South-Western EconNews: Cranberry Giant Made to Look Like a Turkey

Cranberry Giant Made to Look Like a Turkey

Subject

Comparisons with competition

Topic

Monopoly

Key Words

Monopoly

News Story

The cranberry industry is dominated by Ocean Spray, which sells cranberry drinks and other products. The company is a cooperative, owned by 920 cranberry farmers and citrus growers. The success of Ocean Spray has been its control of the supply of cranberries.

However, it is losing its control of the market. One Ocean Spray member founded a breakaway company, Northland Cranberries, in 1996 and produced a 100 percent juice version of Ocean Spray's Cranberry Juice Cocktail, which is only 27 percent juice. Ocean Spray's product response, Wellfleet Farms, has not fared well. Northland already has 10 percent of the cranberry juice market. Ocean Spray plans more new drink products.

As a result, there is overproduction of cranberries and growing inventory. Prices paid to cooperative members by Ocean Spray fell from $55 for a 100-pound barrel in 1998 to $32 to $38 in 1999.

(Updated December 1, 1999)

Questions

1.	Prior to 1996, Ocean Spray approximated a monopoly.
	a) Draw a diagram representing the profit-maximizing equilibrium of Ocean Spray in the cranberry juice market. Show the marginal revenue and demand curves, as well as the average total cost and marginal cost curves. Mark the equilibrium price and output, and shade in the area representing profit.
	b) With the founding of Northland Cranberries, how did the position and elasticity of Ocean Spray's demand curve change? Explain your answer.
	c) Draw the new demand curve on your diagram and show the implications for Ocean Spray's equilibrium price and output. Also shade in the area representing the new amount of profit.
2.	a) Redraw the initial monopoly equilibrium. Shade and label the area representing consumer surplus. Do the same for producer surplus and the deadweight loss.
	b) Now draw another diagram showing today's equilibrium. Shade and label the consumer surplus, producer surplus, and the deadweight loss.
	c) Compare the two diagrams. What has happened to the relative sizes of the three areas?
	3.
Given your answers to Questions 1 and 2, and in view of the news story, are consumers better off now? Offer several reasons for your stance.

Source

Constance L. Hays, "Harvest of Discontent," The New York Times, September 22, 1999.