Essay Sample: The Cereal Industry Before and After 1994 and Its Market Structure

Big Three had dominated the cereal industry before 1994. However, their reign was cut short as competitors grew tired of shifting prices hence the growth of private label producers. These firms had engaged in less aggressive competition due to a mutual agreement they had with Big Three producers. That, therefore, led to the introduction of a monopolistic market in the cereal industry.

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Demand Prior To Entry by Private Label Producers

Before the introduction of private label producers, the demand for cereals from Big Three was very inelastic. The market enjoyed stability with constant growth in profits. The prices set for cereals by Big Three ware affordable to consumers and stable without variation. The Big Three were price dominant over their private sectors competitors. Before interference by private sectors, competitors adopted a less disruptive head-to-head engagement as there was a mutual understanding among them. However, this gradually changed as the Big Three went overboard to further increase in cereals prices (Corts, 1995). The gap between prices of Big Three and those from private label producers was very wide and later led to changes that followed. Price increment by Big Three was the factor which influenced changes in demand elasticity. When Big Three enjoyed major control over prices, the demand was inelastic.

Changes in Demand Elasticity with Private Label Entry

The entry of private label producers meant that Big Three firms were no longer price setters. They had to consult these private sectors before making any price related decision. Private sectors led to the abolition of mutual restraint that formally existed in benefit of Big Three. Firms started making decisions based on what was crucial for them in terms of moving forward. Such decisions led to demand elasticity as various firms adopted different prices which affected consumer's abilities to purchase. The Big Three had to work on their market portfolio in terms of prices and quality in order to stay competitive (Corts, 1995). The gap which existed between private sectors and Big Three narrowed with time due to slow demand. The phenomenon threatened Big Threes dominant position in the market.

The Variable and Fixed Cost of Cereal Production

There are various costs that cereals producers like Big Three encounter. Some of the variable costs include fuel for machinery used in the manufacturing firms. The cost of equipment repairs is yet another variable cost that cereal production firms experience in their operations. Hired labor expenses are diverse as individuals differ in levels of payment. Therefore, if these firms employ different workers during different times, labor will be categorized as a variable cost. The fixed cost of producing cereals includes property tax, self-employed labor, and insurance among others (Obeid et al., 2017). These costs do not change with time or by increased usage. Their cost remains constant and a firm does not have to spend extra for them.

The Market Structure That Ready-To-Eat Was Operating In Before 1994

The ready-to-eat cereals industry was engaged in a monopoly market. The production firm had dominated this market as it led in price setting and determining profit margins. Before 1994, most of the private label producers had taken a back sit by allowing less destructive competition for Big Three. Big three ended up enjoying big sales and profit margins. Ready-to-eat was the major cereal producing firm in the world over centuries and hence enjoyed shifting prices to that which fitted them best. Consumers, although strained by this, had to continue purchasing as ready-to-eat was the best option in the market. Other market players had little influence to prices and followed without aggression to what ready-to-eat did (Richards & Hamilton, 2015). It was until 1994 that ready-to-eat exhausted its evolution as a monopoly that private label producers took over.

Current Market Structure of the Cereal Industry Today

In the cereal industry today, a monopolistic market structure has been adopted. In this market structure, there are numerous small firms which compete against each other. The market structure has firms selling similar but differentiated cereal products from each other. By having differentiated products, each firm has certain market powers where they can set higher prices at a certain range. All firms involved can, therefore, maximize profits, differentiate products, enter and exit the market freely, and also provide a wide range of options for consumers. There is however no optimal output levels since all firms can set their own prices. The cereal industry has numerous brands like Crunch, Froot Loops, Charms, and Apple Jacks among others (Richards & Hamilton, 2015). Although these products are different, they are all used for breakfast.

Use of Marginal Analysis in Determining the Optimal Quantity of Advertising to Be Used By Each Firm

Advertising a product can be costly for firms if the benefits sought do not match the expenses incurred. An organization should be able to match the marginal benefits to the respective cost when determining the effectiveness of advertising. Through marginal analysis, the marketing department of a certain organization like cereal producers should examine the demand from consumers. When there is poor demand, advertising could help boost sales. It could also help create awareness of new products to the market hence increasing sales. When advertising is done correctly, the lifecycle of products is increased allowing them to earn multiple benefits for the organization. However, some hindrances like competition could lead to poor results from advertising. Therefore, before firms make a decision to implement any advertisements, they should conduct a marginal analysis. By doing so, they can hence determine the viability of the program.

Conclusion

The cereals industry has currently increased in market players. A monopoly is no longer an option for various firms that dominated in past decades. To ensure consumers uptake, they have to be creative and adopt differentiated products. Such engagements have seen various firms leap numerous benefits through improved profitability.

References

Corts, K. (1995). The ready-to-eat breakfast cereal industry in 1994 (A) (pp. 1-17). Harvard Business School. Retrieved from https://www.sciencedirect.com/science/article/pii/S0304407698000281

Obeid, T., Alshaikh, H., Nejim, B., Arhuidese, I., Locham, S., & Malas, M. (2017). Fixed and variable cost of carotid endarterectomy and stenting in the United States: A comparative study. Journal of vascular surgery, 65(5), 1398-1406.Retrieved from https://www.sciencedirect.com/science/article/pii/S0741521417300368

Richards, T. J., & Hamilton, S. F. (2015). Variety pass-through: An examination of the ready-to-eat breakfast cereal market. Review of Economics and Statistics, 97(1), 166-180.Retrieved from https://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00447