Tuesday, April 14, 2009

Pricy Cranberries

Cranberry prices have been increasing over most of this decade, and the supply and demand model is a good tool to see why. Basically there are two compounding forces that are driving up cranberry prices - increased demand and decreased supply. Let's look at how.

On the demand side two articles in the 1990's suggested that consuming cranberry juice cocktail can reduce the presence of certain bacteria in the urinary tract, which lead to an increase in the demand for cranberry juice cocktail and thus an increase in the demand for cranberries.

On the supply side, poor weather has reduced cranberry crop yields in some areas by 30%, which in essence shifts the supply curve to the left.

Additionally, companies like Ocean Spray launched an advertising campaign that has been successful in further increasing the demand for cranberries. In 2006, unit sales of cranberry juice cocktail increased by 3.1% while similar shelf juice products unit sales decreased 5.3%. Further increasing overall demand has been the successful introduction of new cranberry flavored drinks. This also increased product differentiation which gives the firms greater ability to raise prices above marginal cost.

Click here if you want to read the entire article.

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