Perfectly Competitive Market – Starbucks

June 24, 2011 at 9:43 pm (Microeconomics)

A perfectly competitive market is one that has many buyers and sellers that purchase and buy a similar product. In order to be considered a company operating within this market, there must be easy entry into the industry and easy exit. Information regarding prices and other important facts are available to all operators. All companies are price-takers because they do not set the price of the products being sold. Starbucks is a company that meet the criteria of a competitive market. However, there is no “pure” market in Canada.

Starbucks made some mainstream decisions for fast growth that have them wishing they could have done it differently. In a letter written by chairman Howard Schultz, he says that the decisions made have in fact took away the main appeal of the company. That small town feel with the smell of fresh coffee has been limited due to modern decor and sealed coffee bag sales. (http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html) The company has closed down 600 stores that were not making a profit and were not expected to in the future. The stores that were closed down were ones that were recently built and near an existing Starbucks. These stores had high costs and low profits. (http://seattletimes.nwsource.com/html/businesstechnology/2008028854_starbucks02.html) Another great article that discusses the decisions that Starbucks is making is by CBC News and is called “Starbucks boosts planned store closures to 600″. (http://www.cbc.ca/news/business/story/2008/07/01/starbucks-closures.html)

I love my coffee and I am willing to pay for it! (Unless of course one cup of coffee increases to ten dollars a cup! I would probably switch to tea at that point.)  Coffee is an addictive product and you will find that people are willing to pay whatecer is charged in order to get a great cup of coffee.

In a perfectly competitive market, demand is perfectly elastic. Viewing Starbucks as a competitive firm, if they were to decrease their coffee prices, demand is consistent and the company will begin to produce at a loss. When looking at the graph, Perfect Competition Graph , you will notice that at P1 Starbucks would be covering their average costs (AC) and making a profit. However, if the price were to fall to P2, they would not be covering all costs and would be operating at a loss. If they are able to cover their variable costs (AVC), they can continue to operate. If at some point variable costs cannot be covered, then this would be their shutdown price.

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