Introduction Of Schmeckt Besser Energy Bar In Monopolistic Competition Market

Market Structures and Introduction of Schmeckt Besser Energy Bar

Module 1

1. When Schmeckt Gut plans to introduce the Schmeckt Besser energy bar on the market, it has to take into consideration the conditions for both supply and demand for that particular energy bar or any other similar energy bar available in the market (Pindyck and Rubinfeld, 2009). This is where the significance of the concept of ‘Elasticities’ is evident.

The elasticity of supply determines how rapidly supply responds to changes in the price levels. When the firm starts the production of energy bars, it should know how changes in the market price will change the output levels such that it is prepared for any change in the market and can adjust its output levels accordingly (Varian, 2009).

The more important consideration is however the elasticity of demand for energy bars in the market. The elasticity of demand determines how the demand for energy bars respond to changes in the price level. It is absolutely mandatory for a firm to estimate the elasticity of the concerned product before it starts to produce the same. This will determine its revenue and hence profit levels in case of any price alteration (Pindyck and Rubinfeld, 2009). If the elasticity of demand for energy bars is low, it will imply that when the price of energy bars increases by a unit percent, the demand for energy bars will decrease less than proportionately. This means that the overall revenue of the firm will increase. Again if the elasticity is very high then demand will be very sensitive to price and hence a very small change in the price level will bring down the demand to a great extent (Varian, 2009). This will result in a fall in the revenue of the firm and consequently its profit levels.

Thus to start production and set the price of the energy bars relative to similar bars that are substitutable in the market, it is essential for the firm to know the elasticities of demand and supply.

2. The procedure adopted by Schmeckt Gut Research Department for the introduction of the energy bars will majorly depend on the elasticity of demand for a similar energy bar in the market. If the elasticity is low, the price should be set a lot lower than the price of similar energy bars to attract customers and hence increase the volume of the initial sales. The price has to be really low to drive the sales of the market in this case (Pindyck and Rubinfeld, 2009). However, if the demand elasticity is very high, the price can be set at any level below the market price. However small the difference may be, it will drive sales to a huge extent because a when price lowers by a small amount, sales will go up considerably (Varian, 2009). Hence consumers will rapidly shift their consumption to Schemeckt Besser energy bars from other energy bars in the market.

Price ($ per energy bar)	Quantity demanded (thousands per day)	Total Revenue (in ‘000 $)
1.00	30	30
1.50	25	37.5
2.00	20	40
2.50	15	37.5
3.00	10	30

The price that maximises the total revenue is $2.00 at which 20,000 units of energy bars are sold and the total revenue results in $40,000.

Role of Schmeckt Gut Research Department for Market Structure Analysis

The price elasticity of demand at $2.00 is:

[{(20 – 25) / 25}/ {(2.00 – 1.50) / 1.50}] = –3 / 5 = –0.6

(Varian, 2009)

a) The price elasticity of demand when the price of Schmeckt Gut Energy Bar increases from $1.00 to $2.00 is:

 [{(20 – 30) / 30}/ {(2.00 – 1.00) / 1.00}] = –1 / 3 = –0.333

b) The price elasticity of demand when the price of Schmeckt Gut Energy Bar is $1.50 is:

[{(25 – 30) / 30}/ {(1.50 – 1.00) / 1.00}] = –1 / 3 = –0.333

a) The cross-elasticity of demand for Fly High’s energy bars sold with respect to the price of our Schmeckt Gut Energy Bar is:

[{(9 – 11) / 11}/ {(2.00 – 3.00) / 3.00}] = 6 / 11 = 0.55

(Pindyck and Rubinfeld, 2009)

4. The cross-elasticity of demand between Fly High’s energy bars and Schmeckt Gut Energy Bar is 0.55 > 0. A positive cross elasticity implies than when the price of Schmeckt Gut’s Energy Bar declines, the demand for Fly High’s energy bar also declines. This means that when the price of the former falls, people substitute their consumption of the latter with the former. Hence the two are substitutes (Varian, 2009).

Reference:

Pindyck, R. and Rubinfeld, D. (2009). Micreconomics. 7^th ed. New Jersey: Prentice Hall.

Varian, H. (2009). Intermediate Microeconomics: A Modern Approach. 8^th ed. New York: W. W. Norton & Company.

Module 2

Problem A:

1. In the market for energy bars, the products produced by different firms are somewhat similar in terms of the type of product; however, they are not exactly substitutes. Every firm can differentiate its energy bar with respect to the composition of different ingredients, the flavour of the energy bar, the quality, the size, the appearance, the packaging, etc (Varian, 2009). The energy bars produced by different companies can be categorized by close but imperfect substitutes. The cross-price elasticity of demand for such products would be positive (Pindyck and Rubinfeld, 2009).

There can be multiple firms producing energy bars in the market. Moreover, there may be many more firms preparing to enter into the market. Since there are many firms, Schmeckt can set its prices independently without considering the prices set by other firms in the market. Since there can be many firms, the price decision of a single firm has no significant impact on the market (Pindyck and Rubinfeld, 2009).

If a certain firm wants to enter into the energy bar market, it does not necessarily have to incur any additional costs. On the other hand, if a certain firm wants to exit the market, it can shut down its production without paying any extra cost for that. Hence, there is no cost for entry into or exit from the market (Varian, 2009).

All the decisions taken by Schmeckt or any other firm in the market can be autonomously made as it is not going to have any impact on the market.

Each firm producing energy bars, including Schmeckt, will enjoy a certain degree of market power because it sells a differentiated energy bar. This implies that a firm can raise the price of its energy bar without losing all its customers. It can also reduce its price without triggering any price war with its potential competitors (Varian, 2009).

The market for energy bars is somewhat characterized by imperfect information.

According to all the above mentioned characteristics, the market for energy bars that Schmeckt is trying to enter into is characterized by Monopolistic Competition (Pindyck and Rubinfeld, 2009).

In order to ensure a smooth introduction of the Schmeckt Besser energy bar, the first criterion that Schemeckt should consider is product differentiation (Pindyck and Rubinfeld, 2009). If the company already has a good reputation in the market, it will be an additional benefit. However, in order to differentiate its energy bar the research department should first analyse the other type of energy bars in the market and determine their kind. Accordingly, the Schmeckt energy bar can be differentiated as much as possible in terms of the quality, the flavours, the packaging, the size, etc. Moreover, it has to take into account the prevailing price structure in the market. Schmeckt must ensure that the price it sets is not very high or very low compared to the price of similar energy bars in the market. At the beginning, when it is just about to introduce the Schmeckt Besser energy bar into a market which already has similar energy bars, it should set the price somewhere around the market price. However, to ensure profit-maximisation, it should equate its marginal revenue to the marginal cost incurred in the production process (Pindyck and Rubinfeld, 2009).

2. Before Schmeckt enters into the production of Schmeckt Besser energy bar, the Schmeckt Gut Research Department has to analyse the market structure of similar energy bars available in the market so as to determine the market framework of energy bars. The specific analyses that the research department has to consider are:

• Type of Product: To check if the different energy bars available in the market are identical or differentiated. If they are differentiated, to determine the degree and kind of differentiation.
• Price Setting: To analyse whether the different firms operating in the energy bar market are price-takers or price-makers, that is, whether they can control the price of the energy bar they produce.
• Market Share: To determine the market share of each firm producing energy bars in the market.
• Entry and Exit: To check whether firms can enter into or exit from the market without incurring any additional cost.
• Market Power: To analyse the degree and kind of market power enjoyed by each firm in the market.
• Information: To check whether complete information prevails between the buyers and sellers in the market.

(Varian, 2009)

This analysis will determine the kind of market structure for energy bars and hence for Schmeckt Besser energy bar when it is introduced into the market (Pindyck and Rubinfeld, 2009). Once the company knows the market structure prevalent, it will be able to adjust its production and sales decisions accordingly.

Reference:

Pindyck, R. and Rubinfeld, D. (2009). Micreconomics. 7^th ed. New Jersey: Prentice Hall.

Varian, H. (2009). Intermediate Microeconomics: A Modern Approach. 8^th ed. New York: W. W. Norton & Company.