Tuesday, June 1, 2010

Soft drink manufacturers collude to stay out of schools?

Is this anti-competitive behavior in the public interest?
Let’s face it. The real reason the competing beverage companies agreed to this campaign is because they want to preempt more onerous regulation and/or “sin taxes” on sugary drinks. (See these articles from Advertising Age.) Unlike the purported goal of enhancing output by creating goodwill, this goal is best served by concerted, rather than individual, action. That’s because voluntary action to preempt more onerous regulation is subject to a collective action problem. Any firm that voluntarily cuts back its sales to forestall regulatory action will want to sacrifice as few sales as possible. Each firm also knows that in deciding whether to impose restrictions, regulators tend to look at overall industry trends. Each firm therefore wants its rivals to cut back a lot (so that the industry as a whole appears to be acting responsibly) while it cuts back only a little (thereby minimizing the cost of its preemptive strategy). If every firm has this attitude, though, the total voluntary reduction by the industry as a whole won’t be sufficient to prevent regulatory action. Thus, rivals seeking to forestall more onerous regulation need to commit to each other that they will each achieve specified reductions.

1 comment:

  1. This is a great example of the prisoners’ dilemma. If all of the soft drink companies agree to look after the health of the country, then the government may not impose taxes that will hurt future sales of other soft drinks. If only one company shows they care, then the other competitors will make more profit and most likely the government will impose taxes. If none of the companies do anything, they all look bad and the government will impose taxes and most likely harsh ones. The best option for all companies in the soft drink market is to come together and all show that they care about the country’s health so they can hopefully remove the “sin taxes”.

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