Question

What market structure does aerie operate in? Why? Analyze the characteristics of this market. What does economic theory tell you about the role of advertising in this market? What can you say about economic profits for this firm in the short run as well as the long run? Does data support economic theory? How can this profit stream change over time?

Answer 1

Aerie operates in monopolisitic type of market structure because there are many retailers of the product in the market selling differentiated product in the market. The characteristics of monopolistic type of market structure are as follows:

1. There are large number of firms in the industry.

2. The product sold by these firms is differentiated.

3. The firms have some control over the price of the product.

4. Freedom of entry and exit of firms is there.

5. Non price competition in the form of advertising is important.

Expenditure on advertising and selling cost is an important feature of this form of market structure. This is because in order to increase their sales and show the differentiated features of their product which distinguishes the firm from other firms in the market, advertising of the product is important.

In the short run, firms under monopolisitic competition can earn profits, howver, in the long run, due to freedom of entry and exit of firms from the industry, the firms only earn nornal profits. Yes, data supports this theory.Profits increase in short run while fall in the long run.