Pricing in a volatile market :: Economics

Pricing in a volatile market Questions : 1)What are the main causes of price volatility in a market? To what extent and how have this general causes applied in the pulp and paper market? First of all the fragmentation of the market causes prices to be volatile. Indeed a unique policy can not be set up and a sort of jungle's law is created. Each producer adapts its own prices as regard its operating costs, investments, volume of production. More over the working rules are different from one country to another and standards of living are world's apart so it can easily explain the gap between two prices. As no single producer has a large production compare to the others, it can not impose its prices to the market and that is why it is obliged to cope with. The volatility of the market is also created by the gap between a so to speak prosperity period during which the producers invest and the second period when capacity created is too much compare to the needs. The offer is bigger than the demand so prices fall. These general causes applied in the pulp and paper market because it corresponds to all that characteristics. Indeed it is a very fragmented industry. For example no single producer has more than 6 per cent share of the overall market and the 10 largest producers represent less than the half of the overall production. As we already said for a market generally speaking, in the pulp and paper market companies during a prosperity time invested in more capacity to take advantage of high prices but as two years are necessary to get a plant up and running, a down period appeared and demand has passed the peak and prices are lower. To cover their invest producer dump all their extra new capacity and it causes the prices to decline steeper. It is a vicious circle. An other element explains the price volatility in the pulp and paper market, it is the entry of lower-cost producers ( South American, Asian) compare to traditionally producers ( Scandinavian, European and North American). More over the Asian economic crisis played a role in price volatility. 2) What effect do you think consolidation in the industry will have on: - (A) the biggest producers The consolidation through takeovers and alliances for the biggest producers allows them to develop bigger global market share and by this way they may have a greater influence over market prices. They can be able to have a real power to decide prices. The joint ventures can also allow the producer to share their necessary investments or