The following describes the ice cream industry in summer 2003:
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 flavors, focusing on single-serving products that carry profit margins 15 to 25 percent higher than the tubs of ice cream in supermarkets. The higher profit 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 profit 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.
a. Describe how the ice cream industry fits the oligopoly model.
b. How does the government influence oligopolistic behavior?
c. Do oligopolists always compete on the basis of price? Explain.