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Monopolistic Competition: Coffee Industry

Microeconomics project

Lotte Muller

on 28 September 2012

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Transcript of Monopolistic Competition: Coffee Industry

Monopolistic Competition
the Coffee Industry What is monopolistic competition? A market in which many firms produce similar good or services but each mantains some independent control of its own price. The characteristics are...
Low concentration of market share
Market power
Independent production decisions
Product differentiation
Low barriers to entry/exit
Brand loyalty
Short-term economic profits
No long-term economic profits many small, relatively differentiated or Branded firms! which lead to By Shea & Lotte An example of a Monopolistically competitive market is the Coffee Industry There are MANY FIRMS that have market share within the coffee industry, making a LOW CONCENTRATION of market share. The press reported that Folger's was the largest selling coffee brand in the nation. With $419.0 million sales, Folger's holds 21.6% of the market share. Maxwell House was the second largest selling brand with $283.7 million in sales and 14.62% of the market share. In third was Starbucks with $189.2 million in sales and only 9.75% of the market share. Folger's Coffeehouse and Maxwell House Master Blend are gourmet spin-offs of Folger's and Maxwell House and together the two only have 10.58% of the market share. All the other producers of coffee have less than 2.3% of the market share. 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. Ease of Entry and Exit 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. Even during the recession, coffee sales have remained the same, even though the market has shifted towards at-home brewing over cafes and coffee houses. Monopolistic competition shown Graphically THE END Short Run Profit: Coffee Industry Long Run Profit: Coffee Industry Non-Price Competition Each firm has some market power It means that the individual companies can charge the price of their products and only lose a limited amount of consumers (brand loyalty). The Downwards sloping demand curve allows this to happen with monopolistic competition For Example: Coffee Industry in Australia
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