As, compete, making a more defined look for the

As, a massive
industry, earning about 1.9bn in 2016, the sweet biscuit industry seems like
quite the prominent market, however the sector has been under massive media
fire, because of the rising concerns over sugar consumption, people are now
more health-focused. But even with the negative attention and government plans
to reduce the sugar consumption, the industry still thrives, as the only
decline we see is in volume sold. The saving grace has been the shifted focus,
mainly firms creating products with less sugars, making them a more “balanced”
choice, and with the growing British population we see a bright future for the
industry.

The sector
itself is quite saturated, and there is an abundance of products, all essentially
being the same, with a few exceptions. However, this is quite typical for a Monopolistically
Competitive market structure, which is the structure of the UK sweet biscuit
market. Additional characteristics include the fact that the firms have some
control over prices, but firms mainly compete with marketing and product differentiation,
as to not incur a price war. Typically, that is how the firms in the industry compete,
making a more defined look for the product helps the consumer easily separate the
product. So brand loyalty is quite prevalent in the industry, and is a main
reason why new entrants can find it hard to sustain themselves, more issues can
occur as rivalry is constant and price wars are inevitable. And because brand
loyalty exists we can also mention the possibility of lowering the price
elasticity of demand. For the most part, entry barriers are quite low, however
remaining in the market itself is quite hard, the top companies have a massive
portion of the market, which further provides evidence on the structure, and
those companies are United Biscuits, owned by Pladis group, Fox’s Biscuits,
owned by 2 Sisters Food Group, Burtons, owned by Ontario Teachers’ Pension Plan
and Nestle. They all own a sum of 58.2% of the market, with United Biscuits
owning 23.1%, Burtons 16.4%, Fox’s Biscuits 7.2%, Nestle S.A 11.5%, and the new
comer Mondelez coming in at a rapid pace with its Oreo biscuits and newly
obtained Cadbury biscuits has been dominating the market recently.

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Now that we
comprehend the market better and finally identify its structure, we can move on
to trying to understand, how price and output is determined by the firms.
Starting with short-run firms under monopolistic competition trying to gain
supernormal profit.

 

Figure 1

In Figure 1 we can see that the
firm is trying to incur as much profit as possible i.e. in the short-run. There
are some conditions that must be met before doing so. Marginal costs (MC) must
equal marginal revenue (MR), and MC curve must cut MR curve from below. Also it
must be understood that in monopolies the demand curve is downward facing and
is known as the average revenue curve (AR). The place where the MC and MR curve
meet is known as the equilibrium (E), E is where the price and output are in
equilibrium, however seeing as P is above E we can assume that P is abnormal or
supernormal, the reason is if P is above, in this case SM, which is the costs
per unit, then PQ is the abnormal profit, or in other words the additional
profit received after subtracting the costs per unit. So the shaded area that
is PQRS, is the area in which supernormal profit is made, as your profits per unit
exceed your costs per unit.

 

 

 

 

 

 

 

Now with that in mind, newcomers will
try to enter the markets in hopes of reaching the supernormal profits. This
creates an interesting scenario, now because of all the new entrants demand
will spread out among the firms, resulting in the decline of supernormal
profit, until firms are only left with normal profit.

As demand is
split up by the firms, it starts to shift towards the left until it becomes tangential
to the AC curve. Firms in the long-run will now be making only normal profits.

 

 

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