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Cadbury, Mars and Nestlé dominate the chocolate industry in the European Union - Leaving Cert Economics - Question 2 - 2016
Question 2
Cadbury, Mars and Nestlé dominate the chocolate industry in the European Union. (a) (i) State a market structure which most closely reflects the situation above, gi... show full transcript
Worked Solution & Example Answer:Cadbury, Mars and Nestlé dominate the chocolate industry in the European Union - Leaving Cert Economics - Question 2 - 2016
Step 1
State a market structure which most closely reflects the situation above, giving a reason for your answer.
Answer
The market structure that most closely reflects the situation is Oligopoly. This is because the chocolate industry in the European Union is dominated by a few large firms, namely Cadbury, Mars, and Nestlé, which together hold a substantial share of the market. The high concentration ratio indicates that these firms have significant control over market prices and production.
Step 2
Outline two other key characteristics of this market structure.
Answer
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Mutual interdependence between firms: In an oligopoly, the actions of one firm significantly influence the actions of the others. If one of the major companies lowers its prices, other firms may follow suit to remain competitive.
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Product differentiation: Firms in this market structure often offer products that are differentiated through branding, marketing, and various features. In the chocolate market, different brands may promote unique flavors or packaging.
Step 3
Explain, with the aid of a labelled diagram, the likely shape of the demand curve in this market structure.
Answer
The demand curve in an oligopoly is often kinked, illustrating that the demand is elastic at higher prices and inelastic at lower prices. The kink represents a price rigidity in the market. If a firm increases its price, it fears losing market share because competitors are likely to keep their prices stable. Conversely, a decrease in price may not substantially increase sales as rivals might also lower their prices. The demand curve can be illustrated as follows:
P | A
| /|
| / |
P1| / | B
| / |
| / |______________ C
| / | Q
|/
-------------------------> Q
Where AB is elastic and BC is inelastic, demonstrating the characteristics of the oligopolistic market.
Step 4
If a large US chocolate manufacturer entered the EU chocolate market, outline the possible economic impacts of greater competition in this market.
Answer
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Lower prices for consumers: Increased competition in the EU chocolate market may lead to price reductions as firms compete for market share, benefitting consumers.
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Increased innovation: More firms entering the market can drive innovation as companies strive to differentiate their products, leading to better quality and variety in the chocolate offerings.
Step 5
Outline two factors which could make it difficult for this US chocolate manufacturer to enter the EU chocolate market.
Answer
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Existence of trade agreements / EU import tariffs: EU regulations may impose tariffs and other trade barriers that could make it costly for US manufacturers to enter the market, effectively reducing potential profit margins.
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Brand loyalty of existing customers: Established brands in the EU chocolate market have significant brand loyalty. A new entrant would face challenges in convincing consumers to switch from well-known brands.
Step 6
Explain why small firms succeed in some markets while other markets are dominated by large firms.
Answer
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Personal service: Small firms often provide more personalized service, which can attract customers looking for tailored experiences or products that larger firms do not cater to.
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Niche markets: Small firms may target niche markets that are not appealing to larger firms. For instance, local or artisanal chocolate producers can capitalize on specific local tastes or preferences that larger companies overlook.