Nestle Bottled Water Project Report

PROJECT REPORT

MASTER 2 - EMO

PROJECT 1: BOTTLED WATER

From the given dataset, we can draw out some information:

Only brand 6 is spring water out of the 6 given brands, also this product belongs to Group 3 (Castel). Therefore, at the moment of the observation, only Castel produces spring water while Group 1 (Nestlé) and Group 2 (Danone) do not.

So, in order to answer the 2 questions, we have to understand the situation and the involved parties. We can consider there are 3 main players in the market: the firms, the competition authority and the supermarkets (as retailers).

Each player has its own goals and therefore, it acts based on the anticipation of others’ responses.

When deciding whether to enter the market for spring water, Nestlé has to consider many issues: the advantages, disadvantages of entering, the price it’s going to set for the products, packaging, capacity…

Question 1:

1. The advantages of Nestle entering the market for spring water

• If Nestlé enters the market then it is less likely to face competition from Danone because Danone does not sell spring water.

• The mineral index of Nestlé’s products is quite high (0.7) compare to that of Castel (0.367) and this may be more attractive to customers.

1. The disadvantages of Nestle entering the market for spring water

• Both Nestlé and Castel sell spring water while Danone does not, so to some extent, products of Nestle are more substitutes to those of Castel than Danone’s.

• However, this may lead to the fact that Castel can launch a price war to fight against Nestle.

• The market trend: for years, bottled water (especially spring water) has come under criticism for the environmental impacts of groundwater extraction; therefore many environmentalists have encouraged people to use tap water instead of spring water. This may affect the behavior of customers and the market of spring water may not be as promising as firms may think.

1. How serious is the risk of a price war launched by rivals firms on this market?

As mentioned above, because Danone does not sell spring water so the competition mainly happens between Nestlé and Castel. So now we mainly discuss the threat of a price war from Castel.

Once Nestlé enters the market for spring water, Castel can choose to fight or to accommodate.

Nestlé

Castel

Enter

Fight        Accommodate[pic 1]

Not enter

++ Nestle

++ Danone

++ Castel

Castel can fight against the entry of Nestle by launching a price war. Castel can set its product price much lower than the monopoly price to get all customers. However, how successful this action is depends on how substitutes its products and those of Nestle are. If they are close substitutes than cutting price will bring Castel big benefit.

Castel’s water products are to some degree substitutes to others’:

Cross price between brands 2 – 4 is 9.3 while cross price between brands 2- 6

is 2.6 (brand 2 belongs to Groups 2, brand 4 belongs to Group 1 and brand 6 belongs to Group 3).

Therefore, pricing behavior of Castel does affect the other 2 groups. And if it is able to cut price, Nestle and Danone will receive big losses.

Question 2: Group 3 is concerned about the strategy of Group 1 may consider launching a hostile takeover bid for Group 1 (We call the merged groups Group 1&3).

Therefore, competition authorities may worry that such a merger will create a dominant position for Group 1 & 3 and thus, they may abuse it to charge monopoly price.

As mentioned in question 1, products of in the market are quite close substitutes, therefore the effect of a merger is not quite a damage. If Group 1&3 charges too high a price, customers can buy other products from Group 3.

So, to conclude, the effect of the take-over on the retail price of bottled water would not be sufficiently negative to make the competition authorities to block such a transaction.

The answers will better answered if more data are given, for example, we need information about the price of oil, fuel, electricity and transportation costs to compute the production costs.

PROJECT 2: BRAZIL CARS

The market for biofuel cars depends on many other factors that are not given in the dataset : the policies for biofuel cars (taxes or subsidies) , the customers’ preferences, the customer’s incomes…, and most importantly, the prices of fuels.

When a person decides to buy a car, his first choice may base on the physical characteristics of the car, or the fuel (conventional or biofuel car types), or imported/domestic car…

The main idea is to evaluate how different characteristics of the car models affect the market share. We can evaluate whether parameter of each characteristic is different for different kinds of cars. For example, we can compare 2 subsets ethanol = 1 and ethanol = 0 to see if there are systematic differences between characteristics, if one characteristic is more important than the other ones.

There are many ways to choose the group and subgroup but we can try with 3 following ways:

1. Ethanol = 1 or ethanol = 0

1. Imported (1) or not imported (0)

1. Category:        + Polular

+ Compact

+ Medium

+ Large

+ Luxury

• We may look at the market share and price of ethanol cars and non-ethanol cars:

[pic 2]

According to the data ethanol cars are cheaper than non-ethanol cars. This may be explained by the fact that ethanol cars are usually small, thus the price can be lower compared to non-ethanol cars (which are usually medium and luxury cars).

[pic 3]

• Assume the group is car size and subgroup is imported/domestic, we will compute the conditional market share given the subgroup.

[pic 4]

Because the logshare of subgroup is greater than logshare in subgroup, this is not a plausible assumption.

• We can redefine: group is ethanol = 1 or = 0, subgroup is imported or domestic and see that this assumption makes sense.

[pic 5]

Therefore, market share increases if it’s an imported and non-ethanol car. However, the price has very small impact on the market share. This can be explained that because the logshare in the subgroup and of the subgroup have already captured the effect of price.