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RTE cereal update

RTE cereal update. Within a week of GM’s announcement, Kellogg essentially follows, while Quaker and PM say they’ll wait Over time, it becomes clear that others are promoting very aggressively 1994 changes in volume: Kellogg -3%, GM -5.4%, PM +3.5%, Quaker 10.8%, PL 9.1%, total market -.5%

zachery-holden
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RTE cereal update

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  1. RTE cereal update • Within a week of GM’s announcement, Kellogg essentially follows,while Quaker and PM say they’ll wait • Over time, it becomes clear that others are promoting very aggressively • 1994 changes in volume: Kellogg -3%, GM -5.4%, PM +3.5%, Quaker 10.8%, PL 9.1%, total market -.5% • In 1995, Kellogg and GM get fed up and retaliate; by end of 1995 promotions higher than before GM’s move • In 1995, Quaker introduces own brand of value-priced cereal in bags

  2. Cereal takeaways: collusion • In contrast to airlines, here successful example of collusion • Focus on industry factors (and where applicable, practices) that make this possible • Few firms • Stable, symmetric costs and demand • Transparency • Clear market leader => price leadership

  3. Cereal takeaways: brand proliferation as barrier to entry • Large variety of existing brands makes it difficult for new firms to enter and get viable market share, given costs of entry • Here, though, this may just be manifestation of “endogenous sunk cost” mechanism • Might deliberate attempts to monopolize play a role? • Maybe, but no clear evidence • To what extent do entered brands constitute commitment anyway?

  4. Cereal takeaways:Collusion vs. entry deterrence • Dilemma for Brands: successful collusion invites entry! • Can private labels be driven back out, or will brands simply have to adjust to new situation? • Optimal response depends on • Size of low end of market • New realities in retail sector • Entrants’ costs and margins • Use comparative cost analysis to see how seriously a price drop would affect entrants

  5. Cereal takeaways: strategicinteraction among incumbents • Think about competitors’ responses: who has which incentives? • GM’s move unprofitable if others don’t match • Price cuts will likely be matched • Cut in promotions: others will likely promote more • GM was hoping to change industry norms, like AA • Lots of money at stake! • Getting out of a Prisoners’ Dilemma can be hard. • Risk of escalation of battle if competitors don’t respond as hoped

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