INDUSTRY AND MARKET PLACE
By Vivian Chui
Industry
H&M operates in the retail clothing industry. This industry sells clothing, accessories, and footwear for all age groups and genders. The most profitable segment of the industry is women’s clothing, generating 53% of the industry’s total profit. The industry contains a large number of firms, many of which are well-known brands that operate internationally.
Market Structure
H&M operates in a monopolistic competition. A monopolistic competition is a type of imperfect competition that is characterised by the large number of firms that sell similar, but not identical products. The four basic assumptions for monopolistic competition are:
Differentiation
Monopolistic competition only exists when there is a difference in the products produced by the firms in the industry. The type of differentiation is based on non-price factors, and can be in many different forms, such as design, packaging, colour, level of skill, or appearance. Advertising is largely used by firms in a monopolistic competition to differentiate and show superiority over other firms that produce close substitutes. Due to product differentiation, there is an extent of brand loyalty present, where consumers will remain loyal to a specific product and continue purchasing it even if price slightly increases.
Barriers to entry and exit
Firms operating under a monopolistic competition face no major barriers to entry and exit. However, the amount of investment needed is relatively larger than firms operating under a perfect competition because of the expenses that are needed in product differentiation and advertising. With no major barriers to entry and exit, firms may enter the market when present firms are earning an economic profit or exit the market when firms are losing money.
Independent decision making
Because of brand loyalty, producers have slight independence in altering the price of their products. Therefore, they are considered price-setters rather than price-takers, as they have the freedom to increase or decrease the price their products are sold at, and they do not have to sell their products at the equilibrium price of the industry. However, this independence is only to an extent, because firms in a monopolistic competition sell products that slightly differentiate from other firms, meaning that substitutes can be easily found and purchased by consumers. As a result, the demand for firms operating in a monopolistic competition is relatively elastic.
Demand and Maximising Profits
H&M operates in the retail clothing industry. This industry sells clothing, accessories, and footwear for all age groups and genders. The most profitable segment of the industry is women’s clothing, generating 53% of the industry’s total profit. The industry contains a large number of firms, many of which are well-known brands that operate internationally.
Market Structure
H&M operates in a monopolistic competition. A monopolistic competition is a type of imperfect competition that is characterised by the large number of firms that sell similar, but not identical products. The four basic assumptions for monopolistic competition are:
- The industry contains quite a large number of firms.
- The sizes of the firms are relatively small compared to the size of the industry, meaning that the actions of one firm are unlikely to have an effect on the industry as a whole.
- The products produced by the different firms are slightly differentiated by non-price factors, for example, packaging, advertisements or customer service. Slight differentiation makes it possible for consumers to tell the difference between one product from another, but this also creates strong competition between the different firms.
- There are no major barriers to entry or exit, giving firms the freedom to enter or leave the industry.
Differentiation
Monopolistic competition only exists when there is a difference in the products produced by the firms in the industry. The type of differentiation is based on non-price factors, and can be in many different forms, such as design, packaging, colour, level of skill, or appearance. Advertising is largely used by firms in a monopolistic competition to differentiate and show superiority over other firms that produce close substitutes. Due to product differentiation, there is an extent of brand loyalty present, where consumers will remain loyal to a specific product and continue purchasing it even if price slightly increases.
Barriers to entry and exit
Firms operating under a monopolistic competition face no major barriers to entry and exit. However, the amount of investment needed is relatively larger than firms operating under a perfect competition because of the expenses that are needed in product differentiation and advertising. With no major barriers to entry and exit, firms may enter the market when present firms are earning an economic profit or exit the market when firms are losing money.
Independent decision making
Because of brand loyalty, producers have slight independence in altering the price of their products. Therefore, they are considered price-setters rather than price-takers, as they have the freedom to increase or decrease the price their products are sold at, and they do not have to sell their products at the equilibrium price of the industry. However, this independence is only to an extent, because firms in a monopolistic competition sell products that slightly differentiate from other firms, meaning that substitutes can be easily found and purchased by consumers. As a result, the demand for firms operating in a monopolistic competition is relatively elastic.
Demand and Maximising Profits
Abnormal Profits in the Short Run
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As seen in Figure 1, the demand curve for a monopolistically competitive firm is a downwards slope. However, demand is relatively elastic since there are many substitutes available. A firm that operates in a monopolistic competition produces so that it is maximising profits (MC=MR). |
Firms operating in a monopolistic competition can make abnormal profits in the short run. As mentioned before, the firm maximises profits by producing at MC = MR. This means that the cost needed to produce one unit is less than the price at which it is sold. As a result, an abnormal profit is earned by the firm. This is shown in the blue shaded area of Figure 2. |
Equilibrium in the Long Run
Firms become attracted to the industry when short-run abnormal profits are being made. Since there are no major barriers to entry and exit for a monopolistic competition, it is possible for other firms to easily join the industry. When these firms enter the industry, they take business away from existing firms. Some firms that lose money leave the market, while others remain. The remaining firms will experience an increase in demand due to the leaving of other firms. Therefore, in the long run, firms always remain in the position shown Figure 3, where firms maximise profits at MC=MR, and the cost needed to produce one unit is equal to the cost the unit is sold at. |
Neither Allocative or Productive Efficient
Allocative efficiency: when a good is produced at a level of output where social welfare is maximised (MC=AR) Productive efficiency: when a good is produced at a level of output where a firm uses all its resources efficiently and produces at the lowest possible cost per unit (MC=AC) A firm in a monopolistic competition always produces at a point where it maximises profits (MC=MR). At this point, it is impossible for allocative efficiency (q2) and productive efficiency (q1) to be achieved. |