Comparing Market Structures

	Perfect Competition	Monopolistic competition	Oligopoly	Monopoly
Number of firms	Many	Many	A few	One
Freedom of entry	Easy	Easy	Difficult	Very difficult
Nature of product	Identical/ Homogeneous	Differentiated	Homogeneous / Differentiated	Unique
Implications for demand curve	Horizontal	Downward sloping – elastic	Downward sloping – inelastic	Downward sloping – most inelastic
Average size of Firms	Small	Relatively small/ Medium	Large	Very large
Possible consumer demand	Low	Low/Medium	Medium / Strong	Strong
Profit making possibility	None	Low / Medium	Medium /Strong	Strong
Government intervention	None	None	Medium	Strong
A new example	Wheat	Optical stores	Steel	Postal Services
Control over pricing	None	Low	Moderate/ Substantial	Substantial

FOUR different market structures with graphs below comparing the demand, costs, revenue, output and profits:

Perfect Competition

At an output of QE, the average cost is C, and the average profit is equal to the distance PC.  The total profit is equal to the average profit times the quantity produced.  This is represented graphically by yellow shaded area.  Image Source Page:http://jimluke.com/teachingportfolio/examples/unit8/jimsguide.html

 

Monopolistic Competition

D is an elastic demand curve with its associated marginal revenue curve MR.  ATC and MC are the normal U-shaped cost curves.  The area Pbq0 represents total revenue.  Similarly, Caq0 represents total costs.  If we subtract costs from revenue, we get an economic profit, which is represented by shaped area PbaC.

Monopoly

We show the firm producing output 20 quantity, the level of output where MR = MC. At that level of output the firm sells its product for $10 per unit.   This means the firm's total revenue is 10 x 20 = 200. At 20 units of output ATC = 7,  so total cost is 20 x 7 = 140. So profit = TR - TC = 200 - 140 = 60. Or average profit is 10 - 7 = 3 per unit, so profit is 20 x 3 = 60.

Image Source Page: http://www.econweb.com/Sample/Monopoly/ProfitMax13.html

                           

 

Oligopoly

The discontinuity in the marginal revenue (MR) curve is the result of the kink in the demand curve.  The MC is the original marginal cost curve. Quantity Q is the profit-maximizing output that results in price P. 

Image Source Page: http://www.businessbookmall.com/economics_26_oligopoly.html

 

          

Defining Oligopoly and Game Theory

Oligopoly is a common market structure.  It is an industry mad e up of a few large firms, which means that the concentration ratio is high.   Firms in the industry, each would realize that by producing more it would drive down the market price.  So each firm realize that profits would be higher if it limited its production. In this case, these companies will engage in collusion.     An agreement among suppliers to set the price of a product or the quantities each will produce.   And the strongest form of collusion is a cartel – an agreement of several firms that increase their profits by telling each other’s how much to produce.  Cartel work to the advantage of their members only if there is no cheating among the participants.

When the decisions of firms significantly affect other’s profits, they are in a situation of interdependence.  The study of behaviour in situations of interdependence is known as game theory.  Game theory was first developed by economists John Neumann and Oskar Morgenstern in the 1940s to analyze strategic behaviour.   The profit earned by an oligopolist, is that player’s payoff.  A payoff matrix shows how the payoff to each of the participants depends on the actions of both.  A matrix helps us analyze interdependence.

I think the game theory is consistently in use in the current economy. The world of oligopoly is a struggle between cooperating and competing.  It pays for oligopoly firms to cooperate because that is how they can make the most joint profits.  But even when they cooperate, there is still the incentive to compete and outdo the rival, which could result in even greater individual profits for one of the firms.

Defining Monopolistic Competition

Monopolistic competition is a market structure characterised by a large number of relatively small firms, similar but not identical products sold by all firms, relatively good but not perfect resources mobility and extensive knowledge prices and technology.

Also, the goods produced by firms operating in a monopolistic competitive markets are subject to product differentiation.  Product differentiation involves the attempt by a seller to offer a product that is seen by the consumer as different and presumably better than the others on the market. A recognizable logo, distinctive brand names and distinctive packaging are popular form of a product differentiation. Like Nike shoes, its unique symbol and its special image, for sure increase the demand for Nike products and enables the company to charge a higher price than the others.   Product differentiation is the primary reason that the firm operating in  monopolistic competitive market is able to create a little monopoly all to itself.

Monopolistic Competitive Companies

Size:	Small Company	Medium Company	Large Company
Features:	Ginger Beef Express Ltd	Lens Crafter	Safeway
Differentiated products	Traditional Northern  Chinese style – Ginger Beef	optical retailer to promise eyeglasses in about an hour	membership price offer to members, easy shopping on line, exceptional customers services
Control over price	Some	Good Control	Some control under pressure between competitors
Mass advertising	Some	a lot of advertising and promotion:  TV , flyers and combined with insurance coverage	extensive in all kind of media: TV, radio and flyers
Brand name goods	private brand name	a variety of brand name frames, lens and contact lens	a large variety of its own brand name goods – ‘SELECT’ and its organic products  - ‘O organics’

Competing as Starbucks

In theory, perfect competition describes markets in which no participants are large enough to have the market power to set the price of a homogeneous product.  The four conditions that must exist for an industry to be perfectly competitive are:

1. Many buyers and sellers all of whom are price takers
2. No preference is shown by either buyers or sellers
3. Easy entry and exit by buyers and sellers
4. The same market information available to all

Starbucks is an example of in part of perfect competition market.  It is a freedom entry into the coffee industry for new firms.   And most of the firms sell the homogeneous product – coffee.  For example:  Second Cup, Tim Horton, MacDonald or some small specialities coffee shops.  

In year of 2008, Starbucks closed 600 stores to realign its growth strategy and compete effectively with its competition.  “The 500 additional stores set to be closed had been on an internal watch list for some time. They were not profitable, not expected to be profitable in the foreseeable future, and the "vast majority" had been opened near an existing company-operated Starbucks, Bocian said.”  Starbucks stores were closed to restructure finances and its profit line.   Starbucks said the store closures will lead to pretax charges of about $328 million to $348 million, including $8 million in severance costs and $120 million to $140 million in lease-termination costs and future lease obligations.

If most firms are making profits in the short run, an expansion of the output of existing firms and new firms into the industry. Firms are responding to the profit motive and super normal profits act as a signal for a reallocation of resources within the market. The addition of new suppliers causes an outward shift in the market supply curve. This is shown in the diagram below.

Making the assumption that the market demand curve remains unchanged, higher market supply will reduce the equilibrium market price until the price equal to long run average cost. At this point each firm is making normal profits only.

Source:  tutor2u.net/economics/content/topics/competition/competition.HTML

 All the investors of Starbucks were looking for the long run gain after closing the non-profitable stores by saving on long-term costs.

In my own opinion, the price of Starbucks coffee is an expensive coffee.  But they have their own brand image - the heritage, the tradition and the passion that’s unique and different from the other coffee shops. Reducing price may not be the ideal core at this point.  But some promotions may help to increase the revenue in the long run.

Sources:

·         Starbucks Gossip
           (http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html)
·         CBC News
           (http://www.cbc.ca/money/story/2008/07/01/starbucks-closures.html)
·         The Seattle Times
          (http://seattletimes.nwsource.com/html/businesstechnology/2008028854_starbucks02.html)

 

 

 

 

Long Run Costs and Economies of Scale

Janitorial Cleaning Services

A potential business I might interest to provide a janitorial cleaning service.  The aim of business is to provide services to general office buildings or corporate and executive offices.  My business won’t be start from a large scale, but start from a small or family basis scale.

My Janitorial cleaning services provide are listed as below: 

1.     Floor cleaning – includes sweeping and mopping, vacuuming, polishing, burnishing and waxing.

2.     Carpet cleaning – includes daily vacuuming, twice a year deep steam carpet cleaning

3.     Garbage bin cleaning daily

4.     Re-cycle bin cleaning weekly

5.     Desk cleaning

6.     Washroom hygiene

7.     Special requested by the customers as written on the contract.

Cleaning products are using green, Eco friendly and safe to the environment.  Services will provide during the day or evening at customer’s convenience.  It is flexible and designs the optimum janitorial cleaning services program as per customer’s business schedule.

 

Image source page: http://www.featurepics.com/online/Cleaning-Equipment-495422.aspx

 

Image source page: http://kent-washington.olx.com/kent-office-cleaning-kent-wa-office-cleaning-services-kent-janitorial-service-iid-84226366

Reference source:  http://www.areal.ca/   that exploring from the Internet. This Company provide janitorial and cleaning services and building maintenance service in a large scale businesses.  Their services not limited to the private general office, but also industrial, retail, hospitality and resources sectors.    Because of their existing 20 years experiences in difference provinces, they have ultimate resources and information of any cleaning products, cleaning techniques and cleaning equipment.  Also they have advantage to purchase these materials in bulk with less costing.   They can absolutely afford the advertisement costs than it does the small company, especially to develop and maintain the company web page in good shape.    Well, because of this large scale of business, they might have their management and miscommunication problem. Interpersonal communication passes through more channels and becomes subject to interpretation by many more people.  If the problem of miscommunication and uncertain responsibility become serious enough, diseconomies of scale would occur.