Starbucks: Growth through Product Differentiation

2. Starbucks: Growth through Product Differentiation Learning Objectives The coffeehouse market is monopolistically competitive rather than perfectly competitive.

3. Monopolistic Competition: The Competitive Modelin a More Realistic Setting Monopolistic competitionA market structure in which barriers to entry are low and many firms compete by selling similar, but not identical, products.

4. Learning Objective 12.1 Demand and Marginal Revenue for a Firmin a Monopolistically Competitive Market The Demand Curve for a Monopolistically Competitive Firm FIGURE 12-1 The Downward-Sloping Demand for Caffè Lattes at a Starbucks

5. Learning Objective 12.1 Demand and Marginal Revenue for a Firmin a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve Table 12-1 Demand and Marginal Revenue at a Starbucks

6. Learning Objective 12.1 Demand and Marginal Revenue for a Firmin a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve FIGURE 12-2 How a Price Cut Affects a Firm’s Revenue

7. Learning Objective 12.1 Demand and Marginal Revenue for a Firmin a Monopolistically Competitive Market Marginal Revenue for a Firm with a Downward-Sloping Demand Curve FIGURE 12-3 The Demand and Marginal Revenue Curves for a Monopolistically Competitive Firm

8. Learning Objective 12.2 How a Monopolistically CompetitiveFirm Maximizes Profits in the Short Run FIGURE 12-4 Maximizing Profit in aMonopolistically Competitive Market

9. Learning Objective 12.2 12-2 Solved Problem How Not to Maximize Profits at a Publishing Company If you were a manager at a publishing firm, how would you determine whether producing one more copy of a book will increase your profits?

10. Learning Objective 12.3 What Happens to Profits in the Long Run? How Does the Entry of New Firms Affect the Profits of Existing Firms? FIGURE 12-5 How Entry of New Firms Eliminates Profits Don’t Let This Happen to YOU!Don’t Confuse Zero Economic Profit with Zero Accounting Profit

11. Learning Objective 12.3 What Happens to Profits in the Long Run? How Does the Entry of New Firms Affect the Profits of Existing Firms? Table 12-2 The Short Run and the Long Run for a Monopolistically Competitive Firm

12. Learning Objective 12.3 MakingtheConnection • The Rise and Fall of Apple’s Macintosh Computer Macintosh lost its differentiation, but still has a loyal— if relatively small—following.

13. Learning Objective 12.3 12-3 Solved Problem The Short Run and the Long Run for the Macintosh

14. Learning Objective 12.3 What Happens to Profits in the Long Run? Is Zero Economic Profit Inevitable in the Long Run? A firm’s profits will be eliminated in the long run onlyif a firmstands still and fails to find new ways of differentiating its product or fails to find new ways of lowering the cost of producing its product.

15. Learning Objective 12.3 MakingtheConnection • Staying One Step Ahead of the Competition: Eugène Schueller and L’Oréal Unlike many monopolistically competitive firms, L’Oréal has earned economic profits for a very long time.

16. Learning Objective 12.4 Comparing Perfect Competition and Monopolistic Competition Monopolistic competition and perfect competition share the characteristic that in long-run equilibrium, firms earn zero economic profits. However, there are two important differences between long-run equilibrium in the two markets: • Monopolistically competitive firms charge a price greater than marginal cost. • Monopolistically competitive firms do not produce at minimum average total cost.

17. Learning Objective 12.4 Comparing Perfect Competition and Monopolistic Competition Excess Capacity under Monopolistic Competition FIGURE 12-6 Comparing Long-Run Equilibrium under Perfect Competition and Monopolistic Competition

18. Learning Objective 12.4 Comparing Perfect Competition and Monopolistic Competition Is Monopolistic Competition Inefficient? Economists have debated whether monopolistically competitive markets being neither productively nor allocatively efficient results in a significant loss of well-being to society in these markets compared with perfectly competitive markets. How Consumers Benefit from Monopolistic Competition Consumers benefit from being able to purchase a product that is differentiated and more closely suited to their tastes.

19. Learning Objective 12.4 MakingtheConnection • Abercrombie & Fitch: Can the Product Be Too Differentiated? Did Abercrombie and Fitch narrow its target market too much?

20. Learning Objective 12.5 How Marketing Differentiates Products Marketing All the activities necessary for a firm to sell a product to a consumer. Brand Management Brand management The actions of a firm intended to maintain the differentiation of a product over time.

21. Learning Objective 12.5 How Marketing Differentiates Products Advertising If the increase in revenue that results from the advertising is greater than the increase in costs, the firm’s profits will rise. Defending a Brand Name A firm can apply for a trademark, which grants legal protection against other firms using its product’s name.

22. Learning Objective 12.6 What Makes a Firm Successful? FIGURE 12-7 What Makes a Firm Successful?

23. Learning Objective 12.6 MakingtheConnection • Is Being the First Firm in the Market a Key to Success? Although not first to market, Bic ultimately was more successful than the firm that pioneered ballpoint pens.

24. Can Dunkin’ Donuts Really Compete with Starbucks? LOOK An Inside Brewing Battle: Dunkin’ Donuts Tries to Go Upscale, but Not too Far

25. K e y T e r m s Brand management Marketing Monopolistic competition