1. Low calorie frozen microwaveable industry has a structure similar to monopolistic competition. Monopolistic competition is a market structure having dual features of monopoly and competitive market. In this market large share of market is concentrated in the hands of few large firms and while there are intensive competition among other small firms. Studies show in low calorie frozen food industry nearly 42.9% shares were captured by three major firms namely Healthy Choice, Smart Ones and Lean Cuisine (Piernas et al., 2014). Thus, an appropriate plan should be designed keeping in mind all the characteristics of such market structure.
In a competitive market structure, proper knowledge regarding the presence of substitute good is important. For low calorie frozen food, availability of close substitute is very common. Even the price of close competitor’s product is an important determinant demand of the concerned firm. However, with imperfect market structure firms enjoy some control over prices unlike in a competitive market. Market is segmented in according to criteria like profile, psychographic and behavioral. Profile differentiates the market from each other and depends on economic status or geographical location (Baumol & Blinder, 2015). This will help to target a specific group of consumers and maintain a monopoly position among this group. Behavioral characteristics capture attitude of final consumer like buying frequency, product choice or brand preference. Psychographic nature depends on lifestyle, opinions or interest about the goods.
2. In the market structure, continuous dominance of few firms can change the structure from a monopolistic competition to an oligopolistic one. Lesser the number of firms in the industry greater is the control over prices (Kirzner, 2015). In such a market structure, management should monitor the competition in the market, price of rival firms product and information about new product entering in the market. In the presence of competition among few rival firms, the firms may engage in price wars then this can reduce their profits. This is not a right strategy. Instead, the firms should focus on innovation to make their product differentiated from others. It will help the firm to attract consumer preferring a differentiated product.
Demand in this market is responsive to a change in buyers’ income, price of substitute products or its own price effects (Rios, McConnell & Brue, 2013). With a changing environment in market, structure from competitive to monopolistic competition or oligopolistic competition a close look towards rivals’ strategy is needed. This will help the firm to run its operation profitably.
3. Like monopoly market, in monopolistic competition also firms can enjoy supernormal profit, normal profit or loss. In the short run price exceeds marginal cost. This may generate a supernormal profit for the existing firms. In a monopoly market, monopoly firm continues enjoying the profit. However, in monopolistic competition with free entry of firms, supply will increase in the long-run and increased supply reduces the price and hence profit. In the long run equilibrium is determined by equalizing marginal revenue and marginal cost (Nocco, Ottaviano & Salto, 2017). The firms will operate at the minimum point of Average Total Costs. At the minimum point average total cost equals marginal cost. From the given information by equalizing average total cost and marginal cost optimum output can be determined.
TC = 160,000,000 + 100Q + 0.0063212Q2
VC = 100Q + 0.0063212Q2
MC= 100 + 0.0126424Q
TC = 160,000,000 + 100Q + 0.0063212Q2
Or,
Or,
At the minimum point of ATC, ATC equals MC and it determines optimum level of price and quantity (Cowen & Tabarrok, 2015).
Therefore,
Or, 100 + 0.0126424Q
Or,
Or,
Or,
Or,
Or,
Or, Units
For the firm, in order to continue its operation, price should cover average variable cost in the short run and average total cost in the long -run. Thus, the cost functions help the firm to determine its optimum level of output and price.
4. In a competitive market, firm close down its operation when price goes below the average variable cost (Bertoletti & Etro, 2017). However, in case of imperfect competition the situation is different. Here, there are several reasons for which a firm can decide to close its business. These include inability of the concerned firm to compete with its close competitors because of lack of innovation. They can fail to compete with low price goods of its rival. In either of the case, firms choose to shut down its plant. Sometimes there can be supply side problems like unavailability of certain type of raw material necessary for producing the goods. Capital inadequacy can be another reason for closing down business. To confront these issues firm should be well prepared. It must have complete information about rivals’ product and existing prices. In order to resolve the issues related to lack of raw material concerned firm need to strengthen its relation with several supplier so that problem of one source can n it harm production much. Another thing that the firm should look is on maintaining sufficient stock of capital.
5. In the imperfect competition firm enjoys some amount of market power and has some control over the price. The extent of market power depends on types of the market. In times of monopoly, power is highest. Now, assuming the frozen food industry is operating under imperfect competition its target is to maximize profit. This can be done by equating marginal revenue and marginal cost (Varian, 2014).
In Assignment 1, the demand equation is given as
Where,
QD = Quantity demanded for 3-pack units
P (in cent) = Price of the product; Given P= 500 cent for 3 pack units
Px (in cent) =Price of leading competitor’s product; Given Px = 600 per 3 packs unit
Y(in dollars)= Per capita income of the standard metropolitan statistical areas located around the supermarkets; Given Y= $ 5,500
A (in dollars) = Monthly advertising expenditure; given A=$10,000
M= Number of microwave ovens sold in SMSA, where the supermarket located; given M= 5,000
Then, the demand for low calorie frozen food is computed as
From this, the inverse demand function is obtained as
Total Revenue (TR) = P*Q
Therefore,
Marginal Revenue (MR)
Or,
Equilibrium condition,
MR = MC
Or, 100 + 0.0126424Q
Or,
Or,
Or, ~ 13611 Units
From the inverse demand function price is determined as
324.0788216
~ 596
In assignment 1, with a competitive market structure approximate values of equilibrium price and quantity was obtained as Q= 22502 Units and P= $384. In contrast with changing structure of the market equilibrium price and quantity has now changed. From the pricing policy suggested above price is obtained as P= $596. Correspondingly, equilibrium quantity is Q= 13611 Units.
Hence, it is clear that now the firm is able to charge a high price and supply a low quantity. This is because of the market power that the firm is now enjoying with changing market structure.
6. Assuming the structure of low calorie frozen food industry as a monopolistic competitive market, the firm is able to make supernormal profit in the short run. However, in order to sustain its market power firms need to invest more on advertising expenditure and promote its own product. Profitability prospect in the short run attracts new firms to enter the industry and this reduces profit in the long-run (Waldman & Jensen, 2016). In the long run firm should operate at the break-even point, which is the minimum point of ATC. Here, the firm is able to enjoy only normal profit.
Short run profit is Total Revenue less Total Cost. Using the value of Q derived in part (5), TR and TC is obtained as,
= 162532249.4
Producer Surplus:
Now,
= 8114517.098
TVC = 100Q + 0.0063212Q2
=1361132.412 + 1171116.994
=2532249.406
Therefore, TR – TVC = 8114517.098-2532249.406
= 5582267.692
In the short run, the firm will enjoy only this amount of producer surplus.
However, in the long-run, the market situation changes. More firms will enter in the industry and this reduces the surplus. In the long-run, market equilibrium is ensured by the tangency of the demand curve to the minimum point of average total cost curve. This is defined as the break-even point of the firm.
Units.
Putting the value of Q, average total cost is calculated as
At times when price exceeds average total cost firms will make profit. In the long run if price goes below average total cost then it will make loss and it is impossible to continue its operation.
7. In monopolistic competition since the firms sell similar but differentiated product advertising play a vital role in marketing strategy of any business firm (Rubinfeld & Pindyck, 2013). Therefore, adequate spending on advertisement is highly recommended for the concerned firm. Advertising of brands, packaging and other related offers help to attract buyers. Also, with advertisement buyers come to know about the new brands and obtain other related information.
Innovation is another thing that helps to modify the existing product with a completely new technology. Innovation also contributes to cost efficiency of the firm. With a cost effective technology firms are in position to maintain its profitability even keeping prices constant or even lower.
References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
Bertoletti, P., & Etro, F. (2017). Monopolistic Competition, As You Like It.
Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave Macmillan.
Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago press
Nocco, A., Ottaviano, G. I., & Salto, M. (2017). Monopolistic competition and optimum product selection: why and how heterogeneity matters. Research in Economics.
Piernas, C., Mendez, M. A., Ng, S. W., Gordon-Larsen, P., & Popkin, B. M. (2014). Low-calorie-and calorie-sweetened beverages: diet quality, food intake, and purchase patterns of US household consumers. The American journal of clinical nutrition, 99(3), 567-577.
Rios, M. C., McConnell, C. R., & Brue, S. L. (2013). Economics: Principles, problems, and policies. McGraw-Hill.
Rubinfeld, D., & Pindyck, R. (2013). Microeconomics. Pearson Education.
Varian, H. R. (2014). Intermediate microeconomics with calculus: a modern approach. WW Norton & Company.
Waldman, D., & Jensen, E. (2016). Industrial organization: theory and practice. Routledge.
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