hospitals and doctors. Such programs were very effective. Research has shown that
90 percent of mothers stick to the formula brand the hospital gives them.
The cozy oligopoly enjoyed by the three companies attracted would-be entrants
and government scrutiny. In the late 1980s, Carnation and Gerber entered the for-
mula market by advertising directly to consumers. However, the American Acad-
emy of Pediatrics opposed this strategy, arguing that direct advertising would
influence mothers not to breast feed. Consequently, the two companies’ sales con-
stituted less than 5 percent of the market. In addition, the federal government took
an interest in formula pricing. Under its Women, Infants, and Children (WIC) Pro-
gram, the government subsidized formula for disadvantaged families. Administered
by the states, the WIC program accounted for about one-third of all formula sales.
In most states, families received WIC vouchers that could be exchanged for any
brand of formula, with the companies giving the government a discount (about
$.50 per can) off the regular wholesale price. However, a number of states insti-
tuted competitive bidding—awarding all WIC sales in the state to the firm making
the lowest price bid.
The history of the baby-formula industry raises a number of questions. Does
viable competition exist in the industry? Are barriers to entry significant? Are prices
excessive? What effect might competitive bidding have on market structure, pricing,
and profitability in the infant-formula industry?350 Chapter 9 OligopolyIn the previous two chapters, we focused on perfect competition and pure
monopoly, the polar cases of market structure. However, many markets
occupy positions between these extremes; that is, they are dominated by nei-
ther a single firm nor a plethora of firms. Oligopoly is the general category
describing markets or industries that consist of a small number of firms.
Because of oligopoly’s importance and because no single model captures the
many implications of firm behavior within oligopoly, we devote the entire
chapter to this topic.
A firm within an oligopoly faces the following basic question: How can it
determine a profit-maximizing course of action when it competes against an
identifiable number of competitors similar to itself? This chapter and the suc-
ceeding chapter on game theory answer this question by introducing and ana-
lyzing competitive strategies. Thus, we depart from the approach taken
previously where the main focus was on a “single” firm facing rivals whose
actions are predictable and unchanging. In crafting a competitive strategy, a
firm’s management must anticipate a range of competitor actions and be pre-
pared to respond accordingly. Competitive strategy finds its most important
applications within oligopoly settings. By contrast, in a pure monopoly, there
are no immediate competitors to worry about. In pure competition, an indi-
vidual firm’s competitive options are strictly limited. Industry price and out-
put are set by supply and demand, and the firm is destined to earn a zero profit
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