Price Leadership Denied in LCD Panel Industry


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published July 1, 2006

In terms of drama, the LCD market has pressed my adrenaline gland for the past five years. Just last month, it hit the accelerator pedal again. What follows is a case study of a failed attempt to assert price leadership.

On June 15th, the Wall Street Journal reported an announcement from AU Optronics that was a clear signal to industry competitors to cut production and hold prices. Within 24 hours, their largest competitor Samsung said no and opted for continued downward pressure on prices.

How did AU Optronics signal a desire to maintain higher prices? Was AU Optronics in a position to lead in pricing? Why did their bid fail? And, why did Samsung choose to continue the pattern of downward spiraling prices?

The Signal

AU Optronics signaled their competitors to cut production through an interview with the Wall Street Journal. In their interview, EVP Hui Hsiung suggested that an increase in inventories has led to greater than expected price declines in the LCD panel industry. He also declared that AU Optronics would reduce capacity utilization by 5% in an effort to reduce inventories and prop up their prices. Seemingly to ensure that their tactics were understood by competitors, Mr. Hsiung added “If others follow, that will help prices stabilize by the third quarter.”

In no uncertain terms, AU Optronics was communicating to its competitors a need to cut production industry-wide and slow the downward trend in pricing.

A key factor that enabled AU Optronics to attempt to collude with its competitors on pricing, without necessarily falling afoul of legal constraints, is that Mr. Hsiung wasn’t speaking directly to his competitors. He was speaking to a reporter. His comments could be interpreted as a statement of strategy for AU Optronics followed by a speculation of what would happen if others did the same.

While it may seem like a thin line between collusion and conversation, the legal difference appeared to be enough for AU Optronics. I will leave this issue for legal council and judicial decisions.

The Power to Lead

AU Optronics is the third largest competitor in the industry with 15% market share against LG Philips’ 18% and Samsung’s 20%. It may not be the largest competitor in the LCD panel industry, but market share is not the only condition that determines the power to lead the industry in pricing.

Many case studies have indicated that secondary and tertiary industry players have the power to lead in price management. Rather than raw size alone, a sufficient condition for claiming the price leadership role is to have the ability to drop prices significantly where doing so would force other industry players to follow in pursuit. In this respect, AU Optronics held sufficient power.

Just one week prior to their conversation regarding prices and production, CFO Max Cheng of AU Optronics openly discussed their investigation into building a new $4 billion 8th generation manufacturing plant. The new plant would produce 50 inch LCD panels in an industry where larger panels mean lower manufacturing costs on a per square inch basis. As if to underline their vision of of the industry, Mr. Cheng stated “This is typical game theory. If your competitor invests, you have to invest. Otherwise, you are being marginalized.”

Couple their sizable market share with the threat of building an 8th generation plant, and AU Optronics clearly had sufficient power to be the leader in terms of encouraging industry wide restraint on production and pricing.

The Failure

But, they didn’t succeed.

Within 24 hours of announcing their plans to reduce capacity utilization in an effort to show restraint in pricing, Samsung’s VP of LCDs, Yeongduk Cho, announced “We have no plans to cut our production levels even if others are doing so.”

Clearly, Samsung had gotten the message from AU Optronics. And clearly, Samsung was replying with a NO. Why?

While it is impossible to fully know the reasons of another’s actions, we can identify at least one reason why AU Optronic’s bid for restraint failed. Signaling to competitors the choice to restrain oneself in cutting prices and expecting them to do the same implies the potential for coordinated action among rational actors. This is where the failure comes in. Although they are major industry competitors, the combined market share of AU Optronics, Samsung, and LG Philips is still only 53%. 47% of the LCD panel market is shared by numerous other competitors, some of which have announced independent plans to build 8th generation plants, and few of which have sufficient reasons to practice restraint when it comes to slowing the freefall of prices. In short, they are not reliably rational.

In other words, the industry isn’t ready to call it quits in the pricing game when it is still taking strides in advancing the technology and exploring new markets. Perhaps in a year or two the market growth will slow sufficiently to allow for mergers and acquisitions, followed by disciplined industry-wide price management.



1. Yun-Hee Kim, “AU Optronics Cuts LCD Output In Bid to Stabilize Falling Prices”, Wall Street Journal, June 15, 2006, p B3.
2. Yun-Hee Kim, “Samsung Sees No Glut, Will Maintain LCD Output”, Wall Street Journal, June 16, 2006, p B2.
3. “June 2006 Quarterly Large-Area TFT Shipment Report”, DisplaySearch private communication. (
4. Evan Ramstad, “The 50-Inch Screen Poses a Gamble”, Wall Street Journal, June 8, 2006, p. B3.

About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.