Pricing in a volatile market :: Economics

Pricing in a volatile merchandiseQuestions 1)What are the main causes of price volatility in a market? To whatextent and how consume this general causes applied in the physical body and papermarket?First of all the fragmentation of the market causes prices to bevolatile. Indeed a unique policy undersurface non be set up and a sort ofjungles law is created. Each producer adapts its own prices as see to itits operating costs, togments, volume of production. More over theworking rules are different from one country to another and standardsof living are worlds apart so it can easily explain the gap between ii prices.As no single producer has a large production compare to the others, itcan not impose its prices to the market and that is why it is obligedto cope with. The volatility of the market is also created by the gapbetween a so to speak successfulness period during which the producersinvest and the second period when capacity created is too much compareto the needs. The offer is bigger than the demand so prices fall.These general causes applied in the pulp and paper market because itcorresponds to all that characteristics. Indeed it is a veryfragmented industry. For example no single producer has more than 6per penny share of the overall market and the 10 largest producersrepresent less than the half of the overall production. As we alreadysaid for a market generally speaking, in the pulp and paper marketcompanies during a prosperity time invested in more capacity to takeadvantage of high prices but as two years are necessary to get a plantup and running, a down period appeared and demand has passed the peakand prices are lower. To cover their invest producer dump all theirextra new capacity and it causes the prices to decline steeper. It isa vicious circle. An other element explains the price volatility inthe 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 Asianeconomic crisis played a role in price volatility.2) What effect do you think consolidation in the industry will haveon- (A) the biggest producersThe consolidation through takeovers and alliances for the biggestproducers allows them to develop bigger worldwide market share and bythis way they may have a greater influence over market prices. Theycan be able to have a real power to decide prices. The joint venturescan also allow the producer to share their necessary investments or