Question

Read the adapted article below from BBC News and answer the following questions.

FAST FASHION: ZARA PROMISES ALL ITS CLOTHES WILL BE SUSTAINABLE BY 2025

Zara - and other brands like Pull & Bear and Bershka - have promised to only sell sustainable clothes by 2025. The company that owns these shops says all cotton, linen and polyester they sell will be organic, sustainable or recycled. Zara has 64 UK stores, and its parent company has 7,490 shops worldwide.

From next year, containers will appear in Zara stores to collect your old clothes so they can be reused or recycled into new items. Some people in the fashion industry have been calling for more clothes recycling in order to protect the environment - while politicians think brands and shops should fund clothes recycling. People in the UK send 235 million items of clothing to landfill each year, according to the most recent figures.

Zara is one of the stores not to currently use plastic bags and Inditex, the company that owns the chain, says that by 2020 it will eliminate the use of plastic bags across all of its brands. Primark and Boots are among the big-name shops that have switched from plastic to paper bags. By 2023 Inditex promises it will have fully eliminated single use plastic in its stores.

Inditex also has a scheme called Join Life running in its shops, which identifies clothes which are made with more environmentally friendly materials than conventional high street stores. These are made from things like organic cotton and recycled polyester.

The boss of Inditex revealed the company's plans at its annual general meeting this week. "Sustainability is a never-ending task in which everyone here at Inditex is involved and in which we are successfully engaging all of our suppliers," said Pablo Isla, in front of shareholders and company executives.

Source: BBC (July 10, 2019). Fast fashion: Zara promises all its clothes will be sustainable by 2025. BBC News. Retrieved from https://www.bbc.com/news/newsbeat-49022453

a. Identify the market structure for clothing stores, like Zara. Justify the reasons for such

a structure to exist.

[5 marks]

b. Do firms within similar market structure as in (a) have a supply curve and market

power? Comment.

[4 marks]

c. Distinguish the demand elasticity between firms, like Zara, and firms that belong to the

other market structures. Provide justification for each structure.

[8 marks]

d. Discuss specifically on the efficiency of the market structure in (a) (a diagram is not

needed here).

[6 marks]

  

e. Determine with justification the type of long run profit made by similar firms in the

market structure in (a). When will these firms cease production in the long run?

[7 marks]

Answer 1

a.)

The market structure to which ZARA belongs is Monopolistic Competition. This market exists because of the following reasons -

• There are many companies selling clothes, and hence the firm has many competitors
• Despite this, the company has a brand value which will differentiate the product from that of its competitors
• Because of the brand value, ZARA will be able to gain some profits, but will not as much as a monopolist would

b.)

Yes, there is market power to some extent, which is borne out of the brand name and the cutomer loyalty.

c.)

Other market structures and the demand curves faced by each firm in the market are as follows -

• Monopolistic Competition - Zara - Elastic demand because there are other similar brands in the market
• Monopoly - Inelastic demand because there is no other substitute firm in the market
• Perfect Competition - Perfectly elastic demand as there are so many substitute firms in the market
• Oligopoly - They facea kinked demand curve with different elasticity: higher elasticity at higher prices and lower leasticity at lower prices

d.)

In monopolistic competition, both productive and allocative efficiency are not obtained. Productive efficiency can only be obtained when the price is equal to the marginal cost of production of the commodity, which is not the case in monopolistic competition. Because of the brand value that firms enjoy, they can gain profits by pricing the clothes more than their actual cost. Similarly, allocative efficiency can only be obtained when the good is priced at the level that maximises social welfare, which will be the point where its price is equal to its marginal cost. Hence, efficiency is not obtained in monopolistic competition.

e.)

A monopolistic competitive market makes profits in the short run because of the heterogenity in its products, but in the long run it only breaks even. This is because these firms in the long run experience reducing demand and increasing costs, until the firms break even at the point where the cost is exactly equal to the revenue, where there is zero economic profit.