How is cereal an oligopoly

However, Kellogg has also proven their strength which is held by remaining focused. P orter's Model Rivalry As discussed previously, the cereal is a highly consolidated market. While the dominance of the big four has dropped some in recent years, the market is still highly consolidated.

While there are only a few major players, these companies have individual brands which compete for very small shares of the market. Kellogg's Frosted Flakes leads all individual cereals with a 4. This is followed by General Mills Cherrios at 3.

There is high competition backed be enormous advertising budgets that make rivalry very intense. T he bargaining power of the buyers can have a significant impact on any industry if the consumers can determine prices or quality.

Consumers do not have a profound impact on the cereal industry for a variety of reasons. First of all, there are only a few major players in the industry. Due to this fact, a company is not dependant on what a few customers want to see changed. Similarly, consumers do not purchase large quantities of cereal at one time. Cereal shopping is generally done weekly with purchases normally including only a few boxes.

Buyers can switch companies to purchase from, however, the companies are still in control due to the small number of companies to select from. A potential threat to the cereal industry is the power of the grocery stores. Cereal manufacturers need to occupy shelf space in order to sell their product.

The grocery stores ultimately have the ability to decide who gets shelf space. However, the cereal industry is an eight billio n dollar business. In order for the grocery stores to make money, they need to shelve breakfast products. With so few companies to choose from, their power is limited. A nother potential threat to the cereal industry is the power of suppliers. Suppliers find that they are able to find the most power in a variety of scenarios.

First, suppliers find power when there are few substitutes to their product. For most cereals, the main ingredients include sugar, food grains, flour, and other dehydrated food products. All of these ingredients are present in a variety of foods and are unable to control buyers of their products. A second form of power derives from suppliers ability to get along without the buyer. All of these products are bought for a variety of reasons, but due to the large size of the cereal industry it is a lucrative buyer for these products.

Another lack of supplier power derives from the potential of suppliers to integrate. Individual companies within an oligopoly have kinked demand curves. The kink occurs at the market price. It is assumed that if an oligopoly raises its price its competitors will not match the increase and the company will lose market share. The graph below shows why companies in an oligopoly are reluctant to raise their prices unless all the companies in the oligopoly do so.

Assume Company One is in an oligopoly. Instead, competitors do not match the price change and many consumers purchase a lower-priced substitute. The graph below explains why companies in an oligopoly fear lowering their prices and only the most aggressive companies would use this strategy to increase their market share. Price wars occur when companies in an industry continually lower their prices to gain market share.

Typically, one company begins the downward spiral by lowering its price. Competitors follow rather than lose market share. For example, one airline may offer an attractive price to attract travelers when it first enters a market. Competing airlines may match or even lower the price to discourage travelers from switching airlines.

Determined to attract passengers, the airline entering the market may further lower prices. The downward price spiral continues! So how do oligopolies adjust their prices? Ideally, they would get together and agree to restrict output to the same as a monopoly. This is collusion, and in most cases, collusion is illegal. Collusion occurs when two or more companies agree on either prices or output with the objective of maximizing the profits of all the companies.

Reaching a compromise without colluding is the challenge. Oligopoly presents a problem in which decision makers must select strategies by taking into account the responses of their rivals, which they cannot know for sure in advance. The Start Up feature at the beginning of this chapter suggested the uncertainty eBay faces as it considers the possibility of competition from Google. A choice based on the recognition that the actions of others will affect the outcome of the choice and that takes these possible actions into account is called a strategic choice A choice based on the recognition that the actions of others will affect the outcome of the choice and that takes these possible actions into account.

Game theory An analytical approach through which strategic choices can be assessed. Among the strategic choices available to an oligopoly firm are pricing choices, marketing strategies, and product-development efforts.

Once a firm implements a strategic decision, there will be an outcome. The outcome of a strategic decision is called a payoff The outcome of a strategic decision. In general, the payoff in an oligopoly game is the change in economic profit to each firm. Some firms in the airline industry, for example, raised their fares in , expecting to enjoy increased profits as a result. They changed their strategic choices when other airlines chose to slash their fares, and all firms ended up with a payoff of lower profits—many went into bankruptcy.

We shall use two applications to examine the basic concepts of game theory. The second deals with strategic choices by two firms in a duopoly. Suppose a local district attorney DA is certain that two individuals, Frankie and Johnny, have committed a burglary, but she has no evidence that would be admissible in court.

The DA arrests the two. On being searched, each is discovered to have a small amount of cocaine. The DA now has a sure conviction on a possession of cocaine charge, but she will get a conviction on the burglary charge only if at least one of the prisoners confesses and implicates the other.

The DA decides on a strategy designed to elicit confessions. If you both confess, your sentence will be three years in jail. If your partner confesses and you do not, the plea bargain is off and you will get six years in prison. If neither of you confesses, you will each get two years in prison on the drug charge. The two prisoners each face a dilemma; they can choose to confess or not confess. Because the prisoners are separated, they cannot plot a joint strategy.

Each must make a strategic choice in isolation. The outcomes of these strategic choices, as outlined by the DA, depend on the strategic choice made by the other prisoner.

The payoff matrix for this game is given in Figure There are four possible outcomes: Frankie and Johnny both confess cell A , Frankie confesses but Johnny does not cell B , Frankie does not confess but Johnny does cell C , and neither Frankie nor Johnny confesses cell D.

For Johnny, the best strategy to follow, if Frankie confesses, is to confess. The best strategy to follow if Frankie does not confess is also to confess. Confessing is a dominant strategy for Johnny as well. A game in which there is a dominant strategy for each player is called a dominant strategy equilibrium A game in which there is a dominant strategy for each player.

Here, the dominant strategy equilibrium is for both prisoners to confess; the payoff will be given by cell A in the payoff matrix. From the point of view of the two prisoners together, a payoff in cell D would have been preferable. Had they both denied participation in the robbery, their combined sentence would have been four years in prison—two years each.

Indeed, cell D offers the lowest combined prison time of any of the outcomes in the payoff matrix. But because the prisoners cannot communicate, each is likely to make a strategic choice that results in a more costly outcome.

Of course, the outcome of the game depends on the way the payoff matrix is structured. The players were given a payoff matrix; each could make one choice, and the game ended after the first round of choices.

The real world of oligopoly has as many players as there are firms in the industry. They play round after round: a firm raises its price, another firm introduces a new product, the first firm cuts its price, a third firm introduces a new marketing strategy, and so on.

An oligopoly game is a bit like a baseball game with an unlimited number of innings—one firm may come out ahead after one round, but another will emerge on top another day. In the computer industry game, the introduction of personal computers changed the rules. IBM, which had won the mainframe game quite handily, struggles to keep up in a world in which rivals continue to slash prices and improve quality.

Oligopoly games may have more than two players, so the games are more complex, but this does not change their basic structure.

The fact that the games are repeated introduces new strategic considerations. A player must consider not just the ways in which its choices will affect its rivals now, but how its choices will affect them in the future as well. We will keep the game simple, however, and consider a duopoly game. The two firms have colluded, either tacitly or overtly, to create a monopoly solution. As long as each player upholds the agreement, the two firms will earn the maximum economic profit possible in the enterprise.

There will, however, be a powerful incentive for each firm to cheat. Suppose, for example, that two equipment rental firms, Quick Rent and Speedy Rent, operate in a community.

Given the economies of scale in the business and the size of the community, it is not likely that another firm will enter. Each firm has about half the market, and they have agreed to charge the prices that would be chosen if the two combined as a single firm. Quick and Speedy could cheat on their arrangement in several ways. One of the firms could slash prices, introduce a new line of rental products, or launch an advertising blitz.

This approach would not be likely to increase the total profitability of the two firms, but if one firm could take the other by surprise, it might profit at the expense of its rival, at least for a while.

Despite the falling demand of consumers, as long as these product lines continue to be demanded by consumers, these oligopolies will continue to thrive. Oligopoly in Cereal Industry 5 Kellogg Kellogg employs 31, employees and primarily produces RTE products and it relies on agriculture resources such as corn grits, wheat, oats, rice, cocoa, soybeans and some fruit to produce these wonderful treats.

These products are manufactured in 18 countries and marketed in more than countries. Kellogg uses direct sales forces to sell to consumers and its main retail customer are the Wal-Mart stores. Choi Despite these earnings, recent reports state that Kellogg is planning to cut its global workforce by 7 percent which equates to about 2, jobs.

Kellogg claims that this is necessary due to falling sales for cereal products especially in the North American market which they feel is due largely to the many option that consumers have now for breakfast choices. General Mills is a manufacturer and marketer of branded consumer foods sold through retail stores.

The Company is also a supplier of branded and unbranded food products to the foodservice and commercial baking industries. The Company manufactures its products in 15 countries and markets them in more than countries.

The Company's joint ventures manufacture and market products in more than countries and republics worldwide. General Mills operates in three segments: U. Retail, International, and Bakeries and Foodservice. Convenience stores and foodservice segment sales slid 0. Under the terms of the deal, PepsiCo, offered 2.

Post Post was founded in and is manufactured in the United States and Canada through a flexible production platform consisting of four owned primary facilities and sold through several retail stores and mass merchandising companies. It also acquired nutritional supplement maker Premier Nutrition Corp. Cereal maker Post Holdings anticipates that its fiscal revenue will top Wall Street's expectations.

The St. They share common raw materials that are required for their products and as those materials fluctuate in the economy so does their price. Price Raw materials such as grains, corn, wheat, and cocoa are common ingredients for these firms. The cost of production for packaging, labor, transportation and energy as well as oil prices and plastics would have an impact on prices as well.

The U. But after high acreage seeded with corn this spring and largely favorable summer weather, the U.