9781118041581

In the early 1990s, the infant-formula industry accounted for annual sales of some $2

billion. Abbott Laboratories, Bristol-Myers Squibb, and American Home Products

Corp. dominated the market with 50 percent, 37 percent, and 9 percent market

shares, respectively. The growth of the overall market had been uneven. Until the

early 1970s, breast feeding of babies was on the decline, sinking to a low of 20 percent

of mothers. Formula makers prospered by offering mothers the convenience of bot-

tled milk. Twenty-five years of research, however, convinced pediatricians that

mother’s milk is the optimum baby food. In the 1990s, about 50 percent of American

mothers breast fed their babies.

The three dominant companies employed strikingly similar business practices.

The formulas they sold were nearly identical (and must have the same nutrients by

federal law). The companies charged virtually the same wholesale prices. They

increased prices by an average of 8 percent annually over the decade (while milk

prices increased by 2 percent annually). They produced a 13-ounce can at a mar-

ginal cost of about $.60 and sold it for an average wholesale price of $2.10. With

average total cost estimated to be about $1.70 per can, the companies enjoyed

nearly a 25 percent profit margin. The companies engaged in almost no advertis-

ing; instead, they promoted and marketed their formulas via give-away programs to

349

CHAPTER 9 Oligopoly

CHAPTER 9 Oligopoly

It is in rare moments that I see my business clearly: my customers, my

organization, my markets and my costs. Then why do I still lie awake at night?

I’m trying to figure the damn strategies of my competitors!

A MANAGER’SLAMENT

Collusion in the

Infant Formula Industry

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