Contemporary Microeconomic Issue Essay Sample

Term Paper: Contemporary Microeconomic Issue
Bread Pricing Scandal in Canada
By:
Word Count:1112
Introduction
In any industry, competition plays a vital role as it motivates businesses to find new ways of operating and also become more efficient. As a result, consumers can benefit from the cheapest prices, best deals, and most efficient product/service (Qaqaya & Lipimile, 2008). Therefore, many governments have established regulatory frameworks to ensure that competition exists in the market. Businesses are expected to follow these laws as any violation of competition laws can invite actions and fines by regulators (UNCTAD, 2014)
A similar case is presented by Russel (2018) about the increase in prices of bread products by a ‘cartel’ of suppliers and retailers in Canada. While the rationale behind the formation of a cartel is briefly explored in this paper, the focus of this paper is on why competition is necessary, thereby justifying the action by regulators.
About the case
As reported by Russel (2018), the Competition Bureau of Canada found that 7 Canadian companies committed indictable offences in a bread-price fixing scandal: Two of the largest bread makers in Canada; Canada Bread and Weston Bakeries mutually agreed to increase their wholesale bread prices over a 14-year period. These two bread makers communicated with five retailers; Giant Tiger, Metro, Sobeys, Walmart Canada, and Loblaw for arranging a mutually -agreed upon price increase. As per the arrangement, the seven companies would discuss price increases at least 3-4 months before implementing. As highlighted by Russel (2018), this arrangement is illegal as laid out in the Competition Act of the country. Since the retailers compete with each other and price plays a key role in influencing purchase decision by customers, so if a single retailer would have increased the price without others doing the same, it could have resulted in a competitive disadvantage for the retailer. However, since the two suppliers ensured an arrangement with competitors of retailers by coordinating the price of their bread products, therefore alignment of prices among the retailers could be achieved. As per the Competition Bureau of Canada, over the period 2001-2015, the retail price of bread products increased at least 15 times (Russel, 2018).
Russel (2018) further reported that while two of the accused companies, Loblaw and Weston have admitted to their role in this scandal, are cooperating with the authorities, and are even offering $25 gift cards to its customers (as a gesture to make up for their wrongdoing), however, retailers Giant Tiger and Metro have denied any wrongdoings and have stated that there is no evidence to suggest any wrongdoing. Also, it is believed that while two members of this cartel have admitted wrongdoings, other participants are still functioning as a cartel (Russel, 2018).
Pricing Decision in Businesses
According to Obigbemi (2010), for any business there are three key decisions: first is what to produce, second is who to produce for, and third is what is the price that customers will be willing to pay? The third key decision is crucial as it impacts the corporate objective of the business. Businesses tend to use either cost minimization or profit maximization for determining the price of product/service, however, the decision is complex as there are several factors that must be considered in pricing decisions: demand, cost, economy, political factors, competitors, and environmental factors. In an ideal scenario, each business must be able to establish a balance between the above-mentioned considerations and achieve profit maximization (or shareholder wealth creation) and market leadership. However, that is not pos...