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The Diaper Price War
Subject Price Competition and Prisoner’s Delimma
Topic Oligopoly
Key Words Price Competition, Prisoner’s Dilemma, Profits, Market Share, Pricing Power
News Story

As Kimberly-Clark, the maker of Huggies diapers, and Proctor & Gamble, the maker of Pampers, increased their competition last year, Kimberly-Clark tried to raise the effective price of its product by reducing the number of diapers in its packages, and cutting its price by a little bit less. Rather than following in a similar fashion, as it had done in the past, P&G responded with its own price cut – it matched the price decrease and kept the number of diapers per package the same. The result: P& G gained significant market share at the expense of Kimberly-Clark.

This classic prisoner’s dilemma outcome arises in a number of industries attempting to ride out the tough economic times. Rather than raising prices to boost profits, firms tend to cut prices in an attempt to gain market share. If other firms do not follow the same path, they will lose market share to those firms with deep enough pockets to suffer through the price cuts. Among other industries, Dell has been engaged in a significant battle for personal computer market share with rival HP-Compaq.

P&G eventually did reduce the number of diapers in the package to match the change by Kimberly-Clark, but not for a number of months after the initial move. The damage had been done, however. P&G reported significantly increased earnings for first-quarter 2003, while Kimberly-Clark had to scale back its earnings estimates. P&G has increased its share of the disposable diaper market by close to 5 percentage points. As P&G’s CEO Lafley states in the article, “When times are tough, you build share.”


(Updated September 10, 2003)

Questions
1.

Draw a 2x2 matrix with P&G as the row player, and Kimberly-Clark as the column player. Describe the outcome of this article in terms of this matrix

2. How is the behavior typical of these two firms (one raises price, the other follows similarly) different than – or similar to – collusion, which is illegal in the United States?
Source Sarah Ellison. “In Lean Times, Big Companies Make a Grab for Market Share.” The Wall Street Journal. 5 September 2003.

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