Pricing in a volatile market
Questions :
1)What are the main causes of price volatility in a market? To what
extent and how have this general causes applied in the pulp and paper
market?
First of all the fragmentation of the market causes prices to be
volatile. Indeed a unique policy can not be set up and a sort of
jungle's law is created. Each producer adapts its own prices as regard
its operating costs, investments, volume of production. More over the
working rules are different from one country to another and standards
of living are world's apart so it can easily explain the gap between
two prices.
As no single producer has a large production compare to the others, it
can not impose its prices to the market and that is why it is obliged
to cope with. The volatility of the market is also created by the gap
between a so to speak prosperity period during which the producers
invest and the second period when capacity created is too much compare
to the needs. The offer is bigger than the demand so prices fall.
These general causes applied in the pulp and paper market because it
corresponds to all that characteristics. Indeed it is a very
fragmented industry. For example no single producer has more than 6
per cent share of the overall market and the 10 largest producers
represent less than the half of the overall production. As we already
said for a market generally speaking, in the pulp and paper market
companies during a prosperity time invested in more capacity to take
advantage of high prices but as two years are necessary to get a plant
up and running, a down period appeared and demand has passed the peak
and prices are lower. To cover their invest producer dump all their
extra new capacity and it causes the prices to decline steeper. It is
a vicious circle. An other element explains the price volatility in
the pulp and paper market, it is the entry of lower-cost producers (
South American, Asian) compare to traditionally producers (
Scandinavian, European and North American). More over the Asian
economic crisis played a role in price volatility.
2) What effect do you think consolidation in the industry will have
on:
- (A) the biggest producers
The consolidation through takeovers and alliances for the biggest
producers allows them to develop bigger global market share and by
this way they may have a greater influence over market prices. They
can be able to have a real power to decide prices. The joint ventures
can also allow the producer to share their necessary investments or
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Sheffet, Mary Jane. "The Supreme Court And Predatory Pricing." Journal Of Public Policy & Marketing 13.1 (1994): 163-167. Business Source Complete. Web. 15 Apr. 2014.
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