Analysis of Sporstwear

Case I. COMPETITION HITS SPORTSWEAR GROUPS PROFIT 1. Explain why the activewear industry in JJB operates may be considered an example of monopolistic rivalry. Textile Intelligence Reports in 2007 indicate that the UK athletic wear merchandise was estimated to have a measure out of ? 3. 65 bn (US$6. 72 bn) in 2006. The reason behind is that, purchase levels are high. Sportswear items are purchased by almost 90% of people under 35 years of age, and by 76% of the population as a whole according to the research.UK sportswear industry can be considered a monopolistic arguing in the sense that there are only about four leading sportswear retailers in the United Kingdom JJB Sports, Blacks Leisure. John David Group and Sports World. The dominating player in the market is JJB sportswear given the number of outlets and stores it operates 450 stores, the closest is JDB by around 300 stores. Given the wide gap, JJB at some guide on has get the hang of the control of the entire market c hanges and distri exception and posed a barrier of entry. pic Illustration from http//www. ized. co. uk/current/leisure/2004_5/111004_map. htm Given the above, characteristic of a monopolistic competition exist in this industry. The characteristic of monopolistic market is further expanded on Question 2. In this case of UK sportswear market structure is a pure monopoly. on that point are quite a number of sellers in the industry and therefore many close product substitutes in existence but nevertheless staunchs like JJB retain some market power. 2. How does the monopolistic market structure exemplified in the article differ from completed competition?Below are two comparable sets that differentiate monopolistic market from perfect competition utter(a) competition Monopolistic competition Many sellers unmarried seller Each firm is relatively small compared to the all overall size of the Monopoly exists when a specific firm has sufficient market/industry market.This prov ides assurance that no single firm can gain control control over a particular product or service and able to determine over hurt or quantity of the entire market or industry. If one firm significantly the terms of quality and price by which all buyers willing decides to increase its output or shut production, the market is have access to similar to JJB case unaffected. The market price does not transfer and there is no distinct change in the quantity purchased or exchanged in the industry. Identical / homogeneous products sold by all firms Unique product Each firm in a short agonistic market sells an identical For a monopoly to exits, there should be a unique product. Monopoly product, they are not perfectly the same but the buyers will not lacks in providing a practicable substitute goods. distinguish any difference.Each competitive firm produces a good that is a perfect substitute for the product of every other firm in the same industry. wrong Taker A s a result not one can control market price.If one tries to charge a higher price, then buyers would immediately switch to other cheaper Price Maker- competitor goods that are perfect substitutes. Since there is no competition, prices are set to maximize profits. However in order to increase sales, prices are reduced by the firm. Low-Entry/Exit Barriers High Barriers of Entry/Exit There are no restrictions, government regulations. Each can do a There is an assurance of sufficient control and dominant presence due start-up hail according to their own resources as recollective as their outputto a number of assorted reasons for barriers to entry (a) required can perfectly compete and apprehension competitors quality and price. government license or franchise as monopoly is often times regulated (b) existing patents and copyrights and (c) high start-up court involve Perfect Information Specialized Information As mentioned in point 2, one firm cannot sell its goo d at a higher commonly characterized by control of information. Monopolistic firm price than other firms.This follows that buyers are completely awareheld exclusively information like a secret recipe, statute or unique of sellers prices. Each firm also has complete information about the method or technology or production which is often protect by prices charged by other sellers. This means that it would be unlikely patents, copyrights, or trademarks. This also creates legal barriers for them to charge less than the current market price. Perfect to entry. knowledge also extends to technology.All perfectly competitive firms have access to the same production techniques. There is a remote possibility that a competitive firm can produce its output faster, better, or cheaper because of special knowledge of information. Nicholson, Walter (2005) pic Also, For a competitive firm, price equals marginal cost. P = MR = MC For a monopoly firm, price exceeds marginal cost . P MR = MC 3. In the great run, are firms better off operating in monopolistic competition or in perfectly competitive markets? Long-run effects of increasing competition in the monopolistically competitive industry In the long run, a monopolistically competitive firm will trade name zero economic profit. However, due to influence in the market it can most of the time raises prices without losing customers but to deflect new entrants, it can lower its prices and supplement on customer loyalty.This means that a firm making profits in the short run will break even in the long run because demand will decrease and average total cost will increase. Also means that a monopolistic firms demand curve is down sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule. See illustration in item 2. Long-run position of a firm in a perfectly competitive industry In the long run positive profit can not be sustained as there is always arrival of new firms or ex pansion of existing competitive firms.This causes the demand curve of individual firm to shift down hold and prices to go downward as well. This means that at the same time the average revenue and marginal revenue curve also points downward. Bottom line, in the long run similar to monopolistically competitive industry, the firms in perfect competition in the long run will also make a normal profit. The level demand curve will touch its average total cost curve at its lowest point Conclusion When the long-run average cost exceeds long-run marginal cost, JJBs output is not at the minimum point on long-run average cost curve.JJB can sell sportswear at a lower price in the long run and by taking advantage of economies of scale, such as price discounts. Therefore is not much difference between monopolistically competitive firms vs. Long-run position of a firm in a perfectly competitive industry. The difference lies mainly on the product (homogenous vs. unique) and influence in the marke t. 4. JJB states that their profit margins were hit by a vigorous promotional campaign launched in October and a Christmas/New Year sale.Illustrate how the promotional campaign is likely to affect their profit margins. Before the promotional campaign pic Similar to a competitive firm, a monopoly maximizes profit by producing the quantity at which marginal cost and marginal revenue are equal Above graph is the scenario of JJB prior to price promotional campaign to ward off growing competition. After the promotional price campaign pic During the promotional campaign, the price maybe less than average cost causing the decline in JBBs profit. This gives no incentive for JJB to reduce cost.References McTaggart, Findlay and Parkin (2007), Economics (5th ed. ) Pearson Education Australia Publisher Nicholson, Walter (2005) Microeconomic Theory Basic Principles and Extensions 9th edition, Ceneage Learning India Pvt Ltd Publisher PERFECT COMPETITION, CHARACTERISTICS, AmosWEB Encyclonomic WEB*pedia, Online, operational http//www. AmosWEB. com, AmosWEB LLC, 2000-2009. Accessed September 12, 2009 MONOPOLY, CHARACTERISTICS, AmosWEB Encyclonomic WEB*pedia, Online, Available http//www. AmosWEB. com, AmosWEB LLC, 2000-2009. Accessed September 12, 2009 Antony Davies & Thomas Cline (2005). A Consumer Behavior Approach to Modeling Monopolistic Competition. Journal of Economic Psychology 26 797826 pic Average Total cost e d pic c Marginal Revenue Marginal cost Demand Revenue Costs and 0 QMAX meter Total cost Average Price Demand Price 0 Quantity of Output Price 0 Monopolists Demand slue Competitive Firms Demand Curve Demand Quantity of Output Average total cost Marginal cost Demand Price Loss 0 Quantity Price Promotion Total cost Average Profit