Managerial Economics - Market Structure in the Frozen Food Industry - Assignment Example

MARKET STRUCTURE IN THE FROZEN FOOD INDUSTRY

Recent decades in the business domain have seen the frozen food industry grow to be one of the fastest growing sectors . Successively, the industry encompasses firms producing frozen products such as fruits, vegetables, and juices. Products from these firmsare then circulated to wholesalers and retail nourishment stores. Consequently, the coordinated system of production, distribution, and methodology in the frozen food industry has been pretty much inclined towards marketing. The industry seeks to expand through heightened innovation, advancing consumer awareness to the comfort and esteem for prices of frozen products, and creating consumer acknowledgment of the quality connected with various brands. Be that as it may, pricing strategies, profitability trends, and the relationship between various firms in the industry tend to vary across an array of factors. It, therefore, becomes imperative to take a gander at the industry’s leading competitors, with a key focus on profitability, their relationships, and underlying pricing strategies. Succinctly, a decreased disposable income amid the recession was highly attributed to the increased profitability in the industry. However, upon the recoup of the economy and disposable incomes, the industry’s income smoothed. The industry performance depicted consumers’ price sensitivity during and after the resources, an aspect that top competing firms have had to consider.

Question One.

Previously, the firm operated in a competitive market. Here, the industry that encompasses numerous organizations with a flexibility of entry, and all these firms producing similar frozen products, the firm was a price taker .Competition between the firms in the industry together with demand and supply forces set the pricing strategies that the firm would be expected to adopt. Given the underlying elasticity in the food industry, market supply and demand forces determined the prices of products. In the competitive market structure, the industry was characterized by quick central and aggressive competitive changes. Accordingly, all the organizations were compelled to adopt innovative and aggressive strategies that should translate to be basic to their long run profitability and success . Successively, price wars between firms in the industry would ensue with significant value cuts and overwhelming marketing strategies.

The graphs below illustrate the firm as a price taker.

The equilibrium price was therefore determined by equating demand to supply;

(Qd = Qs).

Qd =     20,000 - 10P + 1500A + 5PX + 10I

In the short run, the firm would enjoy supernormal profits as illustrated below.

On the other hand, in the long run, the industry supply curve shifts to the right in light of free entry concept and perfect knowledge in the industry by all stakeholders. The prices then go down and if the firm was making losses, it would eventually exit the market. An exit by a firm would consequently shift the supply curve to the left, raising prices and ultimately enabling the remaining industry players to enjoy profits.

Progressively, recent changes in the market environment have enabled the firm to gain significant market power in determining its independent pricing strategy hence the adoption of monopolistic market structure. Here, the demand curve is downward sloping while the firm gets to set its prices. Profit maximization is achieved at the point where Marginal Cost equals Marginal Revenue. (MC=MR). On the off chance that the average revenue falls above the average total cost at profit maximization, the firm enjoys supernormal profits. Super normal profits are attributed to the inelasticity of the demand curve and higher prices .

Subsequently, an analysis of price elasticity points to the differential value versatility between competitive and non-competitive market structures depicts that under the competitive market structure, the frozen products are highly differentiated. The high degree of differentiation enables firms to achieve significant profitability. Here, the consumers are of the conviction that there is an important difference between the products offered by the various firms. As a result of consumer awareness and the heightened degree of product differentiation, the demand for frozen products is a function of specific price strategies adopted by each firm in addition to the marketing endeavors. Firms can only achieve supernormal profits if the cost of production is lower than the costs incurred by competing firms coupled up with a higher acceptance rate in the market. Supernormal profits would ultimately result in an expansion of other outlets and also encourage the entry of other competitors into the business.

Question Two:

In light of the prevailing environmental changes, the firms are no longer price takers as they now enjoy extensive price autonomy. In this case, the firms have a substantial advantage in the adoption of pricing strategies as they can set their specific prices. Be that as it may, the firms should also consider the changes that effect the shift in market structures as they adopt new pricing strategies. These changes may include but are not limited to increased customer loyalty and heightened differentiation. Effective marketing strategies may also result inincreased demand for the frozen products. Moreover, the economies of scale come to play about when per unit production costs fall as the output increases. There is also a high entry cost as a result of the high marketing levels coupled up with the existing reputation of the firms in their quest for brand promotion. Establishment of these brands makes it difficult for other firms to enter the market to differentiate the products further hence the necessity for a choice of output that will maximize profit where marginal revenue is equal to the marginal cost.

Question Three:

Succinctly, the cost functions of the firm illustrate the cost of producing frozen products that the low-calorie, frozen microwaveable food company incurs. In the short run, some inputs utilized by the firm are fixed. On the other hand, the firm can vary its inputs in the long run. It is as a result of these constraints in the short run that the firm’s total cost, in the long run,tend to be lower than the short-run total cost. In light of the comprehension the firm is well aware that cost curves in the short run are operating curves due to the fixed input constraint while in the long run they are planning curves since all inputs can be varied.

The previous market was less intense compared to the current market structure with the former being healthier as buyers were not in much pressure to purchase the products not to mention the free entry and exit for firms. An absolutely competitive marketmay not be a practical one, but it does provide a basic analytical framework of the market structure . The actual market structure is however characterized by an imperfect structuregave the vast number of firms with many products being close substitutes. Consequently, firms attain market power through a downward sloping demand curve that enables them to make pricing decisions and the production quantities that maximize profits. The market imperfections can be attributed to the economies of scale and the production costs both in the short and long run periods.

TC = 160,000,000 + 100Q + 0.0063212Q2

ATC = (160,000,000/Q) + 100 + 0.0063212*Q

TFC = 160,000,000

AFC = (160,000,000)/Q

TVC = 100*Q + 0.0063212*Q2

AVC = 100 + 0.0063212 * Q

MC = 100 + 0.0126 Q

Question Four:

The firm may execute a production shutdown when the total revenue generated from its production endeavors fall short of the variable costs incurred in the production process. In this circumstance, failure by the firm to discontinue operations may lead to negative profitability trends which does more harm to the firm than good. The firm would, therefore, be better off not producing any products. Producing a lower yield would just add to the budgetary misfortunes, hence the necessity for a complete shutdown. In the event that the firm diminished production, it would, in any case,incur variable costs not greater than the revenue in addition to fixed costs which are unavoidably brought about. For that reason, by ceasing operations, the firm just loses the fixed costs. Discontinuation of operations would then take place inside a firm when the marginal revenue is lower than the average variable costat the equilibrium or rather that at profit maximization point. The objective of the firm is to maximize profits and minimize costs. At the point when the firm neglects to accomplish an essential objective of production by failing to produce at a point where marginal cost equals marginal revenue, discontinuation of operations becomes imperative.

Question Five:

Markup pricing would be an effective pricing policy in profit maximization if utilized by the low-calorie, frozen microwavable food company. There exists an array of markup pricing strategies with the flagship being the addition of the production cost of the underlying product to its markup fraction. The markup fraction is chosen at the carefulness of the organization. Fundamentally, this strategy sets costs that encompass the expense of production and yield enough net revenue to the firm to acquire its objective rate of return. The pricing strategy is principally utilizedin light of the fact that it is anything but difficult to ascertain and requires little data. Data on demand and expenses may not be effectively accessible. The data is important to produce exact assessments of minimal costs and revenues. Besides, the procedure of acquiring this extra data may also be costly hence the policy’s effectiveness as an objective way of profit maximization.

Successively, the policy may prove sufficient in the evaluation and estimation of the outline of the underlying products and services when the selling cost is preset, otherwise alluded to as product customizing. Additionally, the policy is also suitable for the firm in a case where the firm seeks to design products for a solitarypurchaser. The frozen food industry depicts some aspects of ‘monopsony buying’ where purchasers comprehend the production costs not to mention the competitive market structure in which the firm operates in. In this manner, the imperative cost would be the cost that a purchasing organization would acquire in the event that it produced the product.

Furthermore, another pricing policy that the firm should adopt should be a price discrimination kind of pricing due to the price sensitivity of the customers as a result of the close substitutes that are available. The price discrimination method to use will depend on the nature of the market power, heterogeneity of the consumers and availability of various market segmenting mechanisms. A comparison between the two scenarios illustrates that the pricing in the imperfect market is higher than that of the perfect market.

As a result, the profit maximizing point can be obtained by equating MR to MC;

π = TR – TC

TR = P*Q

Therefore:

π = P*Q – (TC)

FOC

dπ/dQ = MR – MC = 0

Hence: MR = MC

P= 21100-0.10 Q

TR = (P*Q) = 21,100 Q – 0.10 Q2

MR = 21,100 – 0.20 Q

Profit Maximization:

MR=MC

21,100-0.20Q = 100 + 0.0126 Q

0.2123Q = 21000

Q = 98,916.63

P=21,100-0.10Q

P= 11,208.34

Therefore, the price that maximizes profit is 11,208.34.

Question six

According to Kreps (1990), in a monopolistic market structure, firms enjoy super normal profits which lure more firms into the market. Subsequently, it becomes imperative for the firm to advance its marketing strategies to extend its market control in the industry. As the firm sets out to maintain its market control, it is bound to incur initial costs in all these endeavors which may lower its profitability. New entrants into the industry may result to a reduction in prices which pose a threat to the firm’s ability to endure supernormal profits in the long run.

Question seven

The key areas that can help the firm to improve its profitability and increased value delivery to its stakeholders include costs reduction, increase of the company turnover, productivity, and increased efficiency. The firm may also consider expansion into new market structures as well as development of new products. Be that as it may, the endeavors by the firm to improve profitability may not be effected immediately. For instance, the firm can only invest in Research and Development and promotion in the long run. Increased promotion, Research and Development can sustain the firm’s profitability. Additionally, the firm can also switch up its variable inputs in a bid to boost its market share and profitability in the vast frozen food industry.