According to the modern market trend, the microwavable foods offered by brands such as Healthy Choice and Lean Cuisine have become a convenient option and an easy diet solution for busy people. These microwavable foods are easy to prepare and consume for the people having hectic lives. Thus, there are two growing competitors for this industry of low-calorie frozen, microwavable food. These two competitors have several common factors in their products such as product types and variety, nutritional level and price margin. However, according to the recent financials, Lean Cuisine and Healthy Choice, it had faced a significant drop in their sales level in the frozen single serve meal category. This category of food had faced a significant contraction of demand.
According to Warrous (2014), ConAgra that produces the brand Healthy Choice is planning to increase more profitable purchases from baby boomers that are the part of 60% purchases in the category. The company plans to build an effective marketing approach inclusive of the competitive pricing strategy, as that will incorporate into their retail strategy.
Nestle, the producer of Lean Cuisine, has witnessed the fall in profit margin due to the contraction in the demand of low-calorie frozen, microwavable food industry. They plan to improve the sales of Lean Cuisine by providing new products to the product line. The company has introduced a new line of product, which is made with all-natural ingredients and no preservatives as well as salad additions (Gelski, 2014). According to Gelski (2014), due to the organic growth and lower prices in the market, they planned a lower input cost in order to meet the expectation of the value conscious consumers of the present time through this product line. This product line along with investment in the brand will help to provide greater volume growth as well as improvement in their overall operation margin.
The low calorie frozen, microwavable food industry belongs to a monopolistic market structure. It is a monopolistic market because the products are supplied with unique qualities and different level of pricing for products demonstrates varying price level, which shows their additional features.
As the industry is shrinking, the companies must be competitive through continuously improvement in the process mix and strategic planning. The industry must also be competitive through product differentiation tactics and focusing more on capability building and endorsement of the brand. Lean Cuisine has also associated with Jenny Craig in order to build their brand image. The company plans to develop product line for Jenny Craig and also set a optimum price for this new line. As a result of product differentiation, the industry can also offer a premium price of the product due to the product image in the market, which comes along with the success of the brand (McGuigan, Moyer, and Harris, 2014).
The policies adopted by the government have serious impact on the operations of the business, and the impact of the policy depends upon the level of the policy i.e. state policy, federal policy or local policy. The policy adopted by federal government will have strongest impact on the business and it applies throughout the country. Such regulations will have impact on the operations of the business at higher level like licensing, public utility regulation, regulations on environment and health care, etc. In a similar fashion, the government at a local level can influence the business with building codes, and non-discriminatory and regulatory rules on capital, costs, and revenues, etc.
In the given situation, since there are several companies producing differentiated products within the industry, we can take this situation as monopolistic market. In such market, FDA have clearly stated that even though there is some degree of differentiation in the product, the certain referenced amount for the substitute or imitation food like low calorie food must be same for all the substitute food. So, the company must adopt this rule and operate.
There are numerous similar factors while comparing a perfectly competitive market with a monopolistic market structure. The core difference between a perfectly competitive market and monopolistic market lie in the fact that there exists a high degree of product differentiation in monopolistic while in a perfectly competitive market; the products are perfect substitutes of one another. The price in the monopolistic market is higher than marginal cost of producing the product so the suppliers are the price makers with market power.
The other reason for the change to monopolistic market is the barrier for other firms to enter into the market because of the pricing level being greater than marginal cost. The price of the product has created few barriers to enter, and exit in the monopolistic market while in perfect competition, there are no barriers.
Average Total Cost = TC / Q = 160,000,000 /Q + 100Q + 0.0063212Q2/ Q
= 160,000,000 / Q + 100 + 0.0063212Q
Average Variable Cost = TVC /Q = 100Q /Q + 0.0063212Q2 /Q
= 100 + 0.0063212Q
Find the minimum ATC, where ATC = MC
160,000,000 / Q + 100 + 0.0063212Q = 100 + 0.0126424Q
- 100 + 0.0063212Q – 100 - 0.0063212Q
Q * 160,000,000 / Q = 0.0063212Q *Q
160,000,000 / 0.0063212 = 0.0063212Q2 /0.0063212
25,311,649.686.77 = Q2
Thus, Quantity = 159,096.35 units
In this level of output, the firm will minimize its average total cost in the long run. There will be no short run for the competitive environment.
Average Total Cost = 160,000,000 / 159,096.35 + 100 + 0.0063212 * 159,096.35
= 1,005.68 + 100 +1,005.68
= 2111.36 cents
= $21.11
The firm will be competitive, as the market value will remain the same. As the new firms enter, the price level will fall. In the long run, the firm whose price level goes beyond $21.11 has to exit the market.
4.
For the firm, it must discontinue its productions and operations in case of the reduction of the price below its shutdown point in the short run. Similarly, for the long run, the firm must discontinue its operation if the price is below the break-even level. There will be short-run loss to the monopolist if the average total cost will be higher than the price level charged by the monopolist at the profit maximizing level of output. In case of decrement if price beyond the average variable cost, the overall loss will also be higher than that of the minimum fixed cost.
As the firm might or might not make profit in the short run, the price level must be set at the level where marginal revenue equals to marginal cost. This will enable to earn economic dollars per unit of output (McGuigan, Moyer, and Harris, 2014, pg. 360). The management of the company must find measures to maximize the profit. The profit is maximized by producing output at the point where marginal revenue of the last unit produced will be equivalent to the marginal cost of producing it.
Given,
Quantity = 350,000 – 100P
Comparing the equations,
Q – Q + 100P = 350,000 – 100P + 100P – Q
100P / 100 = 350,000 – Q / 100
Price = 3500 – 0.5748Q
Total revenue = P * Q
= (3500 – 0.5748Q) *Q
= 3500Q / Q – 0.5748Q2 / Q
Marginal revenue = 3500 – 0.5748Q
In order to achieve the maximum level of profit, Marginal Revenue = Marginal Cost
3500 – 0.5748Q = 100 + 0.0126424Q
3500 – 0.5748Q + 0.5748Q -100 = 100 + 0.0126424Q -100 + 0.5748Q
3400 / 0.5748= 0.5748Q /5748
Thus, Quantity = 5915.10 units
The company needs to adopt competitive pricing for their low calorie, frozen microwavable food in order to achieve optimum profit level. Through this pricing policy, the firm can either lower the price margin to attract consumers with low cost leadership, make similar pricing with that of their competitors or set higher prices than existing in the market to depend on the consumer's loyalty and brand image to maximize the profit. In order to offer higher prices, the firm must create an ambience that provides premium products to the consumer by adding extra features, which are not guaranteed by the competitor's products. This will enable to form product differentiation in the market place.
As per the definition of Investopedia, the competitive pricing policy is used by firms which sell similar products available in the market as the services rendered to the consumer will differ between business to business but the core features of the product will remain same between the firms. Competitive pricing policy is used after the pricing of the product achieves its equilibrium level. This can only be possible after existing in the market for a long period of time (Investopedia, n.d.).
Given,
Price = 3500- 0.5748(Q)
We know that, Quantity = 5915.10 units
Price = 3500 – 0.5748 (5915.10)
= $ 100
Now,
Average Total Cost = 160000000 / Q + 100 + 0.0063212 (Q)
= 160000000/5915.10 + 100 + 0.0063212 (5915.10)
= 21049.42 + 100 + 37.39
= 27186.81 or $271.81
This is the average total cost in order to produce 5915.10 units.
Comparing with perfect competition market structure, the profit margin generated in this structure is higher. Moreover, in the long run period, when the firm enters into perfectly competitive market, the supply increases in the market, which shifts the curve towards the right side. This symbolizes a reduction in price level until it reaches zero. In order to protect the firm, it needs to adopt several strategies, which act as barrier to the decreasing level of prices through product differentiation in the market. This will enable the firm to earn positive economic profits.
The company must determine ways in order to bring down the cost of production in the industry through close examination and finding out methods to decrease wastage.
Firstly, the company must configure the suppliers with whom they are currently dealing with to know if the prices and resources are the best available in the market, or to expand its current supplier base by consolidating other suppliers.
Secondly, the company can also focus its attention towards the optimum utilization of their facilities such as generating making value financially from its present space.
Lastly, it can also analyze their production unit in order to reduce the waste and also reduce the cost of raw materials used in the production.
Moreover, the overall profitability of the firm can be enhanced by scrutinizing on general aspects of the product being offered in the market, the target market of the product, and the pricing of the product to foresee the scope of improvement that could be made. Bringing changes in the price, the firm can accommodate its product with respect to fluctuations in the market scenario. Depending on the elasticity of the product, the firm can also raise the price level without any negative effect on the sales quantity. The stress should be given on loyal and profitable consumers to increase profitability.
Furthermore, the firm also possesses the option to merge or do partnership with another firm from a different industry to expand its market. The partner needs to be selected with caution in order to match the organizational culture of the two businesses. It must also analyze if the products complement each other in order to decrease the level of risk in the market.
References
Investopedia. (n.d.) Competitive Pricing. Definition of Competitive Pricing. Retrieved on May 15, 2014, from http://www.investopedia.com/terms/c/competitive-pricing.asp.
Gelski, J. (2013 Aug 9) Nestle seeks to fatten up Jenny Craig, Lean Cuisine profits. Retrieved on May 15, 2014, from http://www.foodbusinessnews.net/articles/news_home/Financial-Performance/2013/08/Nestle_seeks_to_fatten_up_Jenn.aspx?ID=%7BD6AD78D0-5F26-40FA-A4D3-163828854B67%7D.
Mankiw, G. N., (2012). Principles of Microeconomics (6th ed.) . Cengage Learning
McGuigan, J.R., Moyer, R.C., & Harris, F. (2014). Managerial Economics: Applications, Strategies, and Tactics (13thed.). Pricing and Output Decisions: Strategy and Tactics(pg. 336). Cengage Learning, Mason, OH.
Watrous, M. (2014 Feb 14) ConAgra seeking healthier sales for Healthy Choice. Retrieved on May 15, 2014, from http://www.foodbusinessnews.net/articles/news_home/Business_News/2014/02/ConAgra_seeking_healthier_sale.aspx?ID=%7B28F5670D-F1CB-40B1-8756-383C061EE043%7D&cck=1.
