Starbucks: The Limits to Growth through Product Differentiation
Like many large firms, Starbucks started small. Gordon Bowker, Gerald Baldwin, and Zev Siegl opened the first Starbucks in 1971. Starbucks’ current CEO, Howard Schultz, realized that many consumers wanted a coffeehouse where they could sit, read, and drink higher-quality coffee than they could get in diners or donut shops. But it was not difficult for other coffeehouses to copy the Starbucks approach. By 2009, fierce competition and a weak economy led Starbucks to close hundreds of stores and cut prices. Starbucks become profitable once more in 2010, partly due to expansion in overseas markets. Starbucks is in the coffeehouse market, which has low barriers to entry, so the firm has many competitors. But the coffee at Starbucks is not identical to the coffee at competing coffeehouses. The coffeehouse market is therefore monopolistically competitive rather than perfectly competitive.
Competition in the Video Game Console Market
Many of the largest corporations in the United States began as small businesses, including Microsoft, Apple, and Hewlett-Packard. Today, fewer than 10 firms account for the majority of sales in the software and computer industries. In addition to software, Microsoft also sells the Xbox video game console. Microsoft, Sony, and Nintendo account for nearly all sales of video game consoles. In an industry like this, firms must develop business strategies that involve decisions such as what price to charge, how much to advertise, which technologies to adopt, how to manage relations with suppliers, and which new markets to enter. By 2013, many people abandoned their consoles to play games on their smartphones or tablets. In response, Sony and Nintendo emphasized improved graphics and other features to game players. Microsoft marketed its new Xbox One as an all-in-one system integrated with the owner’s television.
-Review course materials
-Read chapters 13 and 14 and review PowerPoint slides
-Participate in online discussion thread for Unit 5 in the Discussion Board section
The textbook mentions that a four-firm concentration ratio of 40 percent or higher can be used to classify an industry as an oligopoly. Economists believe that competition in markets with lower concentration ratios is usually sufficient to ensure that firms do not engage in collusion or otherwise not compete with rival firms. But for oligopoly markets, how can you evaluate whether or not firms are using market power to charge high prices and avoid competition that would benefit consumers?
Give an example of an oligopolistic market, including the firms in the dominant positions, that you believe is engaging in unfair or anticompetitive behavior.