South-Western College Publishing - Economics  
Unhealthy Vitamin Prices
Subject Cartels and Joint Profit Maximization
Topic Oligopoly
Key Words Price, Sales, Cartels, Competitions, Fixing Prices
News Story

The Justice Department has been investigating the markets for vitamins over recent years, obtaining price and sales information from major manufacturers such as Hoffman-LaRoche, BASF, and Rhone-Poulenc. This has culminated in prosecutions of international cartels.

In the market for vitamin B3, also known as niacin and niacinamide, the Swiss manufacturing firm Lonza has pleaded guilty to charges of fixing prices worldwide by agreeing with other major producers to eliminate competition from 1992 through 1998. The company faces a fine of $10.5 million.

In the market for B4, choline chloride, executives from Canada's Chinook Group and DuCoa pled guilty to agreeing to set prices, divide markets, allocate customers, and rig bids. They face fines and jail sentences.

The Justice Department says that consumers have probably been charged hundreds of millions of dollars more than they should have. Consumers are unlikely to see price reductions because the vitamin makers lowered and varied prices when the probe began.

(Updated April 1, 1999)

Questions
1. Why do you think that the market for vitamins is best described as oligopolistic?
2. Based on your general knowledge about vitamins and cartels, what made it possible for vitamin producers to conspire to fix prices and sales for such a long period of time?
3. The Justice Department states that consumers paid hundreds of millions of dollars more than they should have.
  a)Draw a diagram of the joint-profit-maximizing vitamin cartel showing the demand and marginal revenue curves and the marginal cost curve. Mark the equilibrium price and output where the cartel operated.
  b)Now draw a horizontal line at the price level that would have existed had the producers acted competitively. Explain what you have done.
  c)Shade in the area representing the extra amount paid by consumers for the amount of vitamins produced by the cartel.
Source Jayne O'Donnell, "Swiss firm illegally set prices of vitamin B3", USA Today, March 3, 1999.

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