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.

Law of Diminishing Returns

In economics, the law of diminishing returns states that in all productive processes, adding more of one factor of production, while holding all others constant will at some point yield lower per-unit returns.

The article of The Diminishing Returns to Tobacco Legislation which published in The Laissez Faire City Times, March 19, 2001.  It illustrates the phenomenon of diminishing returns to government intervention.

It seems that tobacco is the single greatest cause of preventable death globally.  Government tries and put on every effort to presume effects of tobacco related disease.  They tried to force manufacturers to print the health warnings on tobacco packaging for at least 10 years.  Also tried to increase the cigarette taxation and hope to reduce the consumption of cigarette.  Unfortunately, too much information kills information, especially for the smoking addict.

No doubt that it is really difficult for the smoking addict to stop smoking right away.  Someone cannot just change their habit and their demand.   In my own opinions, provide more effort on health education or free programs start from the youth and teenagers. Try to educate and encourage the youth and teenagers to build up and exercise their own gut.  Also, government has to educate the general public how benefits gain from the healthy life instead of ironic harmful warnings of smoking.

Tobacco is one of the commodities with inelastic demand. For the product of inelastic demand, government could raise their tax revenues by simply raising the tax rate.  A higher tax rate shifts the supply decrease, the price goes up much more than the quantity traded goes down.  Originally, government increase tax rate on tobacco to increase revenue and wish to decrease the supply.  Unfortunately, this has serious consequences lead to develop of a black market for tobacco.   Per the article, the problem of smuggle cigarette is apparently growing.   In this situation, government has to find out another way to stop this black market spread out.

Income and Cross Elasticity

Tourism Industry in Canada

In the latest data from Statistics Canada shows signs of promise that year 2012 might be a year of growth in international tourism arrivals in Canada. Not only the monthly figures promising, but January to April figures continues to hold strong. Between January and April, 2012, visits to Canada from countries other than the U.S. were 7.5% higher than in the same period in 2011. Arrivals from the U.S., meanwhile, were 4.7% higher than in the same period a year earlier. Overall, year-to-date visitation is at 3,277,000, approximately 5.4% higher than the 3,100,000 visitors welcomed here over the same period in 2011.

Source: http://tiac.travel/

Source: http://en-corporate.canada.travel/

Source: www.canadabusiness.ca/eng/guide/2026

Air travel looks like an example of income elastic product. According to the data from the sources, we can assume that if the household’s income rises, almost all of that additional income would be spent on the luxuries that previously could not be purchased. Luxury items usually have higher income elasticity because when people have a higher income, they don't have to forfeit as much to buy these luxury items.This is a reflection of the fact that most people consider such services as travel.  

Elasticity and Revenue

“Due to an increase in operating costs, Tim Hortons restaurants has changed the pricing on select baked goods and lunch items this week,” a spokeswoman for the company said Friday. The coffee and doughnut chain says the price of a muffin is five cents higher, while sandwiches have gone up by about 10 cents. The price of coffee has not changed.

This is the Canadian Press Published Friday, Aug. 03 2012. Check the link below for your interest:
http://www.theglobeandmail.com/news/national/tim-hortons-raises-price-of-muffins-sandwiches-citing-higher-operating-costs/article4462085/
Elasticity of demand is of particular interest to businesses that need to determine how a price change will affect their total sales revenue. Total revenue test is a method of estimating the price elasticity of demand by observing the change in total revenue that results from a price change (when all other factors are constant).

If price cut increase total revenue, demand is elastic.

If price cut decrease total revenue, demand is inelastic.

If price cut leaves total revenue unchanged, demand is unit elastic.

Graph 1, at the top half of demand curve, the demand is elastic. Graph 2 shows that as the price of muffin falls from $30 to $15, quantity demand increase from $0 to $$25, demand is elastic, total revenue increases.

At the midpoint, at a price of $15, demand is unitary and graph 2 shows total revenue is at its maximum.

As a prices are reduced below $15, graph 1 shows that demand is inelastic and graph 2 show that the total revenue fall.

  *** Those figures are fictional. This is an example to show the relationship between elasticity and total revenue.