Analyzing the Monopolistic Competition of the Retail Industry Understanding the Terms Symbol = a code comprised of letters used as a unique identification of the stock 52 week High = the highest price reached during the last 52 weeks 52 week Low = the lowest price reached during the last 52 weeks Dividend = taxable payment declared by a company's board of directors & given to its shareholders out of the company's current / retained earnings Dividend Yield = yield a company pays its shareholders in the form of dividends; calculated by the amount of dividends paid per share over the course of the year divided by the stock price / E Ratio = (aka the price earnings ratio) most common measure of how pricey the stock is; equivalent to a stock's market capitalization divided by its post tax earnings over a year's period Defining the Market The retail industry is comprised of thousands of different brands and companies. However each is defined by its quality of make and materials used. Abercrombie & Fitch, Timberland, and Guess are all well-known and respected brand names. However if prices were to exceed what people are willing to pay, then the consumers would alter their preferences and buy from another brand.
Therefore we are dealing with a monopolistic competition. (Monopolistic competition: a common form of the industry structure characterized by a large number of firms, none of which can influence market price by virtue of size alone; some degree of market power is achieved by firms producing differentiated products. New firms can enter and established firms can exit with ease) I. "common form of the industry structure characterized by a large number of firms none of which can influence market price by virtue of size alone... New firms can enter and established firms can exit with ease".
Every year hundreds of new designers emerge into the retail industry. No matter what one's style of clothing, there are dozens of other brands to choose from should one company's price go beyond the household's expectation of price. Each company is on a careful balance of price and cannot exceed the other company's prices beyond what the consumer sees as reasonable. Moreover, firms can enter and exit easily because there are no tariffs and resources are plentiful.
This is the competitive side of monopolistic competition. II. .".. some degree of market power is achieved by firms producing differentiated products... ". However the retail firm is also monopolistic because of the added aspect that each company does have some degree of market power through their differentiation of products.
One way firms differentiate themselves is through the consumer and the way they fashion their products. The consumer determines the success / failure of a company. A major problem firms face is how to accommodate to the changing preferences of the consumer. Guess was at one point similar to Levi's, a brand of jeans limited to the department store.
However in 2002, Guess signed on Marciano, a prominent high-end European designer, and sales have boomed since. Now, Guess is a well-known, popular brand among teenagers and stocks have risen considerably within the last ten years. Another huge component of differentiation is the marketing industry. Lately the retail industry has been using celebrity endorsement as an effective way to increase sales. Paris Hilton is the spokeswoman for Guess while many black, male celebrities are seen sporting Timberlands.
Timberland and Guess also make extensive use of magazine advertisements. Abercrombie & Fitch has promoted itself in a radical way. Never featured on magazine advertisements or on TV commercials, Abercrombie has been established since the 1800's and has spread itself through word of mouth and is now the premier clothesline for casual wear among American youth. It is in fact the #1 demanded clothing line on Ebay as well.. Strategies for making profit: Short run All firms which are monopolistic ally competitive must examine short-run and long-run strategies. In order to maximize profits, all firms, regardless of their market structure must produce to the point where marginal revenue equals marginal costs.
These costs refer to economic costs (which include sunk, accounting, and opportunity costs). Monopolistic ally competitive firms have a downward sloping demand curve because they are price makers, yet because prices are constricted by the demand of the consumers. As mentioned before, the market structure follows both perfectly competitive firms and monopoly forms of structure. Short-run, the industry functions like a monopoly while in the long-run, the industry functions more like a competitive firm. Although they are able to somewhat control prices due to their product differentiations and their status as a brand name, they will make profits by lowering price. However the danger in lowering prices is that with each additional product, utility will drop for the consumer.
Therefore, firms must be careful in balancing consumer demand with the projected consumer utility. Production should occur where price equals average total cost. All firms, whether in short or long-run should produce to max profits (MR = MC) and short-runs firms should aim towards meeting the profit-maximization point with the output of the demand curve. As a result, short-run equilibrium will occur. Unfortunately, as mentioned before, the retail industry is dependant upon the consumer.
If taste and income were to shift, most likely so would the demand for a normal product. The individual would instead purchase from a substitute brand, buy from an inferior brand, or simply not purchase clothing at all. This would result in demand being lower than the average total costs and ultimately a short-run loss because the company is unable to cover the costs previously incurred. However by matching MR to MC, costs can be minimized by nonetheless result in a loss of profit. If the firm is unable to continue matching the marginal revenue with marginal costs, then it must be forced to shutting down. IV.
Strategies for making profits: Long run However Abercrombie, Timberland, and Guess are all established companies and as such, are focused on a long-run track. As mentioned earlier, monopolistic ally competitive firms tend to act more as perfectly competitive firms in the long-run. Because the retail industry allows for easy entry and exiting, with every new entry and with every exit, the demand curves change. Long-run, the demand curve is equivalent to the price curve which must cross the average total cost curve. This intersection marks the company's most profitable price and quantity of each item and indicates long-run equilibrium. Basically to make profits a firm must: 1.
Cover total costs with their total revenue 2. Make sure MR = MC 3. Sell where price meets the average total cost of production Furthermore, firms need to consider other factors as well. Companies should consider the profitability of producing at home vs. producing overseas. All three companies researched produce in third world countries where cheap labor and lack of benefits provides for the affordability of the product. Moreover technology capital vs. human capital should be looked over for maximum production.
And finally, companies should produce and sell production where the households will be most receptive. Timberlands are successful in areas with cold, long winters like Ohio but would make minimal profit in area such as Florida.
1. Case, Karl E. & Ray C. Fair. Principles of Microeconomics. New Jersey: Pearson Education, Inc., 2004.
2. "Guess-Marciano", 2004.