Economic Impacts of the Citric Acid Cartel

Abstract

Market forces facing single producers usually overwhelm any attempts by a firm to deviate from its assigned role in an industry (see Chapter 2 above). With a given plant in place, once a seller in a competitive market observes the market price, it passively sets its output level at the profit-maximizing point. If, as was the case in the global market for citric acid, food-grade product made by alternative sellers was viewed by buyers as perfect substitutes, sellers have few strategic options to try to improve their profitability. Efforts by a firm to distinguish itself on the basis of delivery terms or after-sales service can easily be imitated by rivals. Investing in a lower cost production technology might yield better profits for a few years but carries the danger of operating at inefficiently low levels of utilization or betting on the wrong technology. Price cuts can be quickly matched by other sellers and can lead to a price war that hurts everyone until it is abandoned. Price increases for homogeneous products will lead to an erosion of a firm’s market share and a build up in excess capacity that further squeeze margins.