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 takers2. 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.
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)
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