Monopolistic Competition: Hennes and Mauritz - Case Study Example

Monopolistic competition: Hennes and Mauritz Introduction Monopolistic competition refers to an imperfect market condition wherethere are several sellers/producers dominating the market, but none of these firms have control over the prices in the market1.The firms operating under the monopolistic competition market condition sells products that are alike, but not perfect substitutes. In this respect, it is concepts such as branding that enables the firms to differentiate their products from those of their competitors2. The firms operating under the monopolistic market condition can operate as monopolies in the short-run, through applying the market power to generate supernormal profits, since the firms operating under this market conditions are not prone to the high level of competition characterized by perfect market conditions. Therefore, they are able to charge relatively higher prices3. On the other hand, the consumers are made to perceive the monopolistic competition market as having no price differences, considering that the firms do not compete on the basis of the prices of the products offered, but on the basis of differentiating their products through branding. The monopolistic competition is characterized by relatively high barriers to entry, which hinders the entry of other firms into the market already curved by the monopolistic firms. This way, the monopolistic competition firms are able to sustain high price charging in the short-run4. However, this condition is reversed in the long run, where the monopolistic competition tendencies are inclined towards those of a perfect market5. This is because, in the long run, many firms will have managed to join the monopolistic competition market, increasing the level of competition, and thus making the prices charged for the products offered in the market decrease. Hennes & Mauritz (H&M) is a clothing fashion company that was established in Sweden in 1947, but the company has grown and expanded over the years to open branches in 28 different countries6. Initially, the company started as a women fashion clothing company selling only women clothes, but it eventually diversified to incorporate both men’s and children’s clothing. Initially started under the company name Hennes, the company rebranded itself after adopting the new line of clothing for men and children in 1968, to take up its current name7. The company is currently running over 1400 stores globally. Discussion Hennes & Mauritz (H&M) is an example of a firm operating under the monopolistic competition, considering that it operates in the fashion clothing industry, where there are few but dominant firms that are responsible for supplying fashion clothing globally. In this respect, Hennes & Mauritz competes against the other major clothing fashion firms through branding its clothing product under the brand name, H&M8. It is through branding that this firm has been able to compete effectively in the monopolistic competition condition under which it operates, since it does not have to compete in terms of prices with the other major fashion clothing firms. Thus, despite the fact that Hennes & Mauritz sells clothing that are highly substitutable products, the differentiation of the branding is the key aspect of the firm retaining its market share globally9. The pricing strategies applied by Hennes & Mauritz are characteristic of the monopolistic competition market condition. Hennes & Mauritz prices its products relatively higher to the prices of the other clothing products that are being offered in the clothing industry perfect market, riding on its differentiated brands10. Consequently, Hennes & Mauritz is able to achieve high profitability compared to the firms operating under the perfect market condition. This is because; the pricing strategy of Hennes & Mauritz ensures that the firm is still able to retain its market share and customer base, even when it prices its products relatively higher than those of the perfect market. Customer loyalty is the basis of Hennes & Mauritz managing to set its prices higher than the prices of the products in the perfect market, because the customers identify with its products and thus they are ready to pay the relatively high prices, due to the dominant nature of the Hennes & Mauritz firm in the fashion clothing industry11. Therefore, premium pricing serves as a major pricing strategy that is applied by Hennes & Mauritz. Premium pricing is a pricing strategy that entails the firm setting the price for its products relatively higher than the prices of similar products in the perfect market12. Under this strategy, the firm involved in premium pricing rides on the differentiation of its products, so that the customers can perceive such products to be superior, compared to those offered under the normal perfect market condition. Therefore, premium pricing is the major pricing strategy applied under monopolistic competition market condition, which entails the firms sustaining a relatively higher price for their products to the prices offered in the perfect market condition, through branding as the main differentiation strategy13. In the short run, Hennes & Mauritz is able to reap higher profitability for the new products it has introduced into the market. This is because; such products are introduced at a relatively high price to attract the attention of the customers by portraying the newly introduced products as superior14. This perception, coupled with the high reputation that Hennes & Mauritz has managed to establish for itself over the years, makes the customers still go for the products, despite the relatively higher price. Thus, the monopolistic equilibrium of the demand and supply of the Hennes & Mauritz newly introduced products is sustained at the level where the marginal revenue (MR) is equal to the marginal cost (MC). In this respect, Hennes & Mauritz is able to reap higher profitability, because the firm is able to collect profits based on the prices set at the average revenue curve15. Hennes & Mauritz short-run Monopolistic competition equilibrium [Source: (Wu & Lupeng, 2009)] Therefore, the difference existing between the average revenue (AR) and the average cost (AC), as presented under the shaded section in the figure above, represents the high price that Hennes & Mauritz is able to charge over the normal market price that is charged under the perfect clothing industry market. When this price difference is multiplied by the quantity of the clothing products sold, it gives the overall supernormal profit that is earned by the firm16. The ability of Hennes & Mauritz to reap supernormal profits from the new products introduced into the market emanates from the good branding reputation that the firm has build for itself, which enhances customer loyalty. In addition, the premium pricing strategy presents its products as superior in the market, making the customers prefer them for fashion status, thus enabling Hennes & Mauritz to reap supernormal profits in the short-run17. In the long-run, the Hennes & Mauritz earns normal profits. This is because; the level of competition in the market for similar products that the firm offers is high, due to the introduction of similar product category by competitors18. Further, considering that such products have been in the market for a while, the customer has ceased to have a preference for such products. This means that Hennes & Mauritz has to compete using a different strategy other than the premium pricing strategy. Thus, in the long run, the prices of the goods offered in the monopolistic competition market condition will have reduced19. Even in the long-run, Hennes & Mauritz is still producing the fashion clothing products at the level where marginal revenue (MR) is equal to marginal cost (MC)20. Nevertheless, at this point, the demand for the products that the firm has offered in the market has now decreased, thus shifting the demand curve to the left, while the average revenue curve also shifts to the left, due to the reduction in the prices of the products21. Hennes & Mauritz long-run Monopolistic competition equilibrium [Source: (Wu & Lupeng, 2009)] The change in both the price and the demand of the Hennes & Mauritz clothing fashion products in the long-run occurs because, the increased competition brought about by the new entrants into the monopolistic competition market for the clothing fashion products will have reduced the prices22. The demand for the Hennes & Mauritz products that have been on the market for a while will also reduce because the customers are seeking for new fashion products. Therefore, in the long-run, Hennes & Mauritz will charge prices that are similar to those of the clothing fashion products in the perfect market condition23. This way, in the long-run, Hennes & Mauritz will just earn normal profits. Conclusion Monopolistic competition refers to a market condition where there are several sellers/producers dominating the market, but none of them has control of the prices in the market. Hennes & Mauritz is a fashion clothing firm that was established in Sweden in 1947, and it has expanded and grown over the years to venture into 28 different countries, with over 1400 stores spread throughout those countries. The firm operates under conditions of monopolistic market condition. This way, it is able to earn supernormal profits in the short-run due to charging relatively higher pieces for the newly introduced products. However, in the long-run, Hennes & Mauritz just earns normal profits, due to the high competition caused by the new entrants, and the reduced demand for the existing products, caused by the need for new fashion products by the customers. Bibliography 1. Frank, R. H. Microeconomics and Behavior (McGraw-Hill, 2008). 2. Depken, C. Microeconomics Demystified (McGraw Hill, 2005). 3. Guy, A. (1978). Beyond Monopoly Capitalism and Monopoly Socialism (Cambridge, Massachusetts: Schenkman Publication). 4. Icon Group International. H and M Hennes and Mauritz Ab: International Competitive Benchmarks and Financial Gap Analysis. (Icon Group International, Incorporated, 2000) 5. Wu, J. & Lupeng, Y. Factors of Branding: A Case Study of Hennes & Mauritz AB in China. (Gävle: University of Gävle. Department of Technology and Built Environment, 2009). 6. Beach, C. B. Monopoly (Chicago: F. E. Compton and Co, 1914). 7. Pindyck, R. & Rubinfeld, D. Microeconomics (Prentice-Hall, 2001). Read More