Discussions week 4
Each DQ post must contain at least one citation from a source in support of your assertions, assumptions, opinions, or conclusions. This may be from your textbook, a source from the LIRN library, or another credible, i.e., academic source.
3. The following facts characterize the furniture industry in the United States:39
a. The industry has been very fragmented, so that few companies have the financial backing to make heavy investments in new technology and equipment.
b. In 1998, only three U.S. furniture manufactur- ers had annual sales exceeding $1 billion. These firms accounted for only 20 percent of the mar- ket share, with the remainder split among 1,000 other manufacturers.
c. c. Capital spending at one manufacturer, Furniture Brands, was only 2.2 percent of sales compared with 6.6 percent at Ford Motor Company. Outdated, labor-intensive production techniques were still being used by many firms.
d. d. Furniture manufacturing involves a huge num- ber of options to satisfy consumer preferences, but this extensive set of choices slows produc- tion and raises costs.
e. e. Small competitors can enter the industry be- cause large manufacturers have not built up any overwhelming advantage in efficiency.
f. f. The American Furniture Manufacturers Association has prepared a public relations campaign to “encourage consumers to part with more of their disposable income on furniture.”
g. g. In fall 2003, a group of 28 U.S. furniture manu- facturers asked the U.S. government to impose antidumping trade duties on Chinese-made bed- room furniture, alleging unfair pricing.
h. h. The globalization of the furniture industry since the 1980s has resulted from technologi- cal innovations, governmental implementa- tion of economic development strategies and regulatory regimes that favor global in- vestment and trade, and the emergence of furniture manufacturers and retailers with a capacity to develop global production and distribution networks. The development of global production networks using Chinese subcontractors has accelerated globalization in recent years.
3. The following discussion describes a patent dis- pute in the pharmaceutical industry:79
In 2008, state and federal authorities were examining whether Abbott Laboratories violated antitrust laws in its efforts to prevent an Israeli company from successfully selling a generic version of its cholesterol medicine, TriCor. Although drug companies typically have 3 to 10 years of exclusive patent rights remaining when their products hit the market, they can often nd ways to extend their monopolies by patenting slight improvements to those drugs. Twenty- ve states and the District of Columbia led suit in
federal court alleging that in addition to ling new patents on questionable improvements to TriCor, Abbott engaged in a practice known as “product switching.” This strategy involved retiring an existing drug and replacing it with a modied version that was marketed as “new and improved,” preventing pharmacists from substituting a generic for the branded drug when they lled prescriptions for it. Although this strategy is not illegal, the plaintiffs argued that Abbott employed it and other strategies solely to preserve its monopoly on TriCor.
One year after TriCor hit the market in 1999, Israeli Teva Pharmaceuticals Industries applied to the Food and Drug Administration (FDA) to market a similar version of the drug. Abbott sued Teva for patent infringement, which triggered a 30-month waiting period during which the generic drug could not be launched while patent challenges were being debated. During the waiting period, Abbott altered its product, lowering the dosage and changing it to a tablet from a capsule. It led for a patent on this modied form of TriCor, bought back the remaining supplies of the capsules and replaced them with the lower-dose tablet. When the 30 months had elapsed, Teva could no longer launch its generic drug because it was no longer strictly bioequivalent to the modiedTriCor.
This process was repeated again from 2002 to 2005. Teva led a counter-suit alleging anti-trust law violation. The company argued that Abbott’s strategy allowed pharmaceutical companies to protect their monopolies indenitely. Abbott said it has the right to protect its innovations and denied switching formulations for the sole purpose of warding off generic competition. It said the two switches brought improvements for patients. Teva argued that the drug’s active ingredient stayed the same and that the supposed improvements were smoke screens.
Describe the role of patents as barriers to entry in the pharmaceutical industry. In the current busi- ness media, follow up on this and other similar cases involving drug patents to determine the strategies that drug firms are currently employing to maintain their market power.
3. The following describes the ice cream industry in summer 2003:42
Given the Federal Trade Commission’s approval of Nestle’s acquisition of Dreyer’s Grand Ice Cream Inc., two multinationals, Nestle SA and Unilever, prepared to engage in ice cream wars. Unilever, which controlled the Good Humor, Ben & Jerry’s, and Breyer’s brands, held 17 percent of the U.S. market, while Nestle, owner of the Haagen-Dazs and Drumstick brands, would control a similar share after buying Dreyer’s.
Ice cream has long been produced by small local dairies, given the problems with distribution. Most Americans eat ice cream in restaurants and stores, although 80 percent of the consumption of the big national brands occurs at home. Both Unilever and Nestle want to move into the away-from- home market by focusing on convenience stores, gas stations, video shops, and vending machines, a strategy the rivals have already undertaken in Europe.
Five national brands—Haagen-Dazs, Nestle, Ben & Jerry’s, Breyer’s, and Dreyer’s— have developed new products and avors, focusing on single- serving products that carry pro t margins 15 to
25 percent higher than the tubs of ice cream in supermarkets. The higher pro t margins can open new distribution outlets. Although traditional freezer space is very costly, Unilever, Nestle, and Dreyer’s have pushed for logo-covered freezer cabinets in stores, given the higher pro t margins.
Under the FTC settlement, Nestle will be allowed to keep Dreyer’s distribution network, which delivers ice cream directly to more than 85 percent of U.S. grocers. Unilever must use middlemen
to deliver most of its Good Humor and Breyer’s products. Nestle can expand from Dreyer’s supermarket base to cinemas and gas stations with little extra cost. The supermarket ties may also help Nestle enter grocers’ competitive prepared-foods section, so that consumers can easily purchase ice cream along with their deli and hot foods. Nestle agreed to sell a number of Dreyer’s secondary brands as part of the FTC approval. However, Nestle-Dreyer’s will be able to sign more licensing agreements with the wider distribution network, and the combined company will be able to turn more of Nestle’s candies into Dreyer’s ice cream.
i. Describe how the ice cream industry fits the oligopoly model.
j. How does the government influence oligopolis- tic behavior?
k. Do oligopolists always compete on the basis of price? Explain.
4. Describe the US government’s strategies regarding antitrust laws of the different market structures.