Kraft's Pricing Strategy

After reading chapter 10 in the text, I was wondering how a company would actually go about signalling to competitors what it intended to do involving pricing strategies. I don't recall ever catching onto a company's "hints" in any reading I've ever done. This could however be because I wasn't looking. I found an article published by a game theories strategy website that outlined Kraft's attempt at signalling its competitors. Kraft like many other companies faces a prisoners' dilemma in their pricing strategy. In the outlook section of their press release they said:

"We're realizing better alignment between pricing and input costs, and
volumes to date have held up well. At the same time, raw materials costs
continue to escalate and the economic environment remains unsettled."

If I were to casually read this, I probably wouldn't have got much out of it. However this is an attempt by Kraft to signal to it's competitors that they too can raise their prices and move to a more profitable position than they are currently in. How the competitors take this news and act on it is beyond Kraft's control. Competitors could see this as a chance to keep prices low and steal market share from Kraft, or they could raise prices to raise profits. However, if they keep prices low, chances are Kraft will also drop their prices back to competitive levels. This will result in lower profits for both Kraft and it's competitors, which is better for you and I as consumers.


Dr. Tufte said...

Farva, this is exactly what we mean by signalling in this context.

Dr. Tufte said...

I don't have a mechanism for granting extra credit for single posts ... but without knocking anyone else ... this is by far the most perceptive post by a student on an I-can't-believe-economists-think-this-way topic that I've seen in a few years.

Sam said...

I just got done reading in the text about signaling. One component that I thought was very interesting is the things that sellers must do to assure buyers that their claims are credible. I really liked the insights that the book gives concerning advertising and credibility. If a seller is making an advertising claim you can judge the credibility of that claim by looking at three different things. First, how much the seller spent in sunk costs to make the claim. Second, how easy it is for consumers to detect poor quality. Third, if poor quality is detected then news of the incident must spread quickly and cut into the seller’s future business. As a marketing and advertising professional I can’t believe I have never seen this written out like this before. This is very useful information.

To tie my comment in with Farva’s post I think it goes without saying that Kraft must be credible in their claims or else they will not be able to convince competitors that they can raise their prices.

Windwalker said...

Kraft is a strong, powerful, reputible brand. Consumers and competition alike pay attention to what market-share leaders have to say, what they dont say but really mean, and what they do or do not do. Kraft is communicating to others that they are aware of tumultous sate of the economy and prices, what the less-informed party infers from this is done at their own peril. As a leader, it was a smart "play" by Kraft to make the initial move. This was an astute observation and posts. I know I will be more observant too when I see an advertisement from a company with buy back guarantees. These are to imply their products are superior to others, but are they really?

Dr. Tufte said...

-1 on Windwalker for punctuation problems.

Sam ... buddy ... if you'd come to me sooner I would've told you all about signalling and advertising!

More seriously, we had a job candidate in last year who described accounting as the language of business, and economics as the philosophy of business. It's kind of in the nature of economics to have asked and answered more questions than the other fields of business. But it's also in the nature of philosophy to be better at generalities than specifics.

In fact, it's kind of odd in some respects that (large) firms and institutions don't have Chief Economics Officers.

A good example of this is how SUU and the state are handling the problems with Juniper Hall. Managers informed by accountants tend to view deferring maintenance as a way to save money, when it is really a way to increase cash flow. A chief economics officer would point out that if you defer maintenance, you don't get rid of the opportunity cost, and you should put money away to cover it.

Windwalker: the fact that Kraft is already large is, in itself, a sunk cost that checks off one of the three items on Sam's list.