Monday, July 15, 2013

Cork or Plastic Wine Stoppers

The Wall Street Journal has a nice article on the wine stopper market.  If we think of the cork wine stopper and the plastic wine stopper as two types of substitutes in the wine stopper market, but that customers view them as being different in their ability to keep wine fresh and untainted, we can use the Cournot product differentiation oligopoly market as a guide to see how changes in preferences impact the quantity demanded, prices and profits in this market.  Given the two products have similar (but not identical costs) complicates the matter a little, but not much.

Notice as customers view cork and plastic as being more similar (i.e. homogeneous) that the market share and profits tend to be more similar.  This was the initial trend.  Cork wine stoppers have subsequently invested in advertising to get customers to view cork wine stoppers as being superior to plastic wine stoppers to offset their reduction in market share and profits.  Of course the other option is for cork producers to find ways to reduce their marginal costs of producing cork, but in an industry like cork production, that is most likely much more difficult.

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