Visy Amcor Cartel: Report on Strategic Market Behaviour

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Student number 3406251 WANG QI

Visy Amcor Cartel: Report on Strategic Market Behaviour
With the information providd, a report about Amcor and Visy case is illustrated.

Market structure
Based on the given case, the market structure is oligopoly. According to (C. Bajada, J. Jackson, R. McIver & E.Wilson2012), characteristics of an oligopoly include the following aspects: fewness of the firms in certain industry, concentration ratio, and highly interdependence on each other. Whenever a firm makes a move about its price or production changing, it should seriously consider the counteraction or its rival‟s as is pointed by Colander David (2002). As is implied in the case, Amcor and Visy take control of about 90 per cent of the market, which indicates concentration ratio and fewness; the two companies also rely on each other as they regularly meet and exchange information. Last but not least, according to Perloff (2008), in an oligopoly market structure, large firms are usually price setters instead of price takers. Amcor and Visy have the ability to set price. Due to the discussion above, the market structure should be oligopoly.

Incentives for collusion
Amcor and Visy are both profit-seeking firms, as a result, the reason for them to collude is to gain more profit and to stay in a safe position in the market at the same time. According to Richard N. Clarke (1983), if big firms share information, collusion brings more profit than companies act independently. A concrete example is shown in Chart-1 based on hypothetical numbers. If both companies adopt a high price, each of them would earn a profit of 10, as is shown in Cell A. If Visy adopts a low price while Amcor adopts a high price, then Amcor will only earn 4 while Visy earns 13, which leads to Cell C. Similarly, Cell B occurs then the opposite policy is adopted. Since interdependence in an oligopoly situation is strong, if one company adopts a lower price the other one to lower its price too. If they both lower prices, Cell D occurs, where both of the companies gain a lower profit. From what has been discussed above, the best choice is to collude to set a higher price.

1

Student number 3406251 WANG QI

Chart-1

Amcor Visy A High High Low

A 10 C

10

B 4

13

4 13

D 6

6

Low

Gains from Agreements between the Firms
The companies make agreements to raise price of quotes together and maintain their existing market share. They also exchange information with one another in order to make sure the price is higher than the current one whenever there is a renegotiation with customers. Since the companies communicate mostly in informal places (parks and hotels) with verbal agreement (telephone), the two companies are making a “Gentlemen‟s agreements‟”, which indicates a Cartel conduct. On one hand, after the agreement is made, both companies can manipulate the price of the industry by making it higher to satisfy a larger profit. On the other hand, there are extra benefits according to (C. Bajada, J. Jackson, R. McIver& E. Wilson 2012). First of all, Amcor and Visy have avoided a price war so that they could both focus on a non-price competition. Secondly, they could also develop for advertising and better products, which is relatively more difficult for their competitors to match. Thirdly, menu coast is also saved.

Consequences of Collusion
Setting price together creates Cartel. In the first place, as is argued by (C. Bajada, J. Jackson, R. McIver & E. Wilson 2012), an oligopoly market is similar to monopoly in terms of product inefficiency and allocation inefficiency. If Amcor and Visy set a fixed high price and maintain their market share, there might be limited output. The price will exceed the marginal cost. Consequently, there would not be enough products to satisfy demand; therefore, buyers have to surrender to a high price and the market power is abused according to. As a result of collusion, clients in business with Amcor and...
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