Kraft’s pricing strategy

Kraft Logo

Pricing can be a classic prisoners’ dilemma problem. All the companies in a market know that they will make more money if they increase their prices. But if everyone else raises their prices then a single company will be better off with lower prices and a higher market share. Once one company has ‘broken ranks’ and gone back to a lower price then their competitors will follow and overall profits will fall again. How can companies agree higher prices (and therefore higher profits) without falling foul of anti-trust or competition legislation which prevents collusion?

Kraft have shown us one of the options:

Kraft has just announced first quarter profits of $799m (BBC story). In the outlook section of their press release they say:

“We’re realizing better alignment between pricing and input costs, and volumes to date have held up well. At the same time, raw material costs continue to escalate and the economic environment remains unsettled,”

This certainly isn’t written in plain English but it is signalling their intention to raise prices to compensate for increasing raw material costs. This is a signal to their competitors that they can raise their prices too and all the companies in the market will move to a more profitable postion than they are currently in. Of course, their competitiors could think that higher prices from Kraft means that they can keep their prices lower and take market share. But they also know from the history of competition in the sector that Kraft would respond with lower prices again.

No-one has done anything wrong as their is no collusion but Kraft are signalling their intentions which allows their competitors to follow suit so everyone reaches a better position (except the consumer!). If their competitors don’t take the hint or try to steal market share then Kraft will reduce prices and everyone will be back into a worse position.

Pricing problems can often be solved by co-operation between companies but you need to find a way to do it which is legal.

(More on this in another post here)

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3 Responses to Kraft’s pricing strategy

  1. Heidi says:

    Brilliant content, We are viewing back again usually to hunt for updates.

  2. Barry Hughes says:

    Thanks for the feedback Heidi, I hope I can keep up the standard! If you don’t want to miss anything then you can sign up to the RSS feed.

  3. lucie says:

    haha unfortunately, cheese is not very popular in china

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