Cleaning Up the Detergent Market

A cartel in detergents broke up over defections from agreed prices and promotion practices.

Between 1997 and 2004, Laurence, Hugues, Pierre, and Christian met over long hours 4 times a year in some secret hotels in suburban Paris to talk about detergents. Their meetings were less about the cleaning power of detergents than about cleaning the detergent market in France. In fact, they were code-named brand directors from the four largest detergent companies that together dominated 90% of the detergent market in France (Financial Times). The companies involved were Proctor & Gamble (35.7%), Henkel, Colgate-Palmolive, and Unilever.

Their meetings, dubbed "store checks" sought to align detergent prices and coordinate promotion policies. But because their products were not exactly homogeneous, some high-end brands were allowed to charge more. The cartel specifically banned "buy-one-get-one-free" offers. Cost savings were not allowed to pass on to consumers, and promotions to add extra quantity free were also limited (WSJ).

Such price collusions did real damage to French consumers because France prohibited stores to sell below cost. As a result, all price increases agreed to by the detergent cartel were passed on to consumers (WSJ).

Although there are brand differentiations among the companies, detergents are mature commodity-type products that do not command much pricing power. Price competition among rivals is particularly ruinous for such low-profit products. Market concentration among a few oligopolistic players facilitates the formation of a cartel to fix prices and split up the market for higher and more stable profit. If the agreed prices stick, competitors essentially become price takers with positive profit. But unlike small price takers who can decide on their maximum profit output, oligopolistic price takers must live within their agreed upon market shares.

Stable fixed prices are conducive to collective profit, but defection from such agreement by undercutting prices to gain market share is even more profitable for the individual defectors. In other words, this is a classic case of a prisoner's dilemma. Indeed, monitoring of defections posed many difficulties for the cartel due to brand differentiation and a profusion of promotion gimmicks. Eventually, the cartel broke up over a June "D-Day" deal of 10% off launched by Unilever. Retaliation ensued with Henkel offering 40% off one of its detergents. Unilever and P&G nailed the cartel coffin with "buy-one-get-one-free" deals.

With the help of a Unilever employee, the French competition authority finally broke the case and fined the conspirators (exempting Unilever for cooperation) 361 million for price collusion (Economist).

References:
  • Economist. 12/11/2011. "Whiter than white?"
  • WSJ. 12/9/2011. "Dirty secrets in soap prices."
  • Financial Times. 12/8/2011. "France fines soap cartel for price fixing."

010705

Opus1 Journal
Term
Definition