Perfect Competition and Monopolistic Competition - Starbucks and Coca-Cola - Assignment Example

Society operates under a global economic system that must be studied in order to achieve business success. Companies can operate under four differentmarket structures. Depending on the market structure on which a company is position they adjust their business strategies based on the characteristic of the economic model. The four types of market structures are oligopoly, monopoly, perfect competition, and monopolistic competition. This paper studies two scenario dealing with two firms operation in a perfect competition and monopolistic competition respectively. In the perfect competition case the focus of the discussion is break-even profits in the long run. In the perfect competition scenario the emphasis of the analysis is on product differentiation strategy. In our first case we have small firm operating in a very competitive environment. The type of environment this company is dealing with can be categorized in economic terms as a perfect competition market structure. Perfect competition is an economic market structure that has many sellers and buyers participating where the firms sell identical products which allows for customers to substitute goods or services with ease (Investopedia, 2009). In this market structure the barriers of entry as low. The low barriers of entry create easy access for suitors to participate in the marketplace. Due to the intense competition companies often leave the marketplace. The fact that products are similar in nature allows for many substitute products to appear. A good example of businesses that participate in perfect competition is the agricultural industry players. In perfect competition the formula to determine profits is price equals marginal costs equals marginal revenues (P=MC=MR). A qualitative interpretation of this formula is that there are cero economic profits achieved in the long run. Since the sellers realize the existence of the zero profit phenomenon merchants are not worried as much about unitary profits in the short run, they instead concentrate on accumulating profits over the long survival. Survival for companies operation under perfect competition is the sign of success. Appendix A shows a graphical illustration of profit behavior under perfect competition. Case b in the graph illustrates the zero profit long run scenario. Appendix B provides more details about the equilibrium that creates a break even profit. Understanding the true reasons why there is not profit in this market structure in the long run is not really that complicated. The profits and losses in the short run occurred due to the fact that in this timeframe at least one of the production resources cannot be changed, while in the long run all quantities of resources can be changed. This characteristic creates for the market structure an exit and entry long run phenomena. When there are high profits in the market new companies enters which dilutes the profits. When prices are low companies fade away from the market which opens up profits for the remaining participants. The exit entry long run phenomena ultimately ends up evening things out which in turn leads to a zero profit achievement in the long run for the market participants. The second scenario involves a company seeking to utilize product differentiation in order to achieve a competitive advantage. The company seeking such a strategy operates under a monopolistic competition market structure. A monopolistic competition market structure has many buyers and sellers, low barriers on entry in the long run, different dimensions and differentiated products. Consider Pizza Hut and Taco Bell. Both companies operate in the fast food industry, but their food menus are completely different. Product differentiation and a proper application of dimensional aspects are the keys that can allow this company to succeed and increase its profits. Product differentiation can create a good or service that in the customer’s mind has more value than a similar competition product. Imagine two companies that sell mp3 devices. Both have similar price structure. One company decides to implement a new service of offering its customer 10 downloads of music from a variety of thousands of songs from of charge for a one year period. This extra package can differentiate one company’s product from the other due to the all inclusive purchase package. The innovative company achieved differentiation based on offering added services to the product. A company in the retail food industry that created a concept to differentiate itself from its direct competitors is Starbucks Café. There are thousands of other coffee houses around the world, but Starbucks Café became the market leader by implement several strategies that made their stores and product’s a unique experience. One of the foundations of Starbucks differentiating strategy is its Fair Trade Coffee (FTC) raw material selection. Fair Trade Coffee is high quality coffee produced in developing countries where the supplies and distributors become allies to ensure the workers proper compensation while the farmers received benefits such as technology transfer and a guaranteed price per pound of $1.26 a pound which is almost twice the going rate for a pound of coffee in the global marketplace (Globalexchange, 2008). Starbucks Café is utilizing the production function to achieve product differentiation. Another ways that a company can achieve product differentiation is by utilizing marketing efforts in order to build a brand image that differentiates one firm from another. In the soda beverage business Coca-Cola has built brand image with over a 100 years of experience in the business that differentiates their soda from any other soda beverage. Due to this differentiation strategy Coca-Cola was able to generate $31.94 billion in revenues globally in 2008 (Thecoca-colacompany, 2009). A company that is able to differentiate its products from the competition creates a uniqueness that intrigues consumer and increases customer retention. Also in many instances the ability differentiate form a branding value that enables companies to charge a premium price for their product and service offerings. In the 21st century due to vast amount of competition the ability to implement a differentiation strategy is imperative in order to be able to compete and achieve greater profits than other participants in the marketplace. References Colander, D. (2004). Economics (5th ed.). The McGraw-Hill Companies. Globalexchange.org (2007). Fair Trade Coffee. Available from < http://www.globalexchange.org/campaigns/fairtrade/coffee/> [Accessed 8 March 2009]. Investopedia.com. (2009). Economic Basics: Monopolies, Oligopolies and Perfect Competition. Available from < http://www.investopedia.com/university/economics/economics6.asp> [Accessed 8 March 2009]. Thecoca-colacompany.com (2009). Financial Overview. Available from < http://www.thecoca-colacompany.com/ourcompany/ar/financialoverview.html> [Accessed 9 March 2009]. Riohondo.edu. Perfect Competition Long Run: Chapter 10-2. Available from http://74.125.47.132/search?q=cache:BLwIfSNDs2IJ:faculty.riohondo.edu/mjavanmard/Booyes%2520Micro/10-2PerfeLong.ppt+Long-run+economci+profits+in+Perfect+Competition&hl=en&ct=clnk&cd=5&gl=us> [Accessed 8 March 2009]. Appendix A: Gain, Loss, and Cero Profit Under Perfect Competition (Colander, 2004, p.251). Appendix B: Long run equilibrium under perfect competition (Colander, 2004, p.256). Read More