2005, sales of The Guardian were falling. It could have
reacted in a variety of ways. However, given that the national
newspaper market is arguably oligopolistic, it chose not to
respond by cutting its price. This could have sparked off a
price war where all the newspapers engaged in the price war
could have ended up worse off. Instead, it chose to respond
to the new tabloid product innovation at The Times and The
Independent by launching its own smaller format, the
‘Berliner’ format. This is smaller than a broadsheet but larger
than a tabloid size. Non-price competition is a key feature of
many oligopolistic markets, reducing the threat that
competition will lead to losses amongst competing firms.
Interestingly, The Times chose the launch of the new
Guardian format to raise its cover price from 55p to 60p.
The owners of The Times cannot have believed that a rise in
price would have much impact on sales of the newspaper,
reinforcing the point that in oligopolistic markets, firms do
not compete on price.
Figure 3 in the student’s book suggests that The Guardian
made the right move in adopting the ‘Berliner’ format.
Question 2
(a) Firms in an oligopolistic market tend not to compete on
price. Instead, they engage in a number of different forms of
non-price competition. It could be argued that the tinned
vegetable market in the UK is not, in fact, oligopolistic. 70 per
cent of the market is ‘accounted for by own label products
of the major supermarket chains’. Own label products tend
to compete on price.
However, Bonduelle will not be competing on price. It has
come up with a different product with different packaging to
increase sales in the market. The product is different because
it contains several vegetables rather than just one. The
packaging is different because it is square rather than round
and is a paper product rather than a tin can. By providing a
different product, Bonduelle hopes to differentiate its product
and be able to charge a higher price than competing own
label products. This sort of behaviour is characteristic of
oligopolistic markets.
Question 3
(a) De Beers raised prices and profits for diamond
producers by controlling supply. Reducing supply to the
market meant that the equilibrium price of diamonds rose.
Higher prices also meant that producers could earn higher
profits.
(b) There was an incentive for producers to move outside of
110