Competitive Strategies in the Italian Pasta Industry

By Simeone, Mariarosaria; Marotta, Giuseppe et al. | Agricultural Economics Review, January 1, 2015 | Go to article overview

Competitive Strategies in the Italian Pasta Industry


Simeone, Mariarosaria, Marotta, Giuseppe, Rotondo, Giacomo, Agricultural Economics Review


(ProQuest: ... denotes formulae omitted.)

Introduction

The aim of this research paper is to analyse the Italian pasta market with a specific focus on the price strategies played by different brands. We applied a theoretical approach to statistical data from preeminent sources (IRI, 2008).

The Italian Antitrust Authority investigated whether companies of the Industrial Union of Pasta Makers, which represent about 85% of the market, colluded to fix the price of pasta. According to the regulator, and the numerous documents found, have clearly showed that in 2006 and 2007 some of these companies had a common strategy of using coordinated prices (Notaro, 2013; Giangiulio D.; 2011).

From this specific case, a certain interest arose in the study of how the price strategies of the major Italian pasta brands have an impact on their own sales and on those of other competitors in the market.

The structure of an industry determines the intensity of competitive rivalry and the cooperative or warfare outcome that can be reached. It is important to understand how competitors are moving. In fact, if competitors try to meet the same needs or to compete with similar products, one firm's gain is likely to erode the others' profitability.

This study differs from those aimed at testing the direction and magnitude of changes in prices which are determined by the need to transfer the cost variations. Moreover, it differs also from those studies that are more specifically designed to verify if, as a result of raw materials purchase price fluctuations, operators are limited to control a transfer on the final sale price (Giangiulio 2011).

In this study, we calculated an index in order to infer the price elasticity for each company. Looking at the value assumed by this index, we deduced that for some of these companies analysed, the results have led to cross price elasticity instead of own price elasticity. Therefore, for these companies, the economic results seem to be influenced mainly by the competitors' price policies rather than by the companies' established price policies. The work focuses on the Italian pasta market with the intent to analyse the value of price policy in the competition among the different main pasta brands on the Italian market.

We referred to the concept of empirical elasticity proposed by Labini (1979). According to the author, when a business man aims to predict the possible consequences of price or quantity variation he will look at the total revenues given by the pairs of prices and quantities. In this paper, because we do not have the prices of the pasta companies, from the data on sales and quantities we have quantified the index over time for each brand. For this purpose, this index as calculated give the reactivity of sales sales to volumes. Once defined η, on the base of data available, from it we infer, through a functional relation, the (adjusted) elasticity respect to the price [varepsilon] in order to capture, for each brand, either the effect of the own price elasticity and of the cross price elasticity.

Because in our study we did not have data to calculate "[varepsilon]" but we had data on rev enues "R" and on quantities "Q" we calculated the value of η for the Italian pasta market and we deduced the value of the elasticity "[varepsilon]" for all the firms using the implicit formula of η.

The results of the analysis highlighted a first group of companies with negative demand elasticity where the quantity demanded moves in the opposite direction to their price variation (i.e. when the price increases the quantity decreases). Furthermore, the results allowed us to identify a more interesting group of companies where the indicator η is between 0 and 1 (0<η<1), the elasticity has a positive value and their revenues seems to be influenced by competitors' price policy. For these companies there are two possible scenarios depending on the sign of the price variation: on one hand they could increase the sold quantities in both volume and value when their price increases, on the other hand they could decrease the sold quantities in both volume and value when the competitive companies adopt a strategies of decrease in price. …

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