Hi, all EC2Cs.
any of you are interested in purchasing the Sloman Econimics textbook.
it's about 45 dollers (selling at $>50 outside) from the supplier (same suppliers who come to our school last time selling bio text books)

if you are interested, please leave your name in the commend. we are considering to purchase together~ ^^

Both Nestle and Mars are chocolate manufacturers. With the rising price of raw material like wheat and cocoa, cost of production increases for both Nestle and Mars. If the firms do not adjust their supply curve, they will lose part of their profits as total revenue remains the same, yet cost of production increases.

Take Nestle as an example, if Nestle decides to maintain to be as profitable, it can only produce less at each price level, meaning that the supply curve is shifted to the left. Demand curve still remains the same. Equilibrium price increases. Consumers have to pay more to buy the same amount of products. Additional costs are passed onto the consumers.

Possible shortcoming of this decision is that Nestle may lose its costumers if we consider Nestle and Mars as close substitutes. Price elasticity of demand of Nestle is high. If Nestle increases its price but Mars does not, the increase in price of Nestle will result to a decrease in quantity demanded of Nestle to a greater extent. Thus, total revenue decreases. The firm’s profit may not be as high as expected. However, as Nestle announced, the brand loyalty has differentiate Nestle from other chocolate manufacturers, making it less substitutable. Nestle is less price elastic. Even with an increase in price, its quantity demanded is not affected much. Total revenue increases and profit increases.

If firms are afraid of losing customers by increasing price and, at the same time, are not willing to hold customers at an expense of losing profits, all chocolate manufacturers may come to some agreements that they will all raise their price at the same rate and same time. Price is pushed up for all chocolate products so that consumers, having no choice, can only pay more. However, this sort of behavior is illegal and vicious. Government will intervene to prevent it.

13 Feb 2008 Germany Price Fixing

Chocolate manufacturers Nestle and Mars were amongst companies who received a visit by German competition authorities. The German Federal Cartel Office is reported to have gone to the headquarters of Nestle, Kraft and Mars in Germany last week as part of investigations that it is carrying out on alleged price fixing in the chocolate industry.

One of the problems facing chocolate producers, like other food product manufacturers, is the rising price of raw materials. Wheat, dairy and cocoa prices have all risen sharply and have put margins under pressure. When input prices rise firms have the option of keeping prices the same and facing smaller profit margins or increasing prices and passing the additional costs on to consumers.

If the firms believe that they can do the latter, then they may well be tempted to do so but when making this decision they will have to think carefully about what their rivals might do. If Nestle, for example, increased their prices but Mars did not, Nestle might lose out on sales to Mars as consumers switch to cheaper products. In making such a decision companies will also be considering the extent of the customer loyalty that they enjoy as well as whether they think that the market will be able to withstand a rise in price.

What has triggered the interest of the German competition authorities is the fact that some of the chocolate producers all raised their prices around the same time. The competition authorities clearly suspect that this sort of behaviour is worthy of investigation.

In October 2007, Nestle announced that it expected to be able to meet its target for sales growth of between 5% and 6% and analysts had predicted that it would be able to raise its margins in the process. Nestle itself said that the strong performance was due to the strength of its brands in the market. The company's chief executive, Paul Brabeck, said at this time that brand loyalty had allowed the business to be able to pass on the higher costs to customers.

The German authorities will be looking to see if there is any suggestion that decisions to increase prices by chocolate manufacturers have any other links than pure coincidence. It is entirely possible, of course, that all these firms have been facing higher input costs at the same time and decided to pass on these costs as a result. The German authorities will continue its investigations to determine whether there has been any breach in competition rules.

URL for this news item: http://www.bized.co.uk/cgi-bin/chron/chron.pl?id=3024

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