Steel price determination in the European Community
| Date | 01 February 1998 |
| Pages | 62-73 |
| DOI | https://doi.org/10.1108/10610429810209746 |
| Published date | 01 February 1998 |
| Author | P.K. Richardson |
| Subject Matter | Marketing |
Introduction
While it might be expected that steel prices in the European Community
(EC), as elsewhere, would fluctuate with output, movements in steel prices
tend to exaggerate the economic activity cycle. At the trough of the last
recession in early 1993, steel prices had declined on average by about 30
percent on the 1990 levels. Prices started climbing in late 1993 and by the
second quarter of 1994 had returned to 1990 levels. The speed with which
manufacturers raised prices as the EC economy turned upwards and the
unity of purpose displayed by manufacturers in raising product prices
became a matter of suspicion to many steel users and industry observers.
The concern was sufficiently strong to cause the European Commission to
seek to determine whether collusive pricing had not become a feature of the
conduct of the industry.
This paper attempts to throw some light on the practice of pricing in the steel
industry of the European Community (EC). In particular, it seeks to explain
why in an industry with high fixed costs, chronic excess capacity and sunk
costs, price remains above marginal cost (in opposition to what economic
theory would suggest). It goes further to advance reasons for price stickiness
as exemplified by the 1993-94 price regime, concluding that this is due
basically to the recognition of interdependence by firms in the industry, a
conduct inherent in the oligopolistic nature of the industry.
After this introduction, the paper reviews price trends within and between
national markets and explains apparent differences. It provides a background
to the paper by a review of the general theory of the economics of market
structure and pricing. It identifies and explains the factors that influence
prices and the process of price determination in the steel industry. It
establishes that in the market for steel, prices strengthen when demand rises
and that demand in turn is mainly determined by the level of overall
economic activity. The paper presents a model of price determination based
on a priori reasoning (the counter factual) and establishes the actual pricing
practice in the industry, at the same time explaining why this diverges from
the former. The discussion throws some light on the pricing practices in the
various market segments of the industry while the conclusion to the paper
draws some policy implications.
Price evidence
Price movements
The European Commission requires steel firms to publish the prices of
those products which come under the ambit of the European Coal and
Steel Community. These products constitute about 80 percent of all steel
products as defined under the Treaty of Paris. In the UK, the list price is
set by British Steel which accounts for about three-quarters of total UK
crude steel output. Elsewhere, for example in Germany, where there is
more than one major producer, the list prices tend to be very close, if not
the same.
62 JOURNAL OF PRODUCT & BRAND MANAGEMENT, VOL. 7 NO. 1 1998 pp. 62-73 © MCB UNIVERSITY PRESS, 1061-0421
Steel price determination in the
European Community
P.K. Richardson
PRICING STRATEGY & PRACTICE
Pricing in the steel
industry
Steel products
To continue reading
Request your trial