Microeconomics Paper

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

P/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.

III. Strategies for making profit : Short run

All firms which are monopolistically 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). Monopolistically 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