Market Structure And Business Strategy For The Low-Calorie Frozen Microwaveable Food Industry

Characteristics of Monopolistic Competition

In the past few years, use of microwave has increased rapidly. In the fast growing world, people have less time to spend on kitchen. With increasing earnings, people are now optimally allocate their time. In microwave, foods are prepared with a much less time. A variety of food can be prepared in microwave. With increasing use of microwave, it has become a vital kitchen appliance (Pitchai et al.,2016). The increased use of microwave raises the demand for microwaveable food as well. People has also become increasingly health conscious and is looking for healthy food option. With presence of so many firms in the industry, the market structure takes forms of perfectly competitive market as assumed in the previous assignment. However, with changing market scenario the low-calorie frozen microwaveable food industry has characteristic similar to monopolistic competition. It is a form of imperfectly competitive market that has characteristic of both competitive and monopoly market (Chugh & Shapiro,2017). The competitive characteristic is found in the presence of considerably large number of buyers and sellers. The difference with competitive market is that unlike perfect competition sellers do not sell a homogenous product. With objective of capturing a greater market share, they differentiate their product as much as possible (Kirzner, 2015). Product differentiation is one of the key features of monopolistic competition. Each sellers is the owner of its own brand and takes monopoly decision regarding their own product. The major brands in the low calorie microwaveable food industry are Lean Cuisine, Healthy Choice and others (Bui, Kemp & Hamilton, 2015). As the low calorie microwaveable food industry has characteristics of monopolistically competitive market, the market plan or business strategy is to made keeping resembles with this form of market.

In imperfectly competitive markets, seller optimize their interest using the market power they have enjoyed. The information of elasticity is helpful in developing a suitable business plan. Demand of low calorie frozen microwaveable firm depends on price of own product, price of competitors product, Income per capita and number of microwave sold. Apart from own price, the price set by competitors is important in determining demand. In monopolistic competition, presence of substitute is very important. Before determining own price, the firm should consider its competitors product (Iyer & Church, 2018). In order to maximize sales volume, the firm should target specific consumer group by segmenting the market according to preferences and other attributes. Location and economic status of customers are two important aspects of market segmentation. Buyers differs in terms of their behavioral pattern. Customers have different preference for brands, different buying frequency for products in the industry (Haaland & Venables, 2016). The specific characteristic of the market, preferences of buyers, nature and price of competitors’ product all should be considered while designing business plan. 

Product Differentiation and Branding

Several factor causes a change in the market structure. Number of sellers and their market power vary in different market structure. Monopolistically competitive firms takes different strategies to differentiate their product. Some firms may capture a much larger share than its competitor does. As firms go bigger, the market power is concentrated in the hands of large firms. The dominance of few large would transform the structure of the market to an oligopolistic market from the initial monopolistic structure (Parenti et al., 2017). The presence of few dominating firms is one factor that causes that change in the market framework. In the oligopoly market, firms always keep a close look at its competitor’s strategy, price and introduction of new products. The firms usually follows strategy of its competitors. When firms compete in terms of price, the all the firms experience a reduction in their product (Zhou et al., 2014). The price competition is one feature of oligopolistic market. In the monopolistically competitive market, firms do not involve in price competition. They mostly compete with product differentiation and innovation.

A number of factors affect demand for low calorie frozen microwaveable food demand. As obtained in assignment 1, price, income, advertisement, price of related products are some factors influencing demand.

Production cost plays an important role in decision making of the firms. Cost are categorized in two groups depending on span of operation. In the short run, there are both fixed cost and variable cost. However, in the long-run all inputs being variable there is only variable cost of production (Varian, 2014). Firms in the monopolistic competition in the short run charges price greater than marginal cost. This yields profit in the short run. In the industry, there are no barriers to entry. Attracted by short-term profit, new firms enter in the industry causing a decline in price. Free entry and exit in the market leads to fluctuations in demand and prices and firms’ decision. However, in the long-run firms profit is always maximized where marginal cost equals marginal revenue. In the long-run firms only attains a normal profit and price is set where demand equals average total cost (Moulin, 2014). Therefore, a well-defined cost function is needed to evaluate firms’ decision-making behavior. For a firm, to continue its operation average variable cost should be covered both in the short run and in the long-run.

The total cost, variable cost and marginal cost function is given as follows

Market Segmentation

Total Cost (TC) = 160,000,000 + 100Q + 0.0063212Q²

Variable Cost (VC) = 100Q + 0.0063212Q²

Marginal Cost (MC) = 100 + 0.0126424Q

Firms has to incur both fixed and variable cost in the short run. In the short run, set up of the firm requires investment on several fixed input and hence has a relatively large fixed cost. Variable costs arise from investment in variable factors. However, in the long run firms only need to spend on variable factors and hence, there is only variable cost in the long-run.

Therefore, short run cost = 160,000,000 + 100Q + 0.0063212Q^2; Where 160,000,000 is fixed cost and 100Q + 0.0063212Q² is variable cost.

Long run Cost = 100Q + 0.0063212Q²

In order to use this information for decision making of the firm, marginal cost is needed.  Marginal cost measures change in the total cost following a change in unit change in output.

Given, Marginal Cost (MC) = 100 + 0.0126424Q

The average total cost is obtained from dividing total cost by level of output.

Using the average total cost and marginal cost firms can determine optimum price and output. The relation between average total cost and marginal cost suggests that Marginal cost equals average total cost at its minimum point (Frank, 2015). Therefore, by equating marginal cost and average cost long run price and output is obtained. This is shown below. 

Or, 100 + 0.0126424Q

Or,

Or,

Or,

Or,

Or,

Or,  Units

The optimum output is obtained as 159096.3535. Corresponding to this output level the values of average total cost and average variable cost is computed as  

There are times where firms take the decision to close down operation. In most of the cases it is the inability of the firms to recover cost in the long run. In the short run, even when firms are unable to recover average total cost completely, they do not close down plants as long as variable cost is recovered (Mankiw, 2014). Once price reaches to the level where it is not possible to recover the variable cost firms shut down its operation. In the competitive market, cost is the only factor that causes shut down of firms. However, for an imperfectly competitive market several factors are there on which firms should look after. For a monopolistic competitive firm, innovation plays an important role in differentiating product. Firms unable to invest in innovation fail to compete in the marketplace (Chen, Zhang & Ngan, 2016). Innovation needs huge investment. In case firm is unable to bear such cost close its operations. If for any reason supply of inputs are interrupted, then firms are unable to continue operation. Presence of economies of scale is an important feature of monopolistic competition. The firm might shut down once its unable to expand production scale due to lack of capital.

Cost Function Analysis

It is the responsibility of management to look after several aspects important for firms’ production. The management should ensure that firms can cover average variable cost during its operation. The management should design strategy based on competitor’s price and output. To solve the problem of interrupted supply of raw materials the firm should establish contact with more than one suppliers instead of relying on a single one (Arrow, 2015). Also, the company should have a steady flow of capital to finance innovation and other expenses. 

Firms in monopolistic competition aims at maximizing profit. The profit maximizing price is set by balancing marginal revenue and marginal cost (Stoneman, Bartoloni & Baussola, 2018). Demand function of the low calorie frozen microwaveable food firm is estimated as 

Q_D = Quantity demanded

Px (in cent) =Price of leading competitor’s product; Given Px = 600

A (in dollars) = Monthly advertising expenditure; given A=$10,000

P (in cent) = Price of the product; Given P= 500

I (in dollars) = Per capita income of the standard metropolitan statistical areas located around the supermarkets; Given Y= $ 5,500

M= Number of microwave ovens sold in SMSA, where the supermarket located; given M= 5,000

Putting the value of all other factors except price, the demand function is obtained as

Using the direct demand function, the inverse demand function needs to be derived to obtain price as a function of quantity.

Inverse demand function 

After obtaining the inverse demand function it is now possible to determine total and marginal revenue as a function of quantity.

Marginal Revenue (MR)

At profit maximizing level,

MR = MC

100 + 0.0126424Q

Or,  ~ 13611 Units

From the inverse demand function price is obtained as 

324.0788216

 ~ 596

When the market structure was perfectly competitive then equilibrium price is estimated as $384.5 and that of competitive output is 22501. Under monopolistic competition price increases to $596 while output now reduces to 13611 units. This shows how change in market structure enable firms to charge a high price for a low quantity of output as compared to perfect competition.

Profit is an important indicator of financial performances. Both short run and long run scenario should be considered to get an overall idea of the firm’s performance (Hill & Schiller, 2015).

Profit in the short run is computed as 

The estimated total revenue and total cost are

Surplus obtained by the producer is Total revenue less total variable cost 

Factors Affecting Demand

= ( )

=    8114517.098

TVC = 100Q + 0.0063212Q²

=

=1361132.412 + 1171116.994

=2532249.406

 TR – TVC = 8114517.098-2532249.406

= 5582267.692

The producer surplus is what firms enjoy in the short run.

In the long run, with entry of new competitors in the market, surplus to firms reduces. The long run equilibrium is obtained where demand curve is tangent to average cost curve.

The output in the long run is 159096.3535.

The minimum average total cost is calculated as

If the firm willing to enjoy profit in the long run it must ensure that revenue is greater than total cost. For this, price needs to be higher than minimum total cost. In the opposite situation, firms incur loss.

The firm should adapt strategies that can increase profitability of the firm. Once the profitability is increased the firm can provide a greater return to its stakeholders. One way to increases profitability is to is increases its market. For this, the firm should make considerable investment in innovation. Another thing firm can do raise sales and its market share is to design product in line with preference of consumers. The firm should conduct market survey for a better understanding of consumer preference. This will help the firm to attract more customers. 

Reference list 

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Chen, H., Zhang, Y., & Ngan, H. (2016). Optimization Approaches in Microeconomics and Game Theory. Power System Optimization: Large?Scale Complex Systems Approaches, 49-75.

Chugh, S. K., & Shapiro, A. F. (2017). Monopolistically Competitive Search Equilibrium.

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Moulin, H. (2014). Cooperative microeconomics: a game-theoretic introduction. Princeton University Press.

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Pitchai, K., Chen, J., Birla, S., Jones, D., & Subbiah, J. (2016). Modeling microwave heating of frozen mashed potato in a domestic oven incorporating electromagnetic frequency spectrum. Journal of Food Engineering, 173, 124-131.

Stoneman, P., Bartoloni, E., & Baussola, M. (2018). The Microeconomics of Product Innovation. Oxford University Press.

Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.

Zhou, Y., Chan, C. K., Wong, K. H., & Lee, Y. C. E. (2014). Closed-loop supply chain network under oligopolistic competition with multiproducts, uncertain demands, and returns. Mathematical Problems in Engineering, 2014.