RTE cereal update Within a week of GM’s announcement, Kellogg essentially follows, while Quaker and PM say they’ll wait Over time, it becomes clear that others are promoting very aggressively 1994 changes in volume: Kellogg -3%, GM -5.4%, PM +3.5%, Quaker 10.8%, PL 9.1%, total market -.5% In 1995, Kellogg and GM get fed up and retaliate; by end of 1995 promotions higher than before GM’s move In 1995, Quaker introduces own brand of value-priced cereal in bags

Cereal takeaways: collusion In contrast to airlines, here successful example of collusion Focus on industry factors (and where applicable, practices) that make this possible – –Few firms – –Stable, symmetric costs and demand – –Transparency – –Clear market leader => price leadership

Cereal takeaways: brand proliferation as barrier to entry Large variety of existing brands makes it difficult for new firms to enter and get viable market share, given costs of entry Here, though, this may just be manifestation of “endogenous sunk cost” mechanism Might deliberate attempts to monopolize play a role? – –Maybe, but no clear evidence – –To what extent do entered brands constitute commitment anyway?

Cereal takeaways: Collusion vs. entry deterrence Dilemma for Brands: successful collusion invites entry! Can private labels be driven back out, or will brands simply have to adjust to new situation? Optimal response depends on – –Size of low end of market – –New realities in retail sector – –Entrants’ costs and margins Use comparative cost analysis to see how seriously a price drop would affect entrants

Cereal takeaways: strategic interaction among incumbents Think about competitors’ responses: who has which incentives? GM’s move unprofitable if others don’t match – –Price cuts will likely be matched – –Cut in promotions: others will likely promote more GM was hoping to change industry norms, like AA – –Lots of money at stake! Getting out of a Prisoners’ Dilemma can be hard. – –Risk of escalation of battle if competitors don’t respond as hoped