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There's something fishy in publicized price hike plans
By John Gong |
April 27, 2011, Wednesday
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Print Edition
Print Edition
EUROPEAN Union regulators recently fined Procter & Gamble and Unilever a total of US$456 million for fixing laundry detergent prices in eight EU countries.
The EU action last Wednesday reminds me of these two companies' recently announced intentions to raise prices on a range of household items such as shampoo, bath lotion, toothpaste, and detergent.
The extent of the price increases - as much as 15 percent in some cases - and the seemingly coordinated nature of the announcement have stoked a public outcry.
Granted, after rounds of quantitative easing in the United States and now in Japan and the subsequent run-up of commodity prices around the world, the inflation beast has clearly climbed ashore. The consumer price index has been hovering close to 5 percent in recent months.
Oil prices, in particular, are again in the three-digit territory. As oil byproducts, some of the raw materials used in shampoo and lotion have seen price increases as high as 50 percent.
So there seems to be a legitimate reason for these companies to transfer higher costs to consumers.
However, the public is crying that the announced price increases seem to be more than enough to cover material cost increases.
If you look at the cost breakdown of a P&G shampoo for example, only 15-30 percent is attributed to manufacturing costs, of which maybe half of it is for raw material. The bulk of the other cost items are for advertising and sales in the distribution channel.
The consumer product industry is famous for its large advertising budget, probably only behind the auto industry. Therefore, it seems that an outrageous 15 percent price hike is more than it needs.
Market power
If that is the case, it then leads to the other more important issue that the public is concerned about - the excessive market power of consumer product behemoths P&G and Unilever.
The public's concern is highly justified, as this industry indeed sees a high market concentration. Let's do a quick back-of-the-envelope antitrust analysis here.
Take shampoo as an example. I think no antitrust expert is going to dispute me on the product definition of shampoo as just shampoo.
The geographic dimension of the relevant market definition should be the national market, since the transport cost of shampoo is relatively low.
OK, let's look at the national market of shampoo. The two giants, P&G and Unilever, with a myriad of brands under them, each occupies about 30 percent of market share, according to the market research company Asia PHPC.
That alone translates into 1800 points of the Herfindahl index, which is the most common index used for measuring market concentration. When adding other companies, my guess is that the Herfindahl index for the shampoo market could be north of 2000.
In the US, a merger request that generates above 2000 in the Herfindahl index would raise grave concerns at the US Federal Trade Commission or the Justice Department, whichever is assigned to evaluate such request.
Based on China's Antimonopoly Law, such a high industry concentration would constitute the market power position, and would also serve as the basis for inquiries into any abuse of such power. And the coordinated nature of these price announcements, in my opinion, seems to be suspect behavior called tacit collusion among an informal cartel of oligopolistic companies.
In fact, the very public announcement of price increase intentions may well serve as a market signal to its rivals that would eventually result in a rough and unspoken coordination of price increases.
Tricky behavior
The result can thus approximate the consequences of traditional price-fixing in a smoke-filled board room, even though each company does nothing but makes its own independent decision by observing what the other companies do in the marketplace or say in the media.
In the history of antitrust enforcement, there is no short supply of behaviors like this.
American Airlines, for example, once repeatedly led the industry with its megaphone loud price increase announcements, followed unanimously by its smaller competitors.
Are the consumer product giants in China also playing a game like this? We don't know yet. But we do know that P&G and Unilever are the very recently convicted villains of price-fixing in the EU market.
Could it be the case that the two seasoned players of the market power game have been price-fixing all along in China as well? And that this time they have the audacity to further increase prices - by a whopping 15 percent?
The regulatory folks at the National Reform and Development Commission seem to have got the message and talked to them into holding back their plan for the moment.
But in my opinion, the mere fact of a well-coordinated and loudly-ochestrated price increase campaign smacks of a tacit collusion conspiracy.
I am keeping a close eye on their next move.
(The author is associate professor of economics at the Beijing-based University of International Business and Economics. Email: johngong@gmail.com)
The EU action last Wednesday reminds me of these two companies' recently announced intentions to raise prices on a range of household items such as shampoo, bath lotion, toothpaste, and detergent.
The extent of the price increases - as much as 15 percent in some cases - and the seemingly coordinated nature of the announcement have stoked a public outcry.
Granted, after rounds of quantitative easing in the United States and now in Japan and the subsequent run-up of commodity prices around the world, the inflation beast has clearly climbed ashore. The consumer price index has been hovering close to 5 percent in recent months.
Oil prices, in particular, are again in the three-digit territory. As oil byproducts, some of the raw materials used in shampoo and lotion have seen price increases as high as 50 percent.
So there seems to be a legitimate reason for these companies to transfer higher costs to consumers.
However, the public is crying that the announced price increases seem to be more than enough to cover material cost increases.
If you look at the cost breakdown of a P&G shampoo for example, only 15-30 percent is attributed to manufacturing costs, of which maybe half of it is for raw material. The bulk of the other cost items are for advertising and sales in the distribution channel.
The consumer product industry is famous for its large advertising budget, probably only behind the auto industry. Therefore, it seems that an outrageous 15 percent price hike is more than it needs.
Market power
If that is the case, it then leads to the other more important issue that the public is concerned about - the excessive market power of consumer product behemoths P&G and Unilever.
The public's concern is highly justified, as this industry indeed sees a high market concentration. Let's do a quick back-of-the-envelope antitrust analysis here.
Take shampoo as an example. I think no antitrust expert is going to dispute me on the product definition of shampoo as just shampoo.
The geographic dimension of the relevant market definition should be the national market, since the transport cost of shampoo is relatively low.
OK, let's look at the national market of shampoo. The two giants, P&G and Unilever, with a myriad of brands under them, each occupies about 30 percent of market share, according to the market research company Asia PHPC.
That alone translates into 1800 points of the Herfindahl index, which is the most common index used for measuring market concentration. When adding other companies, my guess is that the Herfindahl index for the shampoo market could be north of 2000.
In the US, a merger request that generates above 2000 in the Herfindahl index would raise grave concerns at the US Federal Trade Commission or the Justice Department, whichever is assigned to evaluate such request.
Based on China's Antimonopoly Law, such a high industry concentration would constitute the market power position, and would also serve as the basis for inquiries into any abuse of such power. And the coordinated nature of these price announcements, in my opinion, seems to be suspect behavior called tacit collusion among an informal cartel of oligopolistic companies.
In fact, the very public announcement of price increase intentions may well serve as a market signal to its rivals that would eventually result in a rough and unspoken coordination of price increases.
Tricky behavior
The result can thus approximate the consequences of traditional price-fixing in a smoke-filled board room, even though each company does nothing but makes its own independent decision by observing what the other companies do in the marketplace or say in the media.
In the history of antitrust enforcement, there is no short supply of behaviors like this.
American Airlines, for example, once repeatedly led the industry with its megaphone loud price increase announcements, followed unanimously by its smaller competitors.
Are the consumer product giants in China also playing a game like this? We don't know yet. But we do know that P&G and Unilever are the very recently convicted villains of price-fixing in the EU market.
Could it be the case that the two seasoned players of the market power game have been price-fixing all along in China as well? And that this time they have the audacity to further increase prices - by a whopping 15 percent?
The regulatory folks at the National Reform and Development Commission seem to have got the message and talked to them into holding back their plan for the moment.
But in my opinion, the mere fact of a well-coordinated and loudly-ochestrated price increase campaign smacks of a tacit collusion conspiracy.
I am keeping a close eye on their next move.
(The author is associate professor of economics at the Beijing-based University of International Business and Economics. Email: johngong@gmail.com)
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