Question

The accompanying table presents market share data for the U.S. breakfast cereal market. $$ \begin{array}{l|c} \text { Company } & \text { Market Share } \\ \text { Kellogg } & 28 \% \\ \text { General Mills } & 28 \\ \text { PepsiCo (Quaker Oats) } & 14 \\ \text { Kraft } & 13 \\ \text { Private Label } & 11 \\ \text { Other } & 6 \end{array} $$ a. Use the data provided to calculate the HerfindahlHirschman Index (HHI) for the market. b. Based on this HHI, what type of market structure is the U.S. breakfast cereal market?

Short answer

Answer: The U.S. breakfast cereal market is moderately concentrated, with an HHI of 2090.

Step-by-step solution

Calculate the squared market shares

For each company (including "Private Label" and "Other"), square their market share and create a new row in the table with the squared values: $$ \begin{array}{l|c|c} \text { Company } & \text { Market Share } & \text { Squared Market Share }\\\ \text { Kellogg } & 28 \% & (28)^2 \\\ \text { General Mills } & 28 \% & (28)^2 \\\ \text { PepsiCo (Quaker Oats) } & 14 \% & (14)^2 \\\ \text { Kraft } & 13 \% & (13)^2 \\\ \text { Private Label } & 11 \% & (11)^2 \\\ \text { Other } & 6 \% & (6)^2 \end{array} $$

Calculate the Herfindahl-Hirschman Index (HHI)

Add up the squared market shares to find the HHI for the U.S. breakfast cereal market: $$ \text{HHI} = (28)^2 + (28)^2 + (14)^2 + (13)^2 + (11)^2 + (6)^2 $$ $$ \text{HHI} = 784 + 784 + 196 + 169 + 121 + 36 $$ $$ \text{HHI} = 2090 $$

Determine the market structure using the HHI

According to the calculated HHI (2090), the U.S. breakfast cereal market can be classified as moderately concentrated since the HHI falls in the range 1,500 < HHI <= 2,500. This suggests that the level of competition in this market is moderate, with some leading companies having a larger impact on the industry.

Key concepts

Market Structure

Market structure refers to the organization and characteristics of a market, mainly focusing on the number and relative strength of buyers and sellers. In essence, it helps us understand how a market operates. It considers various factors such as:

• The number of firms in the industry.
• The type of products being sold (homogeneous or differentiated).
• The ease of entering and exiting the market.
• The degree of control firms have over prices.

In the U.S. breakfast cereal market, several key players dominate, including Kellogg and General Mills. These companies are significant, given their large market share percentages. This is a clue implying the market is not perfectly competitive but may have an oligopolistic structure. Oligopolies have a few dominant firms exerting considerable control, which is apparent in the cereal industry based on the data and calculated HHI.

Market Share

Market share is a critical concept in understanding a company's influence within its industry. It is the percentage of total sales in a market that a company secures over a set timeframe. Calculating market share involves: - Determining the company's sales over a period. - Dividing these sales by the industry’s total sales in the same period. - Expressing the result as a percentage. In the example provided, companies like Kellogg and General Mills each hold a 28% market share in the U.S. breakfast cereal market. This indicates these companies are the leading forces within this sector. The high market share of these firms suggests influence over pricing and market trends, potentially affecting competitive dynamics. A marked contrast is seen with 'Other' companies, which collectively hold a minor 6% market share, indicative of a competitive struggle against the major players.

Competition Analysis

Understanding competition analysis helps us assess how firms compete within an industry. The Herfindahl-Hirschman Index (HHI) is a popular metric for this analysis. It measures market concentration by summing the squares of individual companies’ market shares. A higher HHI indicates a less competitive market, dominated by a few firms, whereas a lower HHI suggests a more competitive market landscape. Using the provided market share data, the calculated HHI of 2090 for the U.S. breakfast cereal market reflects a moderately concentrated market. In this context, the term 'moderately concentrated' indicates that while competition exists, a few firms still control large shares of the market. This can impact the market greatly, influencing prices, availability, and innovation. Therefore, the HHI gives stakeholders valuable insights into competitive dynamics, helping in strategic planning and regulatory decisions.