The inspiration for these cost-cutting measures is largely derived from decreased demand that stems from higher unemployment and decreasing income. Another issue facing Kellogg is increased competition; the company is losing ground to competitors who offer healthier alternatives like yogurt and oatmeal bars. To compete with rival firms, the company is developing cereals that offer a greater nutritious balance, as opposed to tastes.
Besanko Can a company improve its bottom line by pricing its products incorrectly? Although laws of supply and demand are persuasive teachers and such irrational pricing typically corrects over time, the researchers sought to explain why the full-cost pricing fallacy continues to be perpetuated, even in numerous accounting textbooks.
Their results demonstrate that an exception to the rule does in fact exist, and full-cost pricing can be beneficial in limited market conditions. Modeling Manager Pricing Decisions By modeling numerous marketplace scenarios in which more simplistic pricing strategies are employed, Al-Najjar, Baliga, and Besanko were able to determine how these strategies would play out over time and affect the profitability of the companies using them.
In particular, the authors show that in a differentiated product oligopoly, firms will learn over time to confound variable, fixed, and sunk costs, because marketplace experiences will reinforce the practice through higher true profits.
Examples of such oligopolies—that is, difficult-to-enter markets in which a small number of firms produce similar but not identical products—include the cereal and the global automobile industries. By taking sunk costs into account, firms predispose themselves to set higher prices.
Experimental research supports the conclusion that managers often confuse sunk, fixed, and variable costs. For example, in a study by Offerman and Potters, subjects were asked to play an equilibrium pricing game.
The players were divided into two groups: Theoretically, the equilibrium prices reached during each game should have been identical. But Kellogg oligopoly practice, the equilibrium price reached in the game in which players paid the entry fee was significantly higher than the price reached in the counterpart game with no such fee.
Accounting for the Learning Curve According to Al-Najjar, Baliga, and Besanko, however, such studies fall short of addressing the question of whether managers learn to price their products correctly by observing the dynamics of their own marketplaces, even if the foundations for their pricing strategies are theoretically incorrect.
The model also assumes that each firm has imperfect knowledge regarding the budgeting assumptions and costing methodologies of rival firms, including whether or not their cost bases are inflated and when or even if they make adjustments to their practices.
The model shows two things. First, it indicates the obvious: The second conclusion is more surprising: For instance, in monopoly markets, the confusion of variable, fixed, and sunk costs does not lead to a higher equilibrium price for the simple reason that the monopolist will learn by trial and error what his most profitable price is.
Errors in costing methodologies do not lead to higher equilibrium prices in perfectly competitive markets either, since firms have no pricing power in such markets. If a manager were to inflate the cost basis for his firm, he would simply move the company away from making its profit-maximizing quantity.
Thus, experience in such a market should eradicate the misunderstanding of cost allocation. Similarly, homogeneous product oligopolies do not support the distortion of costs or prices.
When the products of rival firms are interchangeable, customers should be indifferent to where they purchase the products—the decision is based exclusively on price. Therefore, pressure for a firm to lower its prices, undercut its rivals, and capture its entire market is strong enough to clarify any confusion regarding correct costing over time.
Higher Profits Can Encourage Confounding Costs In examining differentiated-product oligopolies, however, the authors discovered evidence supporting the sunk-cost fallacy.
Managers of firms in such markets are incentivized indirectly through higher profits to confound variable, fixed, and sunk costs. The intuition for this result is that in a differentiated-product oligopoly, if a firm raises its prices, its rivals increase theirs as well, resulting in a more profitable industry equilibrium.
The resulting increase in profits reinforces this practice, making firms more likely to take fixed and sunk costs into account in the future.
For example, if restaurant A raises its prices, restaurant B has no incentive to lower its prices, since the meals offered at A are different enough from those at B that such a cut ought not to drive customers away from A to B.
The experimental results indicate that both the number of firms present in the oligopoly market and the degree of differentiation for these goods have profound impacts on the likelihood that a firm would benefit from full-cost pricing. As the data shows, for markets in which there are numerous players, cost-basis distortions are minimal.Kellogg's, doing business as The Kellogg Company, is an American multinational food-manufacturing company headquartered in Battle Creek, Michigan, United States.
Kellogg's produces cereal and convenience foods. Oligopoly in Cereal Industry 6 General Mills General Mills is the second leader in the market and is Kellogg‟s top contender. “General Mills, Inc. (General Mills) is a manufacturer and marketer of branded consumer foods sold through retail stores.
The four major suppliers are Kellogg, General Mills, post and Quaker How many suppliers are there? In the breakfast cereal industry competition is low to medium because these product are in grocery stores and similar to identical that how it's oligopoly.
Currently in case of Kellogg’s there are many local competitors and it is important that the business have their own niches, Let us write or edit the essay on your topic "Breakfast cereal kellogg's as an oligopoly" with a personal 20% discount.
agent qualitative-response setup to analyze entry in oligopoly markets. The observed number of market participants is the dependent variable; it is the equilibrium outcome of a game in which ﬁrms choose whether to enter the market.
In both articles, a reduced-form proﬁt function de-. Snowball: A dynamic oligopoly model with Kellogg School of Management, Northwestern University, Evanston, IL , USA Received 30 June ; accepted 4 April Available online 1 May Abstract Allowing for innovation dynamics in the software market, this paper studies the conditions.