1. Plan for the assessment of Market structure Effectiveness for Operations of the Company.
When there is a fluctuation in the demand for a certain product from one year to the other, we should understand that market and Company performance are changing. There can be observed a decent increasing trend for the products in the microwave category. The complexity of individual lives is increasing and as a result, the perception towards microwave food items is favorable. The savings in time and the wide range of choices could be taken as the main reasons for these types of goods selection. Multi-purpose use also adds value to the benefits provided by the customers.
The reason for the increase in the use of microwave products is the satisfaction among customers regarding its benefits. However, the issue that is rising is the nutrition proportion and calorie levels in the foods. The two key players in the industry are Healthy Choice and the Lean Cuisine. The market share is quite high for these players, and the background is also strong as they are strong companies running from the 1980s.
The profiling and segmentation of the market can be done in a different number of ways. These ways could be based on psychographic profiling or behavioral profiling. This adoption of a certain way of choosing the target market helps make better market decisions. Differentiation and other measures can be easily identified as per the needs of the target audience and their specific traits. These traits determine the general perception of the individuals towards our product or service. This perception drives the usage rate and purchase behavior of the target group.
In economics, the point of equilibrium is the point at which the price and quantity are set in a market run situation. For the given case,
Quantity Demanded (QD) = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
QD = - 5200 - 42P + 20*600 + 5.2*5500 + .20*10000 + .25*5000
QD = -42P + 38650
Quantity Supplied (QS) = -7909.89 + 79.1P
Here,
26770 -42P = -7909.89 + 79.0989P
Or, P = $286.38
The Quantity demanded is 14742 units
Hence, the equilibrium stands at a point where Price= $286.38 and Quantity= 14742
In this case, the significance of a proper customer profiling and market segmentation systems cannot be undermined. There needs to be proper identification of variables that can help in better understanding the profiles. The target customers of each company make up for the target market of the industry as a whole. This is done so that the size of the market can be determined.
Since microwave industry falls under a low-cost industry, there are some important factors that determine the survival and growth. These factors are capital and inventory adequacy, favorable conditions of supply as well as demand and business growth leading to differentiation. Without these, small companies may find it very difficult to sustain. Another important factor is an inclusive pricing strategy. The expansion and effectiveness of Company operations are directly dependent on these factors.
The prices that Companies set for their products and services also determine the profit levels. The most suitable price needs to be selected so that the purchase behavior and intention of the customers can be affected. Promotion and advertising could be the key tools in doing so. The elasticity related to varied sources of revenues and costs also matter. It is because the amount of elasticity in the market determines the success or failure of market strategies.
2. Likely factors that might have caused the change
Price-based competition is one of the main features of a market where monopolistic competition exists. This means that the profits are reduced as the margin on prices is reduced. Differentiation would thus be the key to the success of the Company. There can be varied factors which cause a change in demand. The change could be because of the increase or decrease in the general income level and purchasing capacity of the consumers. It could also be because of a new strategy by the competitors or rise in the market prices for raw materials. Also, if the structure of the market changes there is a change in market demand.
3. Analysis of the major short run and long cost functions for the low-calorie, frozen microwaveable food company.
For a monopolistic market, the condition in the short run is that the price curve is higher than the marginal cost curve. Profit is thus minimized. The level of supply is increased as new players keep entering the market. The price is then reduced. Existing firms are at risk if they cannot establish loyalty. If the new players differentiate themselves in a market where no promotions have taken place, they can easily capture the market of existing brands. Higher profit margin is the pulling factor for the new firms.
For the same market, the condition, in the long run, is that marginal revenue and marginal cost is equal. The upsurge in a number of players and the division of profits among these players causes nominal profits to exist for all the players. In the long run, the profit is divided, and thus super profits do not exist. If the prices exceed the total costs, a firm will be in profit. The survival chances are strengthened.
Taking the variables and the equation,
Total Cost (TC) = 160,000,000 +100Q + 0.0063212Q2
Variable Cost (VC) = 100Q+ 0.0063212Q2
Marginal Cost (MC) =100+ 0.0126242Q
Average Total Cost (ATC) =160,000,000/Q +100 +0.0063212Q
We have,
QD = - 5200 - 42P + 20PX + 5.2I + .20A + .25M
QD = - 5200 - 42P + 20*600 + 5.2*5500 + .20*10000 + .25*5000
QD = -42P + 38650
P = 920.24 - Q/42
Then,
TR = P*Q
TR = 920.24Q – Q2/42
The condition for optimal profits is,
MC = MR
100 + 0.0126424Q = 920.24 – Q/21
Q = 13666.6
P = 594.61
Average Total Cost value:
ATC =160,000,000/13666.6+100+0.006312*13666.6
ATC = 11707.4+100+86.26
= 11893.66
Average Variable Cost (AVC) = 100 +0.0063212*13666.6 =186.26
Here, the price is higher when compared to the average costs of variables. The implication of the analysis is that operations can continue in the short run, and it will still be favorable. For the long run, the chances of operations continuation are quite low as the comparison of prices and ATC says that prices are lesser (M. 2016).
4. Possible circumstances under which the company should discontinue operations:
The reasons for discontinuation can be summarized as:
Inability to compete with other players in terms of product differentiation, advertising or pricing strategies.
Fund problems in the company
Lesser or no availability of raw materials
Incompetency of the firm to analyze external and internal changes
5. A pricing policy that will enable low-calorie, frozen microwavable food company to maximize profits.
Marginal cost pricing is the recommended method of pricing. This type of pricing allows the company to add costs of additionally produced units to the price of the products (Accountingtools.com, 2016). This means that the additional costs or labor and raw materials are borne by the end consumers. Even when sales margins are low, this method will work in favor of the Company. For sustainable gains, the price should be higher than average cost curves at the greatest output level. These are the conditions for profit that the Companies need to borne for financial success in the short and long run.
We have,
P = 920.24 - Q/42
Total Revenue= P x Q = 920.24Q – Q2/42
Marginal Revenue= dTR / dQ =920.24 – Q/21
Profit maximization occurs when,
Marginal Revenue (MR) = Marginal Cost (MC)
920.24 – Q/21 = 100 + 0.0126424Q
Q = 13611.4
P = 920.24 – 13611.4/42
P = 1244.33
Here, it can be established that the demand elasticity for the frozen foods is minimal, i.e. the demand is inelastic.
6. Plan to evaluate financial performance:
For any Company in any type of competition, the financial performance is measured by the revenue and profits that it earns. With the hope of higher profit margins, new firms enter a monopolistic market, and the profits are divided among players. Existing and especially old firms become the victims. They need to resort to advertising and promotions to retain their market share and customers. This is the only hope for them to survive for a long period in these markets. Both long and short term considerations need to be taken. The short run creates lesser profits whereas the long run creates high expenses in promotions but retains loyalty and customers (Managementstudyguide.com, 2015).
Price is the first and the major factor affected. The decrease in price is due to increased supply when new players enter. The expenses in advertising will eventually pay off in the long run. The loss in consumer surplus and the producer surplus needs to be made up by advertisement impacts on the consumers.
Here,
Total Revenue = 920.24Q – Q2/42
Total Cost = 1600,000,000 +100Q + 0.0063212Q2
Producer Surplus = Total Revenue – Total Variable Cost
Variable Cost (VC) = 100Q + 0.0063212Q2
Producer surplus = 920.24Q – Q2/42- 100Q - 0.0063212Q2
= 820.24Q – 0.0301307Q2
= 820.24*13611.4 – 0.0301307 * 13611.4 * 13611.4
Profit = 185270209.96
If the ATC and demand curve are tangent to each other in the long run, the firm will be able to generate profits in a monopolistic market.
Hence, Q= 13666.6 units
Average total cost: 160,000,000/13666.6+100 +0.0063212*13666.6 =1333.26
115.56 + 0.01111 * 120,006 =1217.70 + 1333.26
= 11164448.37
7. Recommendations:
For a Company to operate successfully in competitive situations with high uncertainty, there are many factors that need to be measured and taken care of. One such primary factor would be finding the correct ways to connect with the target group. This can be done by investing in promotional activities in the short run so that long run gain can be obtained. Market researches should be conducted from time to time to understand preference changes and trends in the market. Strategies should have a sustainable vision with differentiation at the core. The product lines should be increased by following appropriate techniques for STP.
References
Managementstudyguide.com,. (2015). Objectives and Importance of Advertising. Retrieved 7 November 2015, from http://www.managementstudyguide.com/objectives-importance-of-advertising.htm
Diffen.com,. (2015). Monopoly vs Oligopoly - Difference and Comparison | Diffen. Retrieved 7 November 2015, from http://www.diffen.com/difference/Monopoly_vs_Oligopoly
Accountingtools.com,. (2016). Marginal Cost Pricing - AccountingTools. Retrieved 2 February 2016, from http://www.accountingtools.com/marginal-cost-pricing
Spaulding, W. (2015). Monopolistic Competition: Short-Run Profits and Losses, and Long-Run Equilibrium. Thismatter.com. Retrieved 7 November 2015, from http://thismatter.com/economics/monopolistic-competition-prices-output-profits.htm
M. (2016). Economics: Marginal Cost and Average Cost curves.Economicsmicro.blogspot.com. Retrieved 2 February 2016, from http://economicsmicro.blogspot.com/2008/11/marginal-cost-and-average-cost-curves.htm
