Strategic Interactions and Institutional Precautions Analysis in the Oligopolistic German Coffee Market

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Abstract

The German Antitrust Authority calls it a ‘chat circle. But Observers and media called it the ‘coffee cartel’. Four of the major players in Germany were part of it: Tschibo, Melitta, Dallmayr und Kraft Foods. The round of CEO´s und Sales Executives were sentenced for having collectively set level, extent and point in time of price increase of the market price for coffee in Germany. The damage for the customer is at least 4,8 Bn Euro.^[1]

As this is a result of the rather high concentration of only a view major player the market environment is described as an oligopolistic market. To understand this market this this paper will first give an introduction of the involved definitions to understand a market with Oligopoly.

Furthermore, Game Theory is used to understand the behaviour of companies in an oligopolistic market. With help of the ‘Prisoners Dilemma’^[2] a model is build up to explain market decisions of involved players and how Price Fixing can be the outcome of the ‘game’.

The last part is dealing with institutional precautions to avoid such concerted practice of price fixing.

Table of Content

Abstract        2

Table of Content        3

Table of Figures        4

Tabellenverzeichnis        4

Abbreviations        4

1        Introduction        5

2        Strategic interactions in oligopoly        6

2.1        Model for Oligopoly Behavior        6

2.1.1        Characteristics of an Oligopolistic Market        6

2.1.2        Prisoners Dilemma as Modell for an Oligopolistic Market        6

2.1.3        Conclusion of the game        8

3        Institutional precautions        9

3.1        Anti-trust laws        9

3.2        Corporate Social Responsibility        9

4        Conclusion        11

List of References        12

Table of Figures

Figure 1 Payoff matrix for Tschibo and Melitta in this Game        6

Figure 2 Payoff per company in different stages of the game        7

Figure 3 Dominant strategy of Melitta        8

Figure 4 Return on Equity and Return on Ethics is no opposite        10

Tabellenverzeichnis

Abbreviations

CSR        Corporate Social Responsibility

1. Introduction

Coffee is one of the most important trade goods. Europe is by far the biggest Importer, followed by USA^[3]. Main producing countries are Brasil, Vietnam and Columbia^[4]. But the worldwide trade with coffee is dominated by a few major players: to name a few Nestlé, Kraft and Procter&Gamble and a few big coffee roasters as Starbucks, Tchibo and Lavazza^[5].

The German Antitrust Authority calls it a ‘chat circle. But Observers and media called it the ‘coffee cartel’.^[6] Four of the major players in Germany were part of it: Tschibo, Melitta, Dallmayr und Kraft Foods. The round of CEO´s und Sales Executives were sentenced for having collectively set level, extent and point in time of price increase of the market price for coffee in Germany. The damage for the customer is at least 4,8 bn Euro.^[7]

In a decision in late 2009, the German Anti-trust Authority imposed fines totalling approximately € 159 500 000 million on three coffee roasters and the six responsible employees. The companies involved are Tchibo GmbH, Melitta Kaffee GmbH and Alois Dallmayr Kaffee oHG.  The information gathered showed that several companies had set up a discussion group made up by their directors and sales managers who met from at least early 2000 until July 2008.

During their regular meetings the coffee roasters agreed on the level, form, extent, date of announcement and implementation of planned price increases. Thus, the companies wanted to maintain the “price architecture” of the companies’ final sales prices and special offer prices for their major roasted coffee products. This objective was particularly realised in the case of five price rises between 2003 and 2008. Apart from the last increase in March/April 2008, all price increases were successful.  The agreements proved to be directly detrimental to the end consumer because the food retail sector generally passed on the price increases directly to the end consumer.

 In the Bundeskartellamt’s view, both the agreement to maintain the “price architecture” and the agreement on the five price increases are hardcore infringements of EU and German antitrust laws.  The decisions of the Bundeskartellamt have been appealed by Tchibo, Melitta, and five individuals concerned. According to German law individuals can be fined up to € 1 000 000 for infringements of the Act against Restraints of Competition.

1. Strategic interactions in oligopoly

2. Model for Oligopoly Behavior

To understand the behaviour of companies in an oligopolistic market, Game Theory can be used to build up a model. Oligopoly is given if a large number of demanders and only a few vendors share a market.