Use the Harvard Business Case, “The Ready-to-Eat Breakfast Cereal Industry in 1994” as the basis for answering the following questions:

1) Prior to the entry of private label producers, how would you classify demand (elastic, inelastic, unit elastic) for cereals produced by the Big Three? Support your answer by using details from the case and referencing the factors that influence the elasticity of demand.

The RTE cereal market had an oligopoly market structure where the big three companies are dominating the market. Putting this in mind, a consumer will be forced to pay regardless of how high the prices are increased due to the scarcity of substitutions available. This will result in an inelastic demand trait in this particular market. As the case elicits the big three companies became “highly concentrated, restraining competition and by taking specific steps to keep new firms from entering the industry”. The filing of the antitrust suit against the big three companies in the 1972 proves that these companies had monopolized the RTE cereal market. Quoting from the case “The FTC case was based on the fact that the industry was concentrated and highly profitable, and not on specific actions that the firms might have undertaken to achieve.” Restrained unwritten agreements, and limited trade dealings with pressuring retailers on premium shelf spaces all had an impact on the elasticity of demand.

2) How would the entry of new private label producers impact the elasticity of demand for the Big Three’s products?

Allowing private label producers entering the market will simply give the consumers an option to choose from when prices do increase from the big three companies, shifting the elasticity of demand from inelastic to an elastic market. As stated in the case, there was an average of 40% decrease per pound then the big three.

3) Identify both a