Business Economics Monopolistic Competition

Question: Discuss about the Business Economics for Monopolistic Competition. Answer: Introduction The market may be defined as a place where there is presence of buyers and sellers with regards to either a particular product or multiple products and interact with each other for purposes of exchange. The internal dynamics and the distribution of market power across various participants is different depending upon the underlying product and the demand and supply force associated with the product. The various options in this regards are oligopoly, monopoly, perfect competition, monopolistic competition etc. (Krugman Wells, 2013). The focus of this particular essay is towards monopolistic competition. It may be defined as a market structure which has elements of both perfect competition and monopoly. This market structure is characterized by the presence of a host of suppliers or sellers which tend to sell products that are differentiated in nature. The firms do not have complete power on the prices but do have reasonable power to impact the same (Nicholson Snyder, 2011). Coffee industry in Australia is an apt example of a monopolistic competition. There is an increase in the consumption of coffee and the players in the industry are driven by the intent to earn maximum profits, As a result, the essay aims the highlight how monopolistic competition I visible in the case of Australian coffee industry. Australian Coffee Industry - Monopolistic Competition There is a continuous uptrend in the consumption of coffee which is apparent from the supporting statistics and a double digit growth with regards to consumption that are provided below (IBIS, 2016). The corresponding graph capturing the above trend is shown below. There are a number of brands that are marketing coffee in which the prominent ones are Nestle and Vittoria. However, the brand having the largest market share in the coffee market is Nestle which boasts of product quality and nutritive value (Campbell Compagnoni, 2016). The company engages in aggressive promotion so as to differentiate its product from competitors and also enable enhancement of brand visibility and brand value. As a result of this, many popular cafes based in Australia (example Circa and Coffee with James) tend to source coffee from Nestle only (Nestle, 2016). The prime offering of Nestle is Nescafe which tends to be available in a plethora of variants so as to match with the specific requirements of different consumers. Another company which acts as a competitor to Nestle and is a prominent player in the Australia coffee market is Vittoria Food and Beverage. The company tends to differentiate its product on the basis of unique taste and a strong brand which has had presence in Australian markets for more than 50 years. The companys daily estimated volume sales to supermarkets alone are 1.3 million cups. The company has a host of brands namely Delta, Aurora besides Vittoria under which the products are sold (Vittoria, 2016). From the above discussion on the two major players in the Australian coffee industry, it is apparent that the underlying market dynamics resemble that of monopolistic competition. This is evident from the fact that even though both the above mentioned companies are selling the same product i.e. coffee but are differentiating these through product attributes and branding (Heffernan, 2015). This non-price based competition is in line with monopolistic competition market characteristics. Besides, in this industry, the entry and exit barriers are relatively low and hence the entry and exit of firms is relatively free and unhindered. Further, even though customers may taste all the available brands of coffee in the market but it is not possible to objectively ascertain the best coffee available and essentially this would be driven by the subjective preferences and evaluation of customer (Mankiw, 2014). Also, the demand curve corresponding to coffee industry is downward sloping as rising prices adversely impacts the demand or consumption of coffee. Further, the elasticity of demand is also relatively high as the consumer does have substitutes in form of different brands although some degree of brand loyalty cannot be denied. The sellers in a monopolistic competition market tend to focus on making the maximum profits which is also adhered to in the case of Australian coffee industry (Pindyck Rubinfeld, 2001). The optimum output level should be the point where the MR and MC are equal. Further, using the demand curve, the price may be modified. The pricing strategies of coffee players are driven by the intention to enhance their market share. However, in the short run the firms are able to make profits as long as the marginal revenue is greater than the average cost as shown in the graph below (Krugman Wells, 2013). It is apparent from the above graph that in order to maximize their respective profit, the sellers should ensure that price should be greater than the average cost. Since, in the short run, the sellers are able to make profit, thus over a period of time more suppliers would enter the market due to low entry barriers. This would tend to lower the price of coffee to such a lower where the company would not earn any economic profit as indicated in the graph below (Nicholson Snyder, 2011). Thus, the central concern of the suppliers in the monopolistic competition market is to gain high market share through differentiation, This lowers the overall average cost and also provides greater market power with regards to price and thus it helps in achievement of profit maximizing goal (Mankiw, 2014). The attempts for this are also visible in the Australian coffee industry (Heffernan, 2015). Conclusion On the basis of the above, it may be concluded that coffee industry is booming in Australia and is an apt example of monopolistically competition market. The various features associated with such a market are closely followed by the Australian coffee industry. The players present tend to be motivated by the desire to earn maximum profits and indulge in non-price based competition. Further, the entry and exit barriers are low for the industry which facilitates entry of new firms in the long term which exert a downward pressure on the profitability of the coffee industry. References Campbell, L Compagnoni, T 2016, Australians Love Coffee. We Have Proof, The Huffington Post, Available online from https://www.huffingtonpost.com.au/2015/08/25/australians-love-coffee-we-have-proof/ (Accessed on August 20, 2016) Heffernan, M 2015, Booming coffee market moves into consolidation phase, The Sydney Morning Herald, Available online from https://www.smh.com.au/business/retail/booming-coffee-market-moves-into-consolidation-phase-20150317-1m1g1p.html (Accessed on August 20, 2016) IBIS 2016, Cafes and Coffee Shops in Australia: Market Research Report, IBIS World, Available online from https://www.ibisworld.com.au/industry/default.aspx?indid=2015 (Accessed on August 20, 2016) Krugman, P Wells, G 2013, Microeconomics, 3rd eds. Worth Publishers, London Mankiw, G 2014, Microeconomics, 6th eds., Worth Publishers, London Nestle 2016, About Nestle, Nestle Website, Available online from https://www.nestle.com.au/aboutus (Accessed on August 20, 2016) Nicholson, W Snyder, C 2011, Fundamentals of Microeconomics, 11th eds., Cengage Learning, New York Pindyck, R Rubinfeld, D 2001, Microeconomics, 5th eds., Prentice-Hall Publications, London Vittoria 2016, Vittoria Food Beverage. Vittoria Website, Available online from https://vittoriafandb.com/coffee.asp (Accessed on August 20, 2016)