Monopolistic Competition in the Retail Industry

Based on this article:

Written by: Rebecca Smithers

The Guardian, Thursday 18 October 2012

http://www.guardian.co.uk/business/2012/oct/18/chain-stores-close-business

Monopolistic Competition in the Retail Industry

Monopolistic Competition in the Retail Industry is not just the current issue that countries face nowadays, but it is an economical issue that is faced all year long by the retailers in 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. Zara, Topman, and Gap 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.

The article from the Guardian.co.uk on “More Than  30 Chain Stores Closing a Day”  by Smithers, Thursday 18 October 2012, http://www.guardian.co.uk/business/2012/oct/18/chain-stores-close-business discusses how more than 30 chain stores are closing a day. There are many issues that may have caused this slum in the retail industry. In my opinion, one of the main causes to this is the monopolistic competition in the industry that retailers face. Retailers face many competitions as they are not the sole sellers, or in other words, the monopoly. There are many retailers that sells products that are about the same, or the same in the market.

Monopolistic competition is often defined as a common form of industry structure characterized by a large number of firms, none of which can influence market price by virtue of size alone, as some degree of market power is achieved by firms producing differentiated products. New firms can enter and established firms can exit with ease.

In monopolistic competition, the industry consists of a large number of firms. The presence of a large number of firms has three implications for the firms in the industry. First, it’s the small market share. Each firm supplies a small part of the total industry in monopolistic competition. Therefore, each firm has only limited power to influence the price of its product. Each firm’s price can deviate from the average price of other firms by only a relatively small amount. This implication is described as small market share.

A firm that produces different products makes the firm hold the market power. Product differentiation allows the firms to compete between each other in the areas of product quality price and marketing. Consumers will be able to choose from variety of qualities and prices which may be affected by each firm’s ways of approaching the consumers through their marketing strategies. Monopolistic competition also, has no barriers of entry for new firms to enter the industry. Firms are able to enter and exit the industry freely.

In Malaysia, with the monopolistic competition in the retail industry, the retailers throw about many creative ways to boost their sales. This includes freebies, goodies, discounts, and many more. For an example, Topshop, a retailer that makes massive sales yearly, has a day exclusively for their members where goodies will be handed out to the first 300 customers and discounts are given, even on new arrivals. This attracts even more customers to be members of the retail company. Even though this exclusive day is only being done once a year, and only for a day, it attracts many consumers who will spend more at their stores, compared to other stores.

Another example comes from America’s retail industry.  Due to the competitive market, retailers have started to give out freebies and increase discounts to attract customers. They came up with the tagline ‘Free Is The New Discount’. Free goodie bags and so on, lure customers into believing that the store has more to offer. This works for the American retail industry as their retail’s sale boosted immensely after that.

Besides giving out free goodies and increasing discounts, the retail industry also have used ‘dirty’ tactics to win over consumers. This may be indirectly, or directly. For an example, to make their products seem more in demand and much better than the competitor’s, the retail company might downgrade the competitor’s product in their commercial or advertisements  to make their product seem more attractive, and as said earlier, it may be indirectly, or directly.

An example for this is when the Blackberry Company attacked Apple indirectly in their television commercial where a blackberry went straight through an apple. Apple later on came up with a comeback via a television commercial as well, indirectly attacking them where the blackberry fell apart upon hitting the apple. A competitive competition such as so, leads many retailers to desperation for survival in the industry.

Apart from that, a firm might also alter the prices of their products according to the desirability of them based on the season and so on. This is determined by the elastic of the products that may be elastic, or inelastic.

Diagram 1 shows that as price increases, the percentage change in demand is lesser than the percentage change in price. This shows that during a peak season where people demand more for the firm’s product, a change in the price will not affect the demand for the product abruptly.

Diagram 2 shows that as price increase, the percentage change in demand is greater than the percentage change in price. This shows that during a normal season, a change in price will affect the demand of the product greatly as compared to Diagram 1, during the peak season. A retail firm might increase the fare during the peak season because the elasticity of demand is inelastic and elastic when it is during the normal season.

Monopolistic Competition is a market structure where a large number of firms compete, each producing differentiated products based on the quality of the product, price, and marketing strategies. Firms are also free to enter and exit the industry. In this competitive market, firms compete with other using various ways and strategies, such as giving out free ‘goodies’, increasing discounts, also attacking each other indirectly or directly via commercials and advertisements. These are the ways for the firms to survive in the industry with the pressure from the competitive competition, but are only efficient to a certain extent.

To conclude, in Monopolistic Competition, retailers need a compelling offer in order to justify their existence in the retail industry. This pushes the retailers to come up with different, brilliant ideas and strategies to tackle the consumers and make the sale. Even though the competition is tough in the retail industry, this competitiveness pushes many retailers to go beyond their comfort zone, and over the consumers’ expectations to stand out in this industry. Some of the major brands we have today once started small, and then worked their way up to where they are today.