South-Western College Publishing - Economics  
DutchFlowerAuctions.Com Not Far Away
Topic Product Markets; Oligopoly
Key Words flowers, competition, Dutch auctions, price, logistics, Netherlands
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Reference ID: A163254935

News Story It used to be that flowers were grown near markets. Transport costs were high, and with such a fragile commodity as roses, the nearer to the market the grower was, the more profitable the operation. Now, logistical advances are changing all of that.

Over time, the Netherlands became a leader in flower brokering, given their exacting standards about bucket size and environmental effects. Millions of flowers went under the Dutch auction clocks each day. In a Dutch auction, numbers on the clock face were prices that would descend until someone was willing to pay that price; this is contrasted with an English auction, in which buyers bid against each other in an ascending fashion until there is only one bidder remaining.

Two Dutch auction firms are planning on merging, giving the new firm almost 98% of the Dutch flower business, and command of about 15% of the global flower trade. The Dutch government is looking into competitive changes as a result of the merger, but many argue that this is exactly what needs to happen for the Dutch to remain competitive.

Auctions similar to those in the Netherlands are now being held in other places around the world where flowers are grown, including China and the Middle East. There is no reason to think that flowers have to go through the Netherlands from China on its way to the US. The newer, larger firm will have an opportunity to focus on technology, including virtual auctions.

In a virtual auction, remote bidding can take place, so the Dutch firms can continue to monitor the flower activity, but not require transportation to the Netherlands. Flowers bought can then be shipped straight from the grower to the buyer, reducing shipping costs, and therefore reducing the costs of Mother’s Day presents around the world.

Discussion Questions:
1. What is the difference between a Dutch auction and an English auction? Under which would you expect to pay more for a given item?
2. What are the benefits and costs of letting the two largest domestic firms merge to form one large firm?
3. Draw a graph of supply and demand in the market for international roses (for example), as technology upgrades continue to reduce transport costs. What is the impact on the world price of roses?
Multiple Choice/True False Questions:
1. What should happen to the price of flowers if auctions become more technologically advanced?
  1. Price should rise.
  2. Price should fall.
  3. Price should not change.
  4. Not enough information in the article to answer the question.
2. Assuming that the two Dutch firms merge to create one large firm, what will happen to that market’s concentration ratio in the Netherlands?
  1. Ratio should rise because the number of firms is rising.
  2. Ratio should rise because the number of firms is falling.
  3. Ratio should fall because the number of firms is rising.
  4. Ratio should fall because the number of firms is falling.
3. True/False. Under a Dutch auction, you only need to outbid your closest rival.
Source “Petal Power.” The Economist, May 10, 2007.
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