Review Sheet for ECON 200 at UA
Review Sheet for ECON 200 at UA
Popular in Course
Popular in Department
This 12 page Class Notes was uploaded by an elite notetaker on Friday February 6, 2015. The Class Notes belongs to a course at University of Arizona taught by a professor in Fall. Since its upload, it has received 19 views.
Reviews for Review Sheet for ECON 200 at UA
Report this Material
What is Karma?
Karma is the currency of StudySoup.
You can buy or earn more Karma at anytime and redeem it for class notes, study guides, flashcards, and more!
Date Created: 02/06/15
An Analysis of the Market for OlestraBased Potato Chips Kristin St Raymond Ayala M Solis Econ 200H Section 5 Who wouldn t want to munch on delectable potato chips all day without the worry of adding extra inches to the waistline This is the assumption the manufacturers of Olestrabased potato chips are banking on Olestra is a fakefat it is a cooking oil made by a combination of sucrose and vegetable oil whose numerous fatty acid chains are indigestible by the human body Therefore it imbues potato chips with the same avor and texture as their fullfat cousins but diminishes the guilt factor substantially Olestra chips have zero fat and half the calories of the fullfat varieties ACSH Obviously this is quite an attractive prospect to chip producers especially in the current times where thinness and physical fitness reign supreme Presently there appear to be three major potato chip brands using the fakefat technology FritoLay s WOW Chips Procter and Gamble s Fat Free Pringles and Utz Brand Yes chips though Utz is sold almost exclusively on the eastern half of the country The market structure is a bit interesting considering that the Olestra oil is an innovation of Procter and Gamble alone Adding to this interest is the heated controversy surrounding the fakefat chips which has undoubtedly had some effect on pricing and market behavior Before examining the market workings of today it could perhaps be beneficial to review a brief history of Olestra Olestra is not a new fat substitute by any means Procter and Gamble scientists discovered it in 1968 They esterified eight fatty acid residues to a molecule of sucrose reasoning that the increased number of fatty acid chains would help premature infants to absorb more fat However just the opposite happened they effectively created a molecule so large and fatty that was indigestible by the body CSPInet This is because so many fatty acid chains are crowded around a sucrose core that digestive enzymes cannot find a breaking point to separate them FDA Backgrounder Realizing that opportunity was knocking at its door Procter and Gamble petitioned the FDA to approve Olestra as a fat substitute for shortening fast food chips and other products such as ice cream in May of 1987 This move garnered criticism by the Center for Science in the Public Interest CSPI who claimed Olestra was inadequately tested and caused numerous detrimental gastrointestinal side effects CNN When the FDA raised similar concerns in 1990 Procter and Gamble narrowed their petition to savory snacks which includes crackers tortilla and corn chips and of course potato chips CSPInet Procter and Gamble devoted extensive time and financial resources to its new baby concentrating on safety testing product development and marketing campaigns It applied for and received a special patent extension in the early 1990s effectively extending the life of its patent until January 25 1998 It was granted FDA approval on January 24 1996 to use Olestra in production of savory snacks but there was a major caveat every bag of Olestrabased snacks had to bear the label This product contains Olestra Olestra may cause abdominal cramping and loose stools Olestra inhibits the absorption of some vitamins and other nutrients Vitamins A D E and K have been added CSPInet Nevertheless Proctor and Gamble and other major snack makers were eager to jump on the Olestra bandwagon after all many stock analysts shared the sentiments of Drexel Bumham Lambert Inc s Hercules Sagalas who proclaimed that Olestra was the single most important development in the history of the food industry and predicted it would bring in 15 billion in annual sales CSPInet This eagerness gives an interesting structure to the market Procter and Gamble who manufactures Olestra under the brand name Olean had a virtual monopoly on the fakefat until 1998 However it decided not to be the sole provider of Olestrabased potato chips Rather it licensed out the use of Olean to its competitors FritoLay a division of Pepsico and Utz Why did Procter and Gamble do such a thing Most likely it was diminishing its own risk as there is a high likelihood that investments in apparently promising innovations will go down the drain Baumol and Blinder 298 Procter and Gamble had invested nearly half a billion dollars in the fatsubstitute so it was exercising justi ed caution in inviting the competition to participate By licensing out the use of Olean to its competitors it could conceivably have created agreements to share its competitors pro ts It also could have engaged in crosslicensing in which it allowed FritoLay and Utz the use of its product in return for information about any of their future innovations Procter and Gamble s move resulted in an oligopolistic market structure as there are only three rms nationwide who market the fakefat potato chips Furthermore one ba1rier to entry is quite clear not just any upstart chip manufacturer has the available funds to obtain use of Olean or to invest in RampD for a new fat substitute How is this market currently doing Test markets of FritoLay WOW Chips initially called Max Chips and Pringles Fat Free Chips showed that there was great interest in the product This interest came in spite of over a thousand reports of adverse side effects associated with Olestra including severe diarrhea fecal incontinence and abdominal cramps CSPInet To counter these claims Procter and Gamble hired numerous consultants and dietitians to back up the product and spent even more money on advertising Nationwide marketing of the WOW Chips and Fat Free Pringles began in the spring of 1998 and there was a huge initial boom in sales This is not hard to comprehend though as Olestrabased products had incredible appeal from a variety of sources health conscious adults and athletes senior citizens or people with health conditions who have to monitor fat intake mothers concerned with the nutritional value of their children s snacks and people who are dieting However sales quickly declined and the reasons for this are not hard to comprehend either There was wide publicity about alleged adverse side effects of Olestraithe gastrointestinal distress and the limited absorption of important fatsoluble vitamins Beyond these some consumers may have felt that the prices of these chips were high relative to their fullfat or baked counterparts The initial boom in sales in 1998 has never been repeated in the Olestrabased potato chip market Furthermore it seems as if no new competitors have entered the market since its beginning even though Procter and Gamble s patent on the fakefat ran out in the same year This has allowed the market to retain its oligopolistic structure rather than shifting to one of monopolistic or perfect competition which often occurs when patents run out What possible reason could there be for the enduring oligopoly Perhaps it is Olestra s bad reputation that has prevented other companies from cashing in on the product Though the fake fat has been supported by many physicians such as C Wayne Callaway of George Washington University who equates its gastrointestinal effects to those caused by bran wwwoleancom it is quite possible that many consumers are turned off by the bad publicity To make matters worse Olestrabased products have been forced to retain their cautionary labels which list a buffet of unappealing side effects These reasons along with the steadily declining sales have perhaps made entry into the market an unfavorable decision for other potential competitors As a result in spite of the opportunity for entry this market has retained an oligopolistic structure This contrasts greatly with the market for regular potato chips which appears to have a monopolistic competition structure Though in the fullfat market there are several brandname bigwigs such as Lay s and Pringles lesser known brands such as Grandma s and Poore Brothers and generic supermarket varieties pack the store shelves A quick trip to any supermarket would show that the same could not be said for the Olestrabased market which relies solely on three manufacturers We have spoken of a boom and decline in this market but what evidence is there to support this Using Pepsico the owner of FritoLay annual reportsl we can trace the nancial success and subsequent dropoff of their WOW Chips In 1998 the year the WOW Chips were launched the Olestrabased snacks accounted for 4 of FritoLay s 75 billion in sales roughly 300 million According to the report this made WOW FritoLay s most successful new product ever pepsicocom The WOW Chips helped to advance FritoLay s pound volume by 5 despite declines in sales of lowfat baked style potato chips In 1999 the story was not as rosy the WOW Chips now accounted for 3 of the 79 billion in sales approximately 240 million This represents a decrease of about 60 million from the previous year These findings are summarized in the table below 300 million 79 billion 3 240 million The 2000 annual report gives no percentage sales of the fakefat chips though a graph depicting sales of snack chip brands in US supermarkets puts the sales of WOW Snacks 1 Procter and Gamble Annual reports were vague in terms of this market and Utz reports were not found at approximately 100 million The nancial review though it gives no quantitative value mentions the continued declines in WOW Brand products pepsicocom which offset the 4 pound volume advancement byiinterestingly enoughithe fullfat versions of Lay s chips In essence the sales declines of the fakefat productsichips which had debuted as FritoLay s most successful productiactually began to eat away at FritoLay s gains from sales of regular chips We have discussed market structure and sales history but where does pricing fit into all of this Unfortunately past prices for years 19982000 could not be found on corporate websites for any of the brands However present prices were obtained for three regions in the United Statesz 39 i 7 429 219 A r r i W We can see some differentiation amongst the three brands prices especially when the net weight of the product is a factor Since net weight among the brands is most similar in the VA example we will examine this portion of the market It appears as if the Lay s are the most expensive which seems to make sense as Lay s is the largest and most widely known potato chip manufacturer in the US FritoLay controls 58 of the US snack chip industry compared to Procter and Gamble s 5 and Utz s portion of Private Label Brands 8 pepsicocom As a result Lay s may be the most trusted and 2 Prices for the AZ and OR markets were obtained in Albertsons Supermarkem in Tucson and Portland Pricing information for the VA market was obtained in a Safeway Supermarket in Sterling desirable brand allowing it to have a higher price The prices of Fat Free Pringles and Utz Yes chips which are almost exclusively sold on the East Coast appear to be identical in the VA market but a slight difference in net weight shows that Utz is actually the more expensive brand It is possible that Utz which has a limited sales region and has found luck along the East Coast feels comfortable charging a higher price relative to Procter and Gamble Another possibility is that Procter and Gamble has such a diverse product base that it can afford to charge the lowest price of the three because doing so poses no real risk to its total profits Though differentiation amongst prices does existia possible result of brand reputation or the manufacturer s product diversityiall prices are fairly comparable Does price discrimination exist in the Olestabased chip market From examining the differences in prices with regard to their locations we can see evidence of some discrimination This is particularly apparent with the Fat Free Pringles whose prices vary in all three places Arizona is the most expensive with a can costing 219 followed by Virginia at 199 and Oregon at 189 What could account for these differences as the product most certainly remains unchanged Perhaps the relatively high elderly population of Tucson allows Procter and Gamble to charge a higher price as many elderly folks are concerned with fat intake for health reasons Virginia s prices may be a bit lower in comparison as Procter and Gamble is forced to compete with not only FritoLay but Utz Yes Chips as well In any of these cases the prices may be dependent on the relative luck the food vendors have had in each location in areas where there are higher sales of these chips manufacturers may have found it easier and more attractive to charge a higher price We stated earlier that past pricing information for the years 19982000 could not be obtained However due to the oligopolistic structure of the market it is quite possible that prices have not uctuated much since the products debut How is this possible given the market s continuously declining sales Price stickiness is a common feature of oligopolies and it results from simple logic if a firm raises its price it will lose many customers because in that case its demand is elastic if it lowers its price the sales increase will be comparatively small because then its demand is inelastic Baumol and Blinder 259 That is an increase in price will result in lost business as competitors retain their old prices but a decrease in price will not dramatically change sales as all competitors will match the cut In the case of the Olestrabased potato chip market a price decrease would be the most reasonable possible event as management surely would not choose to elevate prices in the face of declining sales Furthermore any increase to a seemingly high price would likely drive some of the market to regular or nonfried chips as some people would feel the nonfat benefits are not worth the skyhigh price tag However as prices of these products have remained high relative to their fullfat and baked cousins 12 oz Regular Lay s potato chips299 10 oz Baked Lay s339 65 oz Regular Pringlesl49 it is logical to assume that oligopolistic price stickiness is in effectidespite the decreasing sales A hypothetical shock to the market for snack chips containing Olestra would begin with increased investment into research and development This increased R amp D would be aimed at disproving the claims regarding the negative side effects of Olestra If this were to happen the new information could then be advertised to make consumers aware of the change particularly those consumers who previously chose not to buy Olestrabased snack chips in order to avoid the side effects In addition the warning label that currently appears on these products could be removed with the approval of the FDA This would be most noticeable to people who had already bought the snackchips despite the warnings stated on the label and wordofmouth could serve to increase awareness about the improvements As a result of the improved advertisements demand for these products would eventually increase the demand curve would shift to the right and more people would be willing to buy the snack chips at the same price However the higher demand would not affect the price of the product because oligopolies have kinked demand curves Neither FritoLay nor Pringles would want to raise their prices in response to the outward shift in demand because the risk of losing business to the other company if it were to hold its prices constant would be too high Both consumers and producers would benefit from these changes Consumers would have at their disposal fatfree snack chips that they could be confident no longer caused undesirable side effects and they would have consumer surplus if the prices stayed constant Producers would benefit financially with a more marketable product and therefore a more successful business Demand for Olestrabased snack chips would not shift immediately It would require a lot of advertising to simply make people aware of the change Then even as demand began to increase it most likely would not increase by an enormous amount simply due to the rocky history Olestra has and the bad reputation it has developed in the eyes of many consumers It would require a lot of persuasion to convince some people of the improvement The effects of this shock although visible would be fairly limited The Olestrabased potato chip market has garnered everything from criticism to praise controversy to support Once thought to be one of the snack food industry s biggest breakthroughs touting of the fakefat chips has seemingly declined along with market sales This is most likely due to the horrible publicity Olestra has received over the years as well as to the less than appetizing label its products are forced to bear This controversy has shaped the market into what it is today an oligopoly with declining sales sticky prices and heavy scrutiny Perhaps increased R amp D which could disprove the claims of negative side effects and thus result in a removal of the cautionary label would effectively shock the market and alleviate some of its sales problems However the unfavorable reputation that Olestra has eamediwhether justified or unjustifiedimight still prevent a huge jump in the success of the market Undoubtedly it will be interesting to see how this market behaves and changes both in the present and in years to come Works Cited American Council on Science and Health Issues in Focus Olestra 1997 and 1998 httpwwwacshorgpublicationsstorVolestra Annual Report Pepsico Corporation 1998 Annual Report 1998 httpwwwpepsicocom Annual Report Pepsico Corporation 1999 Annual Report 1999 httpwwwpepsicocom Annual Report Pepsico Corporation 2000 Annual Report 2000 httpwwwpepsicocom Baumol William J and Alan S Blinder Economics Principles and Policy Fort Worth Harcourt 2001 Center for Science in the Public Interest A Brief History of Olestra 2000 httpwwwcspinetorgolestrahistoryhtml CNN FDA Panel Generally Endorses Safety of Olestra June 17 1998 http wwwcnn com HEALTH 9 806 1 7 olestrafda FDA Backgrounder Olestra and Other Fat Substitutes November 28 1995 httpwwwfdagovopacombackgroundersolestrahtml Olean Answers to Questions about Olean Procter and Gamble 1998 httpwwwoleancom
Are you sure you want to buy this material for
You're already Subscribed!
Looks like you've already subscribed to StudySoup, you won't need to purchase another subscription to get this material. To access this material simply click 'View Full Document'