Price War of Pork Munsang College By F.4B Ho Chi Kin F.4B Wong Yat Lun Alan F.4F Wong Anita Mo Yin

Background Information  In the beginning of May, two chain supermarkets started a price war by decreasing the price of pork to the average of $19 per catty.  The effect spread to the wet market as their price was higher than the supermarkets.  The wholesalers deeply opposed to this policy and blocked the slaughter houses at Tsuen Wan and Sheung Shui.

Many wholesalers accused that Ng Fung Hong sells pork to Park’N Shop at a lower price.

Here are the reasons why Ng Fung Hong do this  Park’N Shop buys pork in bulk  Sells in bulk to a single buyer (Park’N) will reduce the average cost of the seller  Thus, seller usually gives discount to the buyer who buys in bulk

Why Park’N Shop decreases the price of the pork?

Reason 1 Q P D S1 S2 p1 p2 q1q2 Gain in revenue Loss in revenue  If Ng Fung Hong sells pork to Park’ N Shop at a lower price, the cost of Park’ N Shop in selling pork decreases.  The supply of pork increases.  Price decreases and the quantity increases.  As pork has a lot of substitutes, the demand for it is elastic.  The percentage decrease in price will be less than the percentage increase in quantity, so the revenue will increase.

Reason 2  When Park’N Shop decreases the price of pork, more people will come to buy pork.  In order to reduce the transport cost and time cost, people will buy other goods there.  Thus, the demand for other goods in Park’N Shop increases.  The price and sales volume of other goods increase.  Revenue of other good increases. Demand & supply of other goods D2D2 p Q D1D1 S P1P1 P2P2 Q1Q1 Q2Q2 Increase in revenue

Other Reason  The market structure of supermarket in Hong Kong belongs to oligopoly.  Wellcome & Park’N Shop dominate the market.  They enjoy brand name and goodwill so entry of new seller is difficult.  They are interdependent. Whenever one of them lowers the price to attract more business, the other will follow.  So when one of them reduce the price of pork, the other will follow.

Impact on the pork in Park’N Shop When Park’N shop sets the price below the new equilibrium price Quantity demanded > Quantity supplied Shortage occurs Therefore there is always a long queue for buying pork P Q P1P1 P2P2 Q1 Q s2 Q d2 Shortage S1S1 S2S2 D

Impact on the pork in the wet market case 1  The pork in Park’N shop and pork in the wet market are substitutes.  When the price of the pork in Park’N shop decreases, the demand for the pork in wet market decreases.  The price and quantity transected of the pork in wet market decrease.  Revenue of the wet market decreases. P Q D1 D2 Q2Q1 P1 P2 S Decrease in revenue

Impact on the pork in the wet market case 2  When the price of the pork in the wet market is set above the new equilibrium price  Quantity supplied > Quantity demanded  Surplus occurs  Therefore a lot of pork was hung without being sold P1 P2 S D1 D2 Qd 2 Qs2Q1Q1 surplus P Q

Impact on the pork buying from the wholesalers  When the quantity transacted of pork in the wet market decreases, the sellers will buy less pork from the wholesalers.  Demand for the pork of wholesalers decreases.  The price & quantity transacted decrease.  Thus, revenue of the wholesalers decreases. P Q S D1 D2 Q1Q2 P2 P1 Decrease in revenue

THE END