Two of the top companies in the low-calorie frozen, microwavable food industry
In modern life, people are becoming busier, thus, they spend very little time for traditional cooking. Due to growing demand for convenient food and thanks to the development of advanced technology, microwave becomes a useful and common tool in kitchen which helps people to save a lot of cooking time and effort as well as preserve the taste of food. The prevalent use of microwave in every household leads to the growing need for microwavable food. For this reason, many low-calorie frozen, microwavable food companies are found to provide high quality food with convenient way of cooking . At the beginning of food processing industry, there are many small firms in the market in which they produce slightly differentiated goods but they are highly substitutes. The market structure can be considered as monopolistic competition or in an extreme case it is perfect competitive. Overtime, due to innovation and change in consumer’s demand, some firms gain market power and become leading companies in this industry. In the USA, one of the top firms in microwavable food industry is Lean Cuisine. The company was established in 1981 by Nestlé with the purpose of supplying healthy food. Lean Cuisine started as low-fat and low-calorie frozen of Stouffer’s food. The firm mainly supplies food to some markets such as USA, Canada and Australia. Lean Cuisine mainly provides traditional dinners, pizzas, and ethnic dishes and so on. The other big company in microwavable food industry is Healthy Choice which is considered as a major competitor of Lean Cuisine. Healthy Choice was found in 1989 by ConAgra Foods. This company is also operated in USA, Australia and Canada. Healthy Choice provides some similar products and some slightly different ones such as frozen dinners, cold cuts, side dishes and canned soups, ice cream and so on. There are several criteria to measure market segment such as customer’s behavior, firm’s profile, etc. The behavior factor is measured by customer’s attitude towards the product. The customer decision to buy is based on some factors such as income, loyalty, brand recognition and quality and price of the product. The profile’s variable is assessed by firm’s location, economic status of targeted consumers, firm’s reputation, etc.
According to assignment 1, if the market structure is perfectly competitive, by putting QD equal to QS, we have:
QD = 38,650 – 42P and QS = 5200 + 45P
Therefore, equilibrium market price and quantity is
38,650 - 42P = 5200 + 45P
87P = 33,450
P = 384.48 and Q = 22,501.6
Under perfect competition, the market clearing price is 384.48 cents and the market quantity is 22,501.6 units.
Two factors have caused market structure change in microwavable food industry. In the new market structure, the initial manner where the change affect business operations.
As mentioned above, at the beginning of frozen food industry, many companies are operated in the market and the share of each firm is so small that no firm is able to affect market price. The market structure is considered as monopolistic and products are highly substituted. Over time, food processing industry becomes more concentrated with fewer manufacturers. For instance, currently, there are only some dominant food companies in USA such as Lean Cuisine, Healthy Choice and Smart Ones. The market structure from monopolistic competition has changed to oligopoly market. The oligopoly is a market structure in which only a few sellers dominate the market. In this market, firms compete with each other based on a principle that their decisions are influenced by those of their rivals. There are several reasons for market concentration. The most reasonable factor is the change in customer’s demand. The change in income or consumer’s preference possibly affects their decision to buy products. For instance, consumer’s strong preference towards products of Lean Cuisine over other firms may force other companies to exit the market (Tatiana & Michael, 2010). The second factor is innovation. By investing into innovation and technology, some firms can reduce production cost and improve quality of products which allow them to increase sales and gain higher profit. Other firms which have high production costs have to leave the market .
When firms have high market share, market power allows them to affect market price. Leading firms can increase market price by reducing quantity in order to improve profit. However, if firms strongly compete in prices, their profit may reduce sequentially. The best way for firm’s reaction is to invest into innovation. By introducing differentiated products and improving quality of products as well as reducing production cost, firms can attract more consumers, gain more profits and stay ahead of their competitors.
Decision of firms in the short-run and long-run.
In monopolistic competition, firms make different decisions in short term and long term. In the short term, firms do not take fixed cost into consideration and they mainly care about variable costs. The operation point in the short term is that firms set price to cover average variable cost. In the short term, firms may earn positive economic profit in case of P>MC. If the profit exists, more firms want to enter the market to absorb profit, which makes quantity increase and reduces the price. The market equilibrium is reached when economic profit is zero. Therefore, in short run, firms need to set price to cover average variable cost but in the long run, firms set price to cover average total cost
We have: TC = 160,000,000 + 100Q + 0.0063212Q2
In the long run: P=ATC=160,000,000/Q + 100 + 0.0063212Q
If Q = 22,501.6, we have ATC=160,000,000/22,501.6+100+22,501.6*0.0063212
PL=ATC=7352.84
VC = 100Q + 0.0063212Q2
AVC = 100 + 0.0063212Q
AVC=100 + 0.0063212*22,501.6
Ps=AVC=242.24
MC= 100 + 0.0126424Q
MC=384.48
If the revenue is smaller than production cost, it induces profit loss. In this case, firms should stop production and pay for the loss which is equal to fixed cost. If firms continue to produce, the loss is even higher. This is the case when P<AVC. Therefore, if P<242.24, firms should discontinue production to minimize the loss.
Possible circumstances in which the firm should discontinue operations and key actions management should take to prevent these situations
There are several situations in which firms have to stop their operations. The first reason is that firms cannot compete with other firms due to high production cost and high price. The second element is that firms are in lack of production factors and capital. It means they do not have enough resources to continue their production. The third factor is that targeted customers change their demand, which leads to considerable decrease of sales. To deal with these problems, advertising is a good tool to increase demand for the products. A good marketing strategy is an effective way to appeal more demand and improve sales . The second way is to introduce innovation into production process so that firms can reduce production cost and improve quality of products at the same time. Additionally, customer’s preference changes time by time, therefore, firms have to update customer’s demand so that they can produce different goods which meet customer’s needs. However, in all cases, if firms are unable to cover the fixed cost, they should shut down to minimize the loss.
Pricing policy that enables the frozen microwavable food company to maximize profits
Since firms have market power, they can affect price in the market. One pricing strategy for firm to maximize profit is to set marginal revenue equal marginal cost. This is the case in which the production cost of an additional unit is equal to the customer’s valuation of that unit.
A firm maximizes profit by setting MR=MC
Supply function is Q = 38,650 – 42P
Inverse supply function is P=920.24 –Q/42
Marginal revenue function is MR=920.24 –Q/21
Marginal cost function is MC= 100 + 0.0126424Q
920.24 –Q/21=100 + 0.0126424Q
0.06026*Q=820.24
Q=13611
P=920.24 –Q/42=920.24–13611/42=596.16
Compared with the case of perfect competition (P=384.48 and Q=22,501.6), the market price is higher when firms have market power and firms provide lower quantity.
Calculate profit in the long run
The market structure is very competitive in the long run because more firms will enter the market if positive economic profit exists. It leads to higher supply of products and lower price. The market equilibrium is obtained when all firms get zero economic profit. This is the case in which P=MC=TC
We have: TC = 160,000,000 + 100Q + 0.0063212Q2
ATC=160,000,000/Q + 100 + 0.0063212Q
MC= 100 + 0.0126424Q
In the long run, P=MC=ATC
160,000,000/Q + 100 + 0.0063212Q=100 + 0.0126424Q
160,000,000 = 0.0063212Q2
Q=159,096
P=100+159,096*0.0126424=2111
Profit of firm in the long run: π=0
In the long run, price and average cost is 2111 and quantity is 159,096 and at this point, firms get zero profit.
If the price is smaller than average cost, firms will make profit loss in the long run and they have to shut down. If price is larger than average cost, firms make positive economic profit, so more firms enter to market until firms get zero profit due to no entry market barrier
Two actions that the firm should take to improve its profitability and give more value to its stakeholders.
There are several ways to enhance a firm’s profitability. The first feasible method is improve technology. By investing in R&D activities to study market demand, customer’s income, preference and its competitors, etc., firms can have a good plan for production. Being innovative is necessary for firms to reduce production cost, improve quality and finally gain more profits. Based on the fact that nowadays most products are only slightly different so customers find it hard to distinguish goods from different companies, an important and effective strategy to improve profit is marketing and advertising so that customers can have better ideas about the firm’s product and distinguish it with those of its competitors. It is true that advertising is quite expensive at the beginning but it has a long term effect and can increase sales in the long run if firms can build good reputation. Moreover, in the development of technology, online marketing is becoming popular and cost-effective. Firms can advertise their products online before using some other expensive means of marketing.
References
Lauren, G. (2011). Defrosting Dinner: The Evolution of Frozen Meals in America. Massachusetts Institute of Technology, Vol 4 (1), 48-55.
Pehanich, M. (2003). Hail to the innovators. Food Engineering.
Rain. T, & Ohri, V. (2011). Principal of Microeconomics. University of Delhi.
Smith, A. F. (2009). Eating history. New York: NY: Columbia University Press.
Tatiana, A., & Michael, W (2010). The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price Elasticity of Demand for Food. Am J Public Health, Vol 100 (2), 216-222.
