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Starbucks: Growth through Product Differentiation

Starbucks: Growth through Product Differentiation. LEARNING Objectives. The coffeehouse market is monopolistically competitive rather than perfectly competitive. Monopolistic Competition: The Competitive Model in a More Realistic Setting.

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Starbucks: Growth through Product Differentiation

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  1. Starbucks: Growth through Product Differentiation LEARNING Objectives The coffeehouse market is monopolistically competitive rather than perfectly competitive.

  2. Monopolistic Competition: The Competitive Modelin a More Realistic Setting Monopolistic competitionA market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products. Oligopoly A market structure in which a small number of interdependent firms compete.

  3. Learning Objective 10.1 Demand and Marginal Revenue for a Firmin a Monopolistically Competitive Market The Demand Curve for a Monopolistically Competitive Firm Figure 10-1 The Downward-Sloping Demand for Caffè Lattes at a Starbucks

  4. Learning Objective 10.1 Demand and Marginal Revenue for a Firmin a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve Table 10-1 Demand and Marginal Revenue at a Starbucks

  5. Learning Objective 10.1 Demand and Marginal Revenue for a Firmin a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve Figure 10-2 How a Price Cut Affects a Firm’s Revenue

  6. Learning Objective 10.1 Demand and Marginal Revenue for a Firmin a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve Figure 10-3 The Demand and Marginal Revenue Curves for a Monopolistically Competitive Firm

  7. Learning Objective 10.2 How a Monopolistically CompetitiveFirm Maximizes Profits in the Short Run FIGURE 10-4 Maximizing Profit in aMonopolistically Competitive Market

  8. Learning Objective 10.3 What Happens to Profits in the Long Run? How Does the Entry of New Firms Affect the Profits of Existing Firms? Figure 10-5 How Entry of New Firms Eliminates Profits Don’t Let This Happen to YOU!Don’t Confuse Zero Economic Profit with Zero Accounting Profit

  9. Learning Objective 10.3 MakingtheConnection • The Rise and Fall of Apple’s Macintosh Computer Macintosh lost its differentiation, but still has a loyal— if relatively small—following.

  10. Learning Objective 10.3 10-3 Solved Problem The Short Run and the Long Run for the Macintosh

  11. Learning Objective 10.3 What Happens to Profits in the Long Run? Is Zero Economic Profit Inevitable in the Long Run? A firm’s profits will be eliminated in the long run onlyif a firmstands still and fails to find new ways of differentiating its product or fails to find new ways of lowering the cost of producing its product.

  12. Learning Objective 10.3 MakingtheConnection • Staying One Step Ahead of the Competition: Eugène Schueller and L’Oréal Unlike many monopolistically competitive firms, L’Oréal has earned economic profits for a very long time.

  13. Learning Objective 10.4 Comparing Perfect Competition and Monopolistic Competition Monopolistic competition and perfect competition share the characteristic that in long-run equilibrium, firms earn zero economic profits. However, there are two important differences between long-run equilibrium in the two markets: • Monopolistically competitive firms charge a price greater than marginal cost. • Monopolistically competitive firms do not produce at minimum average total cost.

  14. Learning Objective 10.4 Comparing Perfect Competition and Monopolistic Competition Excess Capacity under Monopolistic Competition Figure 10-6 Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition

  15. Learning Objective 10.4 Comparing Perfect Competition and Monopolistic Competition Is Monopolistic Competition Inefficient? Economists have debated whether monopolistically competitive markets being neither productively nor allocatively efficient results in a significant loss of well-being to society in these markets compared with perfectly competitive markets. How Consumers Benefit from Monopolistic Competition Consumers benefit from being able to purchase a product that is differentiated and more closely suited to their tastes.

  16. Learning Objective 10.4 MakingtheConnection • Abercrombie & Fitch: Can the Product Be Too Differentiated? Did Abercrombie and Fitch narrow its target market too much?

  17. Learning Objective 10.5 Oligopoly and Barriers to Entry Table 10-2 Examples of Oligopolies in Retail Trade and Manufacturing

  18. Learning Objective 10.5 Oligopoly and Barriers to Entry Barriers to Entry Barrier to entry Anything that keeps new firms from entering an industry in which firms are earning economic profits. Economies of Scale Economies of scale The situation when a firm’s long-run average costs fall as it increases output.

  19. Learning Objective 10.5 Oligopoly and Barriers to Entry Barriers to Entry Economies of Scale Figure 10-7 Economies of Scale Help Determine the Extent of Competition in an Industry

  20. Learning Objective 10.5 Oligopoly and Barriers to Entry Barriers to Entry Ownership of a Key Input If production of a good requires a particular input, then control of that input can be a barrier to entry. Government-Imposed Barriers Patent The exclusive right to a product for a period of 20 years from the date the product is invented.

  21. Learning Objective 10.6 Using Game Theory to Analyze Oligopoly Game theory The study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of each firm depend on its interactions with other firms.

  22. Learning Objective 10.6 Using Game Theory to Analyze Oligopoly All games share three key characteristics: 1 Rules that determine what actions are allowable 2 Strategies that players employ to attain their objectives in the game 3 Payoffs that are the results of the interaction among the players’ strategies Business strategy Actions taken by a firm to achieve a goal, such as maximizing profits.

  23. Learning Objective 10.6 Using Game Theory to Analyze Oligopoly A Duopoly Game: Price Competition between Two Firms Figure 10-8 A Duopoly Game

  24. Learning Objective 10.6 Using Game Theory to Analyze Oligopoly A Duopoly Game: Price Competition between Two Firms Payoff matrix A table that shows the payoffs that each firm earns from every combination of strategies by the firms. Collusion An agreement among firms to charge the same price or otherwise not to compete. Dominant strategy A strategy that is the best for a firm, no matter what strategies other firms use. Nash equilibrium A situation in which each firm chooses the best strategy, given the strategies chosen by other firms.

  25. Learning Objective 10.6 MakingtheConnection • A Beautiful Mind: Game Theory Goes to the Movies In the film A Beautiful Mind, Russell Crowe played John Nash, winner of the Nobel Prize in Economics.

  26. Learning Objective 10.6 Using Game Theory to Analyze Oligopoly Firm Behavior and the Prisoners’ Dilemma Cooperative equilibrium An equilibrium in a game in which players cooperate to increase their mutual payoff. Noncooperative equilibrium An equilibrium in a game in which players do not cooperate but pursue their own self-interest. Prisoners’ dilemma A game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off.

  27. Learning Objective 10.6 10-6 Solved Problem Is Advertising a Prisoners’ Dilemma for Coca-Cola and Pepsi?

  28. Learning Objective 10.6 Using Game Theory to Analyze Oligopoly Can Firms Escape the Prisoners’ Dilemma? Figure 10-9 Changing the Payoff Matrix in a Repeated Game

  29. Learning Objective 10.6 Using Game Theory to Analyze Oligopoly Can Firms Escape the Prisoners’ Dilemma? Price leadership A form of implicit collusion where one firm in an oligopoly announces a price change, which is matched by the other firms in the industry.

  30. Learning Objective 10.6 Using Game Theory to Analyze Oligopoly Cartels: The Case of OPEC Cartel A group of firms that collude by agreeing to restrict output to increase prices and profits. Figure 10-10 World Oil Prices, 1972–2006

  31. Learning Objective 10.6 Using Game Theory to Analyze Oligopoly Cartels: The Case of OPEC Figure 10-11 The OPEC Cartel with Unequal Members

  32. Can Dunkin’ Donuts Really Compete with Starbucks? LOOK An Inside Brewing Battle: Dunkin’ Donuts Tries to Go Upscale, but Not too Far

  33. K e y T e r m s Monopolistic competition Nash equilibrium Noncooperative equilibrium Oligopoly Patent Payoff matrix Price leadership Prisoners’ dilemma Barrier to entryBusiness strategy Cartel Collusion Cooperative equilibrium Dominant strategy Economies of scale Game Theory

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