Question

An economist might say that starbucks is perfectly competing in a monopolistically competitive market structure. because you just need an espreso maker and some beans, market entry is easy. but to be successful, you need something unique- the monopolistic part. starbucks, through its beans, its barista training and its store design competed successfully. also, facingf monopolistic competition in large cities like NY and Chicago, they needed a store on every block. in light of this

a. apply your understanding and concepts from microeconomic, to investigate and summarize the major characteristics of the coffee industry.

b. describe and analyze the pricing policies that you would expect to find in this industry

Answer 1

Answer

a) True, coffee industry has all the characterisitics of a monopolistically competitive market.

The coffee market can be seen as Monopolistic because the market has the ability to differentiate products, allow firms to make independent production decisions, and enable new companies to easily enter the market during economic down turns. Ease of entry and exit to the coffee market are possible due to the extremely low costs of opening your own coffee house or place of business. On average, it only costs from $20,000 for a cart to $375,000 for a full sit down restaurant. With this small of an initial investment, small firms can easily enter. Firms can also easily exit once all economic profits are gone.

b) Pricing policies in the coffee industry

In the coffee industry, there is freedom of entry, but firms have a degree of market power (inelastic demand curve) because of product differentiation. Therefore, firms in monopolistic competition have a motive to try and improve their product differentiation and brand image.

Thus, firms in the coffee industry are seeking to attract custom through the methods of non-price competition. This includes a unique selling point (the best coffee), securing the best location and/or offering internet delivery.

For certain products, premium products are priced at a level (compared to "regular" or "economy" products) that is well beyond their marginal cost of production. For example, a coffee chain may price regular coffee at $1, but "premium" coffee at $2.50 (where the respective costs of production may be $0.90 and $1.25).