An Analysis of the Market for Olestra-Based Potato Chips

Kristin St. Raymond Ayala M. Solis Econ 200H, Section 5

it imbues potato chips with the same flavor and texture as their full-fat cousins but diminishes the guilt factor substantially: Olestra chips have zero fat and half the calories of the full-fat varieties (ACSH). This is because so many fatty acid chains are crowded around a sucrose core that digestive enzymes cannot find a breaking point to separate them (FDA . considering that the Olestra oil is an innovation of Procter and Gamble alone. Therefore. whose numerous fatty acid chains are indigestible by the human body. made by a combination of sucrose and vegetable oil. Olestra is not a new fat substitute by any means. which has undoubtedly had some effect on pricing and market behavior. They esterified eight fatty acid residues to a molecule of sucrose. there appear to be three major potato chip brands using the fake-fat technology: Frito-Lay’s WOW! Chips. Procter and Gamble scientists discovered it in 1968. Presently.Who wouldn’t want to munch on delectable potato chips all day without the worry of adding extra inches to the waistline? This is the assumption the manufacturers of Olestra-based potato chips are banking on. Obviously. Procter and Gamble’s Fat Free Pringles. reasoning that the increased number of fatty acid chains would help premature infants to absorb more fat. Adding to this interest is the heated controversy surrounding the fake-fat chips. it is a cooking oil. and Utz Brand Yes chips (though Utz is sold almost exclusively on the eastern half of the country). especially in the current times where thinness and physical fitness reign supreme. However. this is quite an attractive prospect to chip producers. Olestra is a “fake-fat”. The market structure is a bit interesting. just the opposite happened: they effectively created a molecule so large and fatty that was indigestible by the body (CSPInet). Before examining the market workings of today. it could perhaps be beneficial to review a brief history of Olestra.

Procter and Gamble. concentrating on safety testing. and K have been added” (CSPInet). 1998). Procter and Gamble petitioned the FDA to approve Olestra as a fat substitute for shortening. fast food. who manufactures Olestra under the brand name Olean. product development. E. of course. Realizing that opportunity was knocking at its door. Nevertheless. Inc. but there was a major caveat: every bag of Olestra-based snacks had to bear the label “This product contains Olestra. This move garnered criticism by the Center for Science in the Public Interest (CSPI). Olestra inhibits the absorption of some vitamins and other nutrients. Vitamins A. Proctor and Gamble and other major snack makers were eager to jump on the Olestra bandwagon. Procter and Gamble narrowed their petition to “savory snacks”. and.’s Hercules Sagalas. It applied for and received a special patent extension in the early 1990s (effectively extending the life of its patent until January 25. after all. This eagerness gives an interesting structure to the market. had a virtual monopoly on the . who proclaimed that Olestra was “’the single most important development in the history of the food industry’” and predicted it would bring in $1. Procter and Gamble devoted extensive time and financial resources to its new baby. tortilla and corn chips. D. and other products (such as ice cream) in May of 1987. and marketing campaigns.5 billion in annual sales (CSPInet).Backgrounder). chips. potato chips (CSPInet). who claimed Olestra was inadequately tested and caused numerous detrimental gastrointestinal side effects (CNN). When the FDA raised similar concerns in 1990. which includes crackers. It was granted FDA approval on January 24. Olestra may cause abdominal cramping and loose stools. 1996 to use Olestra in production of savory snacks. many stock analysts shared the sentiments of Drexel Burnham Lambert.

including severe diarrhea. it licensed out the use of Olean to its competitors Frito-Lay (a division of Pepsico) and Utz. Procter and Gamble had invested nearly half a billion dollars in the fat-substitute. It also could have engaged in cross-licensing. How is this market currently doing? Test markets of Frito-Lay WOW! Chips (initially called Max Chips) and Pringles Fat Free Chips showed that there was great interest in the product.fake-fat until 1998. To counter these claims. Furthermore. Procter and Gamble hired numerous consultants and dietitians to back up the product and spent even more money on advertising. it decided not to be the sole provider of Olestra-based potato chips. By licensing out the use of Olean to its competitors. This interest came in spite of over a thousand reports of adverse side effects associated with Olestra. This is not hard to . Why did Procter and Gamble do such a thing? Most likely it was diminishing its own risk. so it was exercising justified caution in inviting the competition to participate. it could conceivably have created agreements to share its competitors’ profits. fecal incontinence. and abdominal cramps (CSPInet). Nationwide marketing of the WOW! Chips and Fat Free Pringles began in the spring of 1998. in which it allowed Frito-Lay and Utz the use of its product in return for information about any of their future innovations. as there is a “high likelihood that investments in apparently promising innovations will go down the drain” (Baumol and Blinder. 298). as there are only three firms nationwide who market the fake-fat potato chips. Rather. one barrier to entry is quite clear: not just any upstart chip manufacturer has the available funds to obtain use of Olean or to invest in R&D for a new fat substitute. and there was a huge initial boom in sales. Procter and Gamble’s move resulted in an oligopolistic market structure. However.

To make matters worse. which often occurs when patents run out. sales quickly declined. Beyond these. have perhaps made entry into the market an unfavorable decision for other potential competitors. even though Procter and Gamble’s patent on the fake-fat ran out in the same year.comprehend though. some consumers may have felt that the prices of these chips were high relative to their full-fat or baked counterparts. However. This has allowed the market to retain its oligopolistic structure rather than shifting to one of monopolistic or perfect competition. The initial boom in sales in 1998 has never been repeated in the Olestra-based potato chip market. Though the fake fat has been supported by many physicians (such as C. as Olestra-based products had incredible appeal from a variety of sources: health conscious adults and athletes. in spite of the opportunity for entry. who equates its gastrointestinal effects to those caused by bran (www. it is quite possible that many consumers are turned off by the bad publicity. along with the steadily declining sales. What possible reason could there be for the enduring oligopoly? Perhaps it is Olestra’s bad reputation that has prevented other companies from cashing in on the product. and the reasons for this are not hard to comprehend either. Furthermore. As a result. senior citizens or people with health conditions who have to monitor fat intake. These reasons. it seems as if no new competitors have entered the market since its There was wide publicity about alleged adverse side effects of Olestra—the gastrointestinal distress and the limited absorption of important fat-soluble vitamins. mothers concerned with the nutritional value of their children’s snacks. this market has retained an . Olestra-based products have been forced to retain their cautionary labels. which list a buffet of unappealing side effects. and people who are dieting. Wayne Callaway of George Washington University.olean.

These findings are summarized in the table below: 1998 1999 Total Sales WOW! Chips % of Total Sales WOW! Chips Sales in $ $7. the Olestra-based snacks accounted for 4% of Frito-Lay’s $7.5 billion 4% $300 million $7. the year the WOW! Chips were launched. but what evidence is there to support this? Using Pepsico (the owner of Frito-Lay) annual which appears to have a monopolistic competition structure. This represents a decrease of about $60 million from the previous year. This contrasts greatly with the market for regular potato chips. In 1999. The WOW! Chips helped to advance Frito-Lay’s pound volume by 5%.oligopolistic structure. We have spoken of a boom and decline in this market. though a graph depicting sales of snack chip brands in U.9 billion in sales (approximately $240 million). which relies solely on three manufacturers. we can trace the financial success and subsequent drop-off of their WOW! Chips.9 billion Decrease: $60 million 3% $240 million The 2000 annual report gives no percentage sales of the fake-fat chips. A quick trip to any supermarket would show that the same could not be said for the Olestra-based market. despite declines in sales of low-fat. supermarkets puts the sales of WOW! Snacks 1 Procter and Gamble Annual reports were vague in terms of this market and Utz reports were not found.5 billion in sales (roughly $300 million). such as Lay’s and Pringles. the WOW! Chips now accounted for 3% of the $7.S. In 1998. baked style potato chips. the story was not as rosy. . According to the report. lesser known brands (such as Grandma’s and Poore Brothers) and generic supermarket varieties pack the store shelves. Though in the full-fat market there are several brand-name bigwigs. this “made WOW! Frito-Lay’s most successful new product ever” (pepsico.

Lay's 6. though it gives no quantitative value. Utz $0. Lay's 6. As a result. present prices were obtained for three regions in the United States2: Price Per Oz Tucson.34 N/A 12 oz.99 Tucson. AZ 12 oz. . Pringles 5 approximately $100 million.5 oz. compared to Procter and Gamble’s 5% and Utz’s portion of Private Label Brands’ 8% (pepsico. Lay's 6.40 Portland. Pringles 5 oz. Pringles 5 oz. Pringles 5 oz.S.5 oz. (Frito-Lay controls 58% of the U. Pricing information for the VA market was obtained in a Safeway Supermarket in Sterling. which seems to make sense as Lay’s is the largest and most widely known potato chip manufacturer in the U. Utz $4. we will examine this portion of the market.36 $0. OR Sterling. Lay's 6. Lay's 6. Pringles 5 oz. snack chip industry.49 $0. However. VA We can see some differentiation amongst the three brands’ prices.99 $1. past prices (for years 1998-2000) could not be found on corporate websites for any of the brands. especially when the net weight of the product is a factor.29 N/A 5 oz. VA Sterling.29 $1. In essence. OR Portland. It appears as if the Lay’s are the most expensive. Lay’s may be the most trusted and 2 Prices for the AZ and OR markets were obtained in Albertsons Supermarkets in Tucson and Portland.29 $2.5 oz. the sales declines of the fake-fat products—chips which had debuted as Frito-Lay’s most successful product—actually began to eat away at Frito-Lay’s gains from sales of regular chips.36 $0. Utz $4.19 N/A 12 oz. We have discussed market structure and sales which offset the 4% pound volume advancement by—interestingly enough—the full-fat versions of Lay’s chips.5 oz.5 Since net weight among the brands is most similar in the VA example.31 $0. The financial review.S. Utz $0. Lay's 6.89 N/A 5 oz.5 oz. Pringles 5 oz. Utz $0.29 $1. AZ 12 oz. but where does pricing fit into all of this? Unfortunately. mentions the “continued declines in WOW! Brand products” (pepsico. Utz $2.

The prices of Fat Free Pringles and Utz Yes chips (which are almost exclusively sold on the East Coast) appear to be identical in the VA market. but Utz Yes Chips as well. manufacturers may have found it easier and more attractive to charge a higher price. . Though differentiation amongst prices does exist—a possible result of brand reputation or the manufacturer’s product diversity—all prices are fairly comparable. Virginia’s prices may be a bit lower in comparison as Procter and Gamble is forced to compete with not only Frito-Lay. we can see evidence of some discrimination. Does price discrimination exist in the Olesta-based chip market? From examining the differences in prices with regard to their locations. In any of these cases. in areas where there are higher sales of these chips. as many elderly folks are concerned with fat intake for health reasons. whose prices vary in all three places: Arizona is the most expensive. It is possible that Utz. which has a limited sales region and has found luck along the East Coast. feels comfortable charging a higher price relative to Procter and Gamble. with a can costing $2.desirable brand. followed by Virginia at $1.99 and Oregon at $1. but a slight difference in net weight shows that Utz is actually the more expensive brand. as the product most certainly remains unchanged? Perhaps the relatively high elderly population of Tucson allows Procter and Gamble to charge a higher price. allowing it to have a higher price. the prices may be dependent on the relative luck the food vendors have had in each location.19. This is particularly apparent with the Fat Free Pringles.89. What could account for these differences. Another possibility is that Procter and Gamble has such a diverse product base that it can afford to charge the lowest price of the three because doing so poses no real risk to its total profits.

39. 259). it is logical to assume that oligopolistic price stickiness is in effect—despite the decreasing sales. Furthermore. If this were to happen. as prices of these products have remained high relative to their full-fat and baked cousins (12 oz. Regular Pringles=$1. However. the new information could then be advertised to make consumers aware of the change. as management surely would not choose to elevate prices in the face of declining sales. Baked Lay’s=$3. an increase in price will result in lost business as competitors retain their old prices. any increase to a seemingly high price would likely drive some of the market to regular or non-fried chips. it will lose many customers (because in that case its demand is elastic). it is quite possible that prices have not fluctuated much since the products’ debut. due to the oligopolistic structure of the market.We stated earlier that past pricing information for the years 1998-2000 could not be obtained. A hypothetical shock to the market for snack chips containing Olestra would begin with increased investment into research and development. particularly those consumers who previously chose not to buy . if it lowers its price.5 oz. as some people would feel the non-fat benefits are not worth the sky-high price tag. a price decrease would be the most reasonable possible event. That is. but a decrease in price will not dramatically change sales as all competitors will match the cut. 10 oz. given the market’s continuously declining sales? Price stickiness is a common feature of oligopolies.49).99. 6. This increased R & D would be aimed at disproving the claims regarding the negative side effects of Olestra. How is this possible. Regular Lay’s potato chips=$2. In the case of the Olestra-based potato chip market. However. the sales increase will be comparatively small (because then its demand is inelastic)” (Baumol and Blinder. and it results from simple logic: “if a firm raises its price.

This would be most noticeable to people who had already bought the snack-chips despite the warnings stated on the label. Neither Frito-Lay nor Pringles would want to raise their prices in response to the outward shift in demand because the risk of losing business to the other company. Then. Producers would benefit financially with a more marketable product and therefore a more successful business.Olestra-based snack chips in order to avoid the side effects. it most likely would not increase by an enormous amount simply due to the rocky history Olestra has and the bad reputation it has developed in the eyes of many consumers. if it were to hold its prices constant. the higher demand would not affect the price of the product because oligopolies have kinked demand curves. However. would be fairly limited. It would require a lot of persuasion to convince some people of the improvement. Consumers would have at their disposal fat-free snack chips that they could be confident no longer caused undesirable side effects. demand for these products would eventually increase (the demand curve would shift to the right). and they would have consumer surplus if the prices stayed constant. In addition. and word-of-mouth could serve to increase awareness about the improvements. although visible. and more people would be willing to buy the snack chips at the same price. It would require a lot of advertising to simply make people aware of the change. would be too high. The effects of this shock. . the warning label that currently appears on these products could be removed (with the approval of the FDA). Demand for Olestra-based snack chips would not shift immediately. even as demand began to increase. As a result of the improved advertisements. Both consumers and producers would benefit from these changes.

Once thought to be one of the snack food industry’s biggest breakthroughs. However. This controversy has shaped the market into what it is today: an oligopoly with declining sales. This is most likely due to the horrible publicity Olestra has received over the years as well as to the less than appetizing label its products are forced to bear. Perhaps increased R & D. would effectively shock the market and alleviate some of its sales problems. which could disprove the claims of negative side effects and thus result in a removal of the cautionary label.The Olestra-based potato chip market has garnered everything from criticism to praise. Undoubtedly it will be interesting to see how this market behaves and changes both in the present and in years to come. sticky prices. and heavy scrutiny. the unfavorable reputation that Olestra has earned—whether justified or unjustified—might still prevent a huge jump in the success of the market. controversy to support. touting of the fake-fat chips has seemingly declined along with market sales. .

Works Cited American Council on Science and Health.” 1999 Baumol.” 2000.” Procter and Annual Report: Pepsico Corporation. “A Brief History of Annual Report: Pepsico Corporation.fda. Fort Worth: Harcourt. 1995 http://www. “1998 Annual “Olestra and Other Fat Substitutes. Blinder. http://www. “Issues in Focus: Olestra.” 1997 and 1998. 1998. 1998 http://www.html Olean.” 1998 http://www. Economics: Principles and Policy.pepsico. “2000 Annual Report.html Annual Report: Pepsico Corporation. William J.cnn.pepsico.” June 17. and Alan S.cspinet. 2001 Center for Science in the Public Interest. “FDA Panel Generally Endorses Safety of Olestra.olean.” 2000 “Answers to Questions about Olean.” November 28.fda FDA Backgrounder. . http://www. “1999 Annual Report.