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Case Study: Milk, Including Honey

Monopolistic Competition and Oligopoly

Case Study: Milk, Including Honey

Fronterra, created in 2001 by New Zealand lawmakers, benefits some 13,000 dairymen instead of all the citizens of the country.

The fortunes of the dairy industry lead the New Zealand economy. Fronterra, the dominant player, is:

· Export focused

· A commodity player

· Deals with exchange rates, particularly the U.S. dollar

· Is plugged into the Knowledge Economy (a government sponsored program)

· Has the backing of powerful lawmakers who overrode previous legislation on competition policy issues

Dissidents state that "if the government really wanted to make transformational change in New Zealand, it would insist that Fronterra was not captive to its current owners, particularly because Cabinet Ministers frequently claim that one of the reasons why New Zealand companies do not maximize their growth is the lack of ambition of their owner-shareholders, who do not want to dilute their holdings and who are content to take regular cheques and an easy lifestyle."

They would prefer that ordinary New Zealanders be allowed to buy stock in the venture.

Source: Fran O'Sullivan, "Pressure on NZ's Big Cheese," New Zealand Herald, December 20, 2004.

Questions:

1. What would the textbook call this market structure?

2. Is this a case of collusion?

3. Why is any collusion fragile?

4. Are the central elements of an oligopoly present in the story?

5. Would citizens be better served if ownership in Fonterra was open to all?

Solution Preview

1. It is an interesting market structure but I would say it is a cooperative that function as a monopoly. It is a cooperative of dairy farmers that dominates the New Zealand market and ensures exporting. According to their website Fronterra had 96% of all dairy farmers on board at the start of operations. They control most of the supply of dairy products in the country. 1

2. It is a case of collusion but when we think of collusion we tend to think of illegal price fixing, in this case, it is legal price ...

Solution Summary

Monopolistic Competition and Oligopoly

Case Study: Milk, Including Honey

Fronterra, created in 2001 by New Zealand lawmakers, benefits some 13,000 dairymen instead of all the citizens of the country.

The fortunes of the dairy industry lead the New Zealand economy. Fronterra, the dominant player, is:

· Export focused

· A commodity player

· Deals with exchange rates, particularly the U.S. dollar

· Is plugged into the Knowledge Economy (a government sponsored program)

· Has the backing of powerful lawmakers who overrode previous legislation on competition policy issues

Dissidents state that "if the government really wanted to make transformational change in New Zealand, it would insist that Fronterra was not captive to its current owners, particularly because Cabinet Ministers frequently claim that one of the reasons why New Zealand companies do not maximize their growth is the lack of ambition of their owner-shareholders, who do not want to dilute their holdings and who are content to take regular cheques and an easy lifestyle."

They would prefer that ordinary New Zealanders be allowed to buy stock in the venture.

Source: Fran O'Sullivan, "Pressure on NZ's Big Cheese," New Zealand Herald, December 20, 2004.

Questions:

1. What would the textbook call this market structure?

2. Is this a case of collusion?

3. Why is any collusion fragile?

4. Are the central elements of an oligopoly present in the story?

5. Would citizens be better served if ownership in Fonterra was open to all?

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