Starbucks And Dunkin Donuts Monopolistic Competition

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Charlotte Ruhl Principles Of Microeconomics Final Paper Prof. Enrico Marvas November 30, 2015 Monopolistic Competition: When Quality Matters Monopolistic competitions are imperfect competitions referring to those market structures that fall between perfect competition, being a description of a type of market structure that is at its greatest possible level to function and pure monopoly, a type of market structure that faces no competition due to having a sole seller of a good with no close subistitutes. To investigate the market of the beverage industry we find multiple firms that produce a single beverage with slight differentations, such as coffee. Examples of these companies are Starbucks and Dunkin Donuts. How do Starbucks and Dunkin…show more content…
There is no excess capacity in perfect competition in the long run, only in monopolistic competition. Free entry results in competitive firms produce at the point where average total cost is minimized which is the efficient scale of the firm. Concerning monopolistic competition, output is less than the efficient scale of perfect competition. For a competitive firm, price equals marginal cost. Where as for a monopolistically competitive firm, price exceeds marginal cost. This mark up is due to price exceeding marginal cost, an extra unit sold at the posted price meaning more profit for the monopolistically competitive firm (Mankiw). Further, monopolistic competitions also have an effect on the welfare of society, due to the market not having all the desirable properties of a perfect competition. Since there is the normal deadweight loss of monopoly pricing in monopolistic competition caused by the mark up of price over marginal cost. However, the administrative burden of regulating the pricing of all firms that produce differentiated products would be…show more content…
Advertising on the other hand, also provides information to consumers, increases competition by offering a greater variety of products and prices. The method of advertising also effects the willingness of a firm to spend the money on the specific marketing method, because it can be used as a signal to consumers about the quality of the product being offered, giving the company a reputation (Dixit). Moreover, branding, along with brand names can also have an effect on monopolistic competitions. The usage of brand names can cause consumers to perceive differences that do not really exist. However, they are also very useful in providing a way for consumers to ensure that the specific good they are buying is one of high quality. This is done by providing information about the quality and giving firms incentive to maintain high quality. Competitive advantage can be done by gaining power over one another that can be distinctive and defensible. Firms can hold price below average cost for a period of time and force out other competitors or even prevent new firms from entering the market due to this strategy of gaining more costumers. Companies can also use aggressive marketing techniques or hit and run tactics of taking profits and then exiting the

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