Different Firms In The Cereal Industry example essay topic

Cereal: The Manufacturing Industry Everyday, more than eighty million Americans have some type of cereal for breakfast. Cereal is one of the most popular breakfast foods and some brand is found in almost every home in America (Topher). This vast industry stems from the late 1800's when John Harvey Kellogg and C.W. Post began cereal production in Battle Creek, Michigan (Topher). Today, numerous types and varieties of cereal line the grocery store shelves. However, only a few select companies make every one of those different kinds of cereal. There are four different categories into which economists classify industries.

These categories are perfect competition, monopolistic competition, oligopoly, and monopoly. Each of these four categories has its own unique characteristics. Perfect competition has an unlimited number of firms, while a monopoly has one single firm, and an oligopoly consists of a small number of interdependent firms. The demand curve of an oligopoly depends on how firms choose to deal with their interdependence with the other firms in the industry.

A firm within an oligopoly market can choose to cooperate with other firms in the industry, which is illegal, or the firm can choose to compete against the other firms. An oligopoly produces either differentiated products or homogeneous products. In an oligopolistic market, entry barriers, which prohibit new firms from entering the industry, are present. Examples of entry barriers include patents, brand loyalty and trademarks. Long-run economic profits are possible for an oligopoly, and non-price competition is a significant way to compete with other firms in the same market.

Most of the non-price competition in an oligopoly comes from product differentiation. The cereal manufacturing industry is an oligopolistic market because it exhibits many of these traits. An oligopoly consists of a small number of interdependent firms. The cereal manufacturing industry consists of four different firms that control almost all of the market. These companies are Quaker Oats, Kellogg, Kraft Foods, and General Mills (Lazich 68). In 2001, General Mills and Kellogg led the industry with a market share of 32.2 and 30.7 percent, respectively (68).

Kraft Foods had a market share of 16.3 percent and Quaker Oats had a market share of 19.0 percent (68). The remaining 11.8 percent of the market share was held by other firms (68). In 2002, Kellogg took the lead with 32.7 percent followed by General Mills with a 31.8 percent market share (Reyes). An oligopoly consists of either differentiated or homogeneous products.

The cereal industry produces differentiated products. Each company produces many different brands of cereal. Typically, the companies aim their cereals at different segments of the population. These may consist of children, adults, and health conscious consumers (Topher).

Trix cereal by General Mills and Kellogg's Corn Pops cereal are examples of cereal aimed at children, while Kellogg's Special K is generally aimed at adults. Post's Grape Nuts is one type of cereal for people who are health conscious. Another way that cereal companies differentiate their product is by pushing their cereal as a finger food (Topher). Since an oligopolistic market potentially makes an economic profit in the long run, firms want to enter the market. However, this is not easy since an oligopoly has entry barriers. The main entry barrier for the cereal industry is brand loyalty.

The companies with the most brand loyalty have the most market power (Joy). An example of this is the different cartoon characters companies place on their cereal boxes. They implant the images in the mind of the consumer, and make their brands more recognizable to the public (Topher). For example, Tony the Tiger, Toucan Sam, and the Trix rabbit are all cereal box cartoons and are very popular with children. Generally, people will buy the name brand cereals rather than trying the generic or store brand cereals. This can be seen by walking down the cereal aisle in any grocery store where most of the shelf space is taken up by the major companies' cereals.

Firms trying to enter the market find it very difficult to compete against the kind of control that the top four companies have over this industry. Another example of an entry barrier is technology (Topher). The major companies in this industry are constantly developing new products, which makes it almost impossible for a new firm to come up with its own special product (Topher). The huge amount of money required for advertising is a final barrier faced by entering firms (Joy). Non-price competition is significant in an oligopolistic industry.

Non-price competition means that the firms within an industry do no compete against each other by changing the price of their product. In the cereal industry, the major non-price competition comes from product differentiation. The companies make many different types of cereal for different types of people. Companies increase their sales and consequently, their market share, by advertising how their product differs from the product of the other companies in the industry. For example, General Mills advertises that their Total cereal has more vitamins and minerals and is therefore better for the consumer than Kellogg's Special K. The cereal market will definitely continue to grow.

Normally, economic downturns minimally affect food industries because people will always need food (Joy). This gives the cereal market an inelastic demand, which means that consumers will buy cereal at almost any price. However, when people have a smaller amount of income available, they tend to buy more generic brands and less name brands (Joy), or they may find substitutes for cereal (Topher). Therefore, companies have some control over the cereal industry, but there are substitutes so that consumers can always find something else for breakfast other than cereal. The cereal manufacturing industry is composed of a small number of firms that produce differentiated products. Entry barriers exist for firms wanting to enter the market.

The different firms in the cereal industry differentiate their products in order to compete with the other firms in the industry. This analysis of the cereal manufacturing industry shows that this industry is an oligopoly.

Bibliography

Joy, Richard. Foods & Nonalcoholic Beverages. Industry Survey. New York: Standard & Poor's, 2002.
Lazich, Robert S., ed. Market Share Reporter: An Annual Compilation of Reported Market Share Data on Companies, Products, and Services. Gale Group, 2002.
Reyes, Sonia. "Kellogg Pours $50 M into Fruit Harvest". Brand week. 4 Nov. 2002: 4.
EBSCOhost. Topher. "Topher's Breakfast Cereal Character Guide: Analysis of the Cereal Industry". 1998.
St. Norbert College. 12 April 2003 web.