It is believed by some economists that by and large, the North American market (primarily the U.S.) for breakfast cereals reflects a monopolistically competitive structure with extensive product differentiation, significant levels of advertising expenditure, and brand-building exercises undertaken by firms , and freedom of entry and exit in the long run. Companies such as Kellogg's, General Mills, and Post dominate this market, but other players exist as well; however, there are seemingly endless varieties of breakfast cereals and each variant often resembles a single brand-for example, Kellogg's Froot Loops is unique and so is General Mill's 'Cheerios'. Because of such strong levels of product differerentiation and high marketing costs associated with each brand, these companies operate with excess capacity,meaning that their output levels do not reach the minimum point of the LAC (Long-Run Average Cost) curve. To explain this phenomenon, free entry and exit of firms also ensures that there is active price competition among cereal manufacturers, although there may not be much interdependence between prices of rival firms due to product differentiation. Therefore, when prices fall due to free entry of firms, firms also find it very hard to realize economies of scale by producing more cereal of the same type. Based on what you have understood about monopolistic competition, would you support the argument that the breakfast cereal market is monopolistically competitive ? You may justify your own point of view in detail. If you do not agree that this market is monopolistically competitive, explain why you think this is so.
