Price War of Pork

Munsang College

By F.4B Ho Chi Kin

F.4B Wong Yat Lun Alan

F.4F Wong Anita Mo Yin

Background Information

In the beginning of May, two chain supermarkets started a price war by decreasing the price of pork to the average of $19 per catty.

The effect spread to the wet market as their price was higher than the supermarkets.

The wholesalers deeply opposed to this policy and blocked the slaughter houses at Tsuen Wan and Sheung Shui.

Many wholesalers accused that Ng Fung Hong sells pork to Park’N Shop at a

lower price.

Here are the reasonswhy Ng Fung Hong do this

Park’N Shop buys pork in bulk

Sells in bulk to a single buyer (Park’N) will reduce the average cost of the seller

Thus, seller usually gives discount to the buyer who buys in bulk

Why Park’N Shop decreases the price of

the pork?

Reason 1

Q

P

D

S1S2

p1p2

q1 q2

Gain in revenue

Loss in revenue

If Ng Fung Hong sells pork to Park’ N Shop at a lower price, the cost of Park’ N Shop in selling pork decreases.

The supply of pork increases.

Price decreases and the quantity increases.

As pork has a lot of substitutes, the demand for it is elastic.

The percentage decrease in price will be less than the percentage increase in quantity, so the revenue will increase.

Reason 2 When Park’N Shop decreas

es the price of pork, more people will come to buy pork.

In order to reduce the transport cost and time cost, people will buy other goods there.

Thus, the demand for other goods in Park’N Shop increases.

The price and sales volume of other goods increase.

Revenue of other good increases.

Demand & supply of other goods

D2

p

Q

D1

S

P1

P2

Q1 Q2

Increase in revenue

Other Reason

The market structure of supermarket in Hong Kong belongs to oligopoly.

Wellcome & Park’N Shop dominate the market.

They enjoy brand name and goodwill so entry of new seller is difficult.

They are interdependent. Whenever one of them lowers the price to attract more business, the other will follow.

So when one of them reduce the price of pork, the other will follow.

Impact on the pork in Park’N Shop

• When Park’N shop sets the price below the new equilibrium price

• Quantity demanded > Quantity supplied

• Shortage occurs

• Therefore there is always a long queue for buying pork

P

Q

P1

P2

Q1 Qs2 Qd2

Shortage

S1

S2

D

Impact on the pork in the wet market

case 1 The pork in Park’N sho

p and pork in the wet market are substitutes.

When the price of the pork in Park’N shop decreases, the demand for the pork in wet market decreases.

The price and quantity transected of the pork in wet market decrease.

Revenue of the wet market decreases.

P

Q

D1

D2

Q2 Q1

P1

P2

S

Decrease in revenue

Impact on the pork in the wet market

case 2 When the price of the pork in the wet market is set above the new equilibrium price

Quantity supplied > Quantity demanded

Surplus occurs

Therefore a lot of pork was hung without being sold

P1

P2

S

D1

D2

Qd2 Qs2 Q1

surplus

P

Q

Impact on the pork buying from the

wholesalers When the quantity transacted of pork in the wet market decreases, the sellers will buy less pork from the wholesalers.

Demand for the pork of wholesalers decreases.

The price & quantity transacted decrease.

Thus, revenue of the wholesalers decreases.

P

Q

S

D1

D2

Q1Q2

P2

P1

Decrease in revenue

THE END