Read the following article and the question prompts.

Steel Manufacturers Respond to Recession

Manufacturers of stainless steel products experienced a sharp drop in revenue as a result of the recession of 2007-2009. Demand for steel typically falls sharply during economic downturns as firms revise their investment plans and consumers reduce their spending on automobiles and other products. But the response of some steel firms to the 2007-2009 recession was different from past recessions: They raised their prices. Dennis Oates, CEO of Universal Stainless and Alloy Products, Inc. claimed: "We are raising our prices because of increased costs of operating our mills at lower levels." The costs of some equipment can't be reduced when demand falls. For example, a Universal plant uses a "preheater" to shoot air heated to 2,300 degrees Fahrenheit to hold melted steel in a large ladle. Shutting the preheater down would cause bricks inside the ladle to disintegrate, so the firm keeps it running even when steel isn't being made. The firm also keeps a "baghouse"a device that vacuums pollutantsrunning continuously because turning its motors on and off would damage them.

Though some of Universal's customers balked at paying higher prices, steel service centersmiddlemen who sell steel to manufacturersbelieved that they could pass the price increases on to their own customers. The steel service centers had fewer opportunities to buy from Universal's foreign competitors. Tight credit conditions and uncertainty made foreign orders difficult. John E. Lichtenstein, managing director of Accenture's Metal Industry Group, explained: "You have no idea what the market is going to be 50 to 90 days from now. The last thing you want to do is pay for steel today and have the margin drop 20% to 30% once you get it."

Source: Robert Guy Matthews, "Fixed Costs Chafe at Steel Mills," Wall Street Journal, June 10, 2009.

Questions to think about:

• Do you support Universal's strategy of raising prices in response to lower demand for steel during a recession? Should Universal reduce cost instead of raising prices?
• Do you think Universal experienced economies of scale or diseconomies of scale?
• Do you think steel service centersmiddlemen who sell steel to manufacturerscould pass the price increases on to their own customers?
• Should government do something to the steel industry in response to the recession? If yes, what should the government do? If no, why not?
• Given that the average cost of steel manufacturing rises during recessions, what can Universal and other steel companies do in the future to keep the cost steady especially during the time of recessions?
• Do you think it is appropriate to open up the market to foreign competitors in order to keep the steel prices steady during economic downturns?