The cereal aisle in your typical American supermarket is remarkable. With box after box on top of box, the aisle looks like a technicolor version of The Wall from Game of Thrones. Though dazzling to the eyes, it’s overstimulating, especially to any parent who has bravely marched down this aisle with a child in tow.
But behind the cast of cereal box characters – Tony the Tiger, Toucam Sam, Dig’em Frog, Lucky, Snap, Crackle and Pop – is a story about competition in our food system and how it impacts consumers, the farmers who grow our food and quite possibly the very soil they grow it in. This story is so interesting that I will be covering it in not one, but two blogs.
So many brands, but so few companies
On the one hand, there is head-spinning diversity in the cereal market: cereals with colorful marshmallows, tiny churros, and one made of chocolate chip cookies. You can buy a Sour Patch Kids cereal or one branded with the viral characters from the YouTube video “Baby Shark”. Healthier varieties are available, too: shredded wheat, flaky corn cereals, puffed rice cereals, the classic “O” made from oats, and how can we forget, Grape-Nuts. When you stop and think about the variety of our cereal options, how many different recipes, manufacturing processes, machines, and ideas went into producing such diversity, it’s astounding.
On the other hand, that jazzed-up wall of hundreds of cereal brands obscures this fact: according to the Census Bureau’s most recent Economic Census, just eight companies accounted for 94% of US breakfast cereal production. Economists typically designate a market with relatively few sellers as an oligopoly (but as I will explain later the cereal market isn’t structured exactly like an oligopoly). Generally speaking, however, compared to companies operating in highly competitive markets – those with lots of buyers and sellers – who must price low to maintain market share, so-called oligopolists can more easily track competitors’ prices and adjust accordingly.
In the most extreme oligopoly scenario, businesses can and do collude behind the scenes with other companies to set prices to maximize profits. A textbook non-food example of this is the U.S. generic drug manufacturing industry. A year-long investigation revealed that the handful of U.S. generic drug manufacturers (that’s right, an oligopoly type market structure) were engaged in collusion on prices. Regulators were tipped off by price spikes of as much as one thousand percent. According to investigators, the companies kept detailed spreadsheets to coordinate prices and divide up market shares. Crucially, this type of pricing behavior is only manageable when there are few companies in the market. And for some consumers, price spikes for drugs could be deadly, which is why it’s essential that regulators are keeping tabs on market competition, quantities produced, and prices.
We do find examples of collusion in the food system. Take the Federation of Quebec Maple Syrup Producers (or in French, Federation des Producteurs Acericoles de Quebec or FPAQ). The maple syrup business in the Canadian province is serious business given that it produces 72% of the world’s maple syrup. FPAQ functions primarily to coordinate a collective agreement among over 13,000 Quebecois maple syrup producers to set production quotas and negotiate a benchmark price with its accredited buyers. Economists would argue that FPAQ is acting almost like a monopolist since they control the vast majority of the world’s syrup production.
This is, for the most part, a really good system for Quebecois maple syrup farmers because it keeps their prices high. But limiting supply and negotiating prices naturally makes prices go up. Consequently, we pancake, waffle, and oatmeal lovers are left paying more for the liquid gold we love to drizzle on our favorite breakfast. The main point is that market concentration, like what we see with Canadian syrup producers, has its upsides, but importantly, it has downsides for some producers and consumers.
Don’t worry, no breakfast cereal collusion
I wouldn’t worry too much about U.S. breakfast cereal manufacturing colluding on prices. That’s because the cereal market isn’t structured exactly like an oligopoly, even though just a few companies make nearly all the brands we see in our grocery stores.
According to economic theory, our breakfast cereal market is structured as a monopolistically competitive market. It’s deemed monopolistic (i.e. only one seller) because each cereal brand has a monopoly on that brand. No other cereal can be Lucky Charms; there’s just one Frosted Flakes and one Cap’n Crunch. Those brands are unique or differentiated from every other brand. This differentiation allows for companies to maximize profit for that brand, with less consideration for the prices charged by others. Compare that to maple syrup, which is harder to brand and differentiate to win the hearts and stomachs of shoppers.
At the same time, the breakfast cereal market is also highly competitive – hundreds of cereal brands in a single grocery store aisle aggressively compete for your food dollar. To do this the small handful of breakfast cereal companies come up with new brands and products (such as Baby Shark cereal), meaning that a new brand can enter the market (or exit it, if it’s a flop) with relative ease. These companies also spend millions on clever, brand-specific advertising campaigns to convince shoppers that their brand is the superior choice for their morning meal. This competition pushes prices down, as each company tries to win shoppers on price.
Counterintuitively, these price effects combined lead to less cereal production by individual cereal manufacturers, and higher manufacturing and marketing costs. As a result, economists say the market operates with excess capacity: individual cereal makers could produce more cereal for a lower price if the market were more competitive (i.e. many sellers and many buyers). Excess capacity partially results from all the advertising companies do to win over shoppers. Duplication in these types of markets also contributes to the problem of excess capacity. For example, Malto-o-Meal (I grew up on it, don’t get me wrong) makes the same cereals in your favorite boxed brands and just puts them in a plastic bag. Some economists may argue that these markets can result in too much variety that we really don’t need. That seems like a reasonable concern in the case of our wall-to-wall technicolor cereal aisle! At the same time, other economists argue that the variety we have in monopolistically competitive markets is economically valuable.
Enough of the cereal talk, get to the point Boehm!
While having too many breakfast cereal brands isn’t a life or death type of situation, the cereal aisle’s market structure example does illustrate a key point about market structure and competition in our food system and its implications on, prices, production, farmers and consumers. It’s COMPLICATED.
The cereal market example also provides a nice entry point into a broader discussion on competition and market structure across our food supply chain. It’s a discussion that stretches all the way back to the farms where cereal grains are grown. This more farm-focused discussion on competition and market concentration will be the topic of my next blog. So stay tuned.
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