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ECON 101 Economic : Breakfast Cereal Market Analysis

Answer:


Breakfast Cereal Market Analysis:

Breakfast cereals earn substantial importance in our daily life irrespective of difference in taste, preference and culture across various countries. Owing to the fact of existential enormity of the suppliers in the market, breakfast cereal can be termed as one of the important market to follow monopolistic competition structure. While studying the broad market structure of the product, the essay aims to present the comparative scenario with respect to introducing the product differentiation strategy. The discussion ends with evaluating the efficacy of the decision of differentiation strategy.

Many producer brands are visibly operating in the breakfast cereal market to meet the demand of innumerable consumers globally. This has led to immense competition in the market that forces different companies to come up with products different from others. This is done not only to capture the attention of the consumers but also it leads to one of the important business strategy changing the future of the brand with subsequent changes in the market operation (Chisholm & Norman, 2012). In general there  are few eminent market players in this product market for example, Kellogg’s, Baggrys, Marico, PepsiCo along with other small brands of local importance. Broadly, the brands have two segments of production;

Ready to eat Breakfast Cereals: This segment comprises of Cornflakes, Muesli and others

Hot Breakfast Cereals: This segment mostly includes oats and others.

In absence of product differentiation, the production of same type of goods lead to perfect competition in the cereal market, which makes the producers complete price taker and firms, earn normal profit. Any changes in price say increase in prices makes one firm loose the market share as people switch to other brands providing the same products at lower price.

Product differentiation strategy promotes non-price competition allowing the firms to bring changes in their products and diversify among business ranges (Dhingra & Morrow, 2012). The launching of flavored oats, muesli and mixing dry fruits, nuts with the mainstream products were the materialization of product differentiation market strategy. This not only allowed the firms to gain more market share but also they could have some control over market price if not full control. People accepted the flavored oats and muesli with slight higher price over the initial monotonous cornflakes. As a result, monopolistic competition grew stronger. Post differentiation equilibrium price in the market increased owing to rising demand, which shifted as result of eagerness to try the new launches of the same old necessities like breakfast cereals (Caminal & Granero, 2012). This enhanced the market supply too. Firms like Kellogg’s now can charge higher price due to consolidate brand loyalty without fear if losing market share or customer base (Zhelobodko, Kokovin, Parenti & Thisse, 2012). This leads the firm to earn economic profit in the short run that makes the decision of product differentiation justified and efficient. However, the long run operation of the firm leads to zero economic profit amid presence of few barriers to entry and exit in the industry following this market structure.

To conclude it can be fortified that product differentiation indeed is best strategy for firms facing immense market competition, which further allows it to earn more market share and popularity simultaneously along with being able to capture economic profit though for short run only. The competition pressurizes the firm to come up with efficient allocation and outcome that evokes non-price competition which again ultimately allow the firms to gain.

References:

Caminal, R., & Granero, L. M. (2012). Multi?product Firms and Product Variety. Economica, 79(314), 303-328.   

Chisholm, D. C., & Norman, G. (2012). Market access and competition in product lines. International Journal of Industrial Organization, 30(5), 429-435.

Dhingra, S., & Morrow, J. (2012). Monopolistic competition and optimum product diversity under firm heterogeneity. London School of Economics, mimeograph.

Zhelobodko, E., Kokovin, S., Parenti, M., & Thisse, J. F. (2012). Monopolistic competition: Beyond the constant elasticity of substitution. Econometrica, 80(6), 2765-2784.

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