Market Structures: Monopolistic Competition

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Table of Contents

Introduction
Monopolistic Competition: A Brief Overview
KFC Case Study
Competition Analysis
Market Power Recommendation
References

Introduction

Competition plays a pivotal role in determining the profitability and survival of businesses in various industries. However, the level of competition varies from one market to another, thereby leading to different market structures, which affect the market place differently.

One of the most prominent market structures is monopolistic competition. This paper shall set out to discuss this market structure. This shall be done by applying its structural and competition characteristics to KFC, which is an internationally renowned quick service restaurant franchise.

Monopolistic Competition: A Brief Overview

According to Mankiw (2011), market structures are defined by their level of organization and their differences in characteristics. Monopolistic competition markets are characterized by the presence of a large number of small firms, sale of differentiated products (similar but not identical), limited barriers to enter or exit an industry, and extensive technological and pricing knowledge among buyers and sellers (Mankiw, 2011).

Lambin and Schuiling (2012) state that as a result of large numbers of close substitutes produced within this market structure; firms display a demand curve that is relatively elastic.

KFC Case Study

In any given state in America, there are over 50 different quick service restaurants dealing with close substitute products. According to Mankiw (2011), a monopolistic competition market structure is characterized by the presence of numerous small firms, each being relatively small in comparison to the overall market size. Due to this saturation of firms, sellers of differentiated products have minimal market control in determining the prevailing price or quantity of their products.

KFC is one of over 100 eateries operating in America. As such, if the price of a chicken burger is about $3, each restaurant (KFC included) sells its chicken burger within that price range. Setting a higher price would give KFC’s numerous competitors a competitive advantage as the quantity demand for KFC products drop and clients switch to other restaurants.

Similarly, Lambin and Schuiling (2012) assert that firms in monopolistic competition industries sell similar products, which are slightly different (differentiated products). Product differentiation enables firms in a monopolistic competitive industry have a competitive advantage over their rivals. For example, chicken sold by KFC, Red Rooster or Nandos may come from the same supplier. However, each of these restaurants cook, pack, or serve their end product differently from each other.

Thirdly, resource mobility in a monopolistic competition industry is relatively easy in regard to entry and exit. This means that entry barriers such as state policies, regulations, start-up costs are minimal. Similarly, firms can exit the industry with little to no restrictions (Taylor & Weerapana, 2007).

In addition, firms can acquire resources, labor and capital without being discriminated upon. This can be evidenced from the fact that KFC has penetrated different regions around the world, and can leave or switch to a different business without incurring high expenses.

Finally, buyers and sellers have extensive knowledge regarding the prices or technology used in a monopolistic competition industry. Lambin and Schuiling (2012) further explain this by stating that while buyers may lack some information, they are relatively knowledgeable about the prices, as well as the differences between various close substitutes. On the other hand, sellers know the price range of close substitutes.

For example, chicken sold at KFC is almost the same price as chicken sold at Red Rooster. Technologically, all the restaurants competing with KFC have the same knowledge on how to prepare chicken. As such, they may be using the same production technology. Examples include ovens, cutleries and fryers.

Competition Analysis

KFC faces a non-price competition at the market place. According to Taylor and Weerapana (2007), competition between monopolistically competitive firms is based on perceived, physical and support service differences that result from product differentiation. Key competitors include but are not limited to Red Rooster, McDonald’s, Nandos and Hungry Jack’s among others.

Market Power Recommendation

According to Mankiw (2011), monopolistically competitive firms have minimum control when it comes to determining the terms and conditions of exchange. With this in mind, KFC should focus its attention on raising its products’ level of brand awareness. Through innovative product differentiation, KFC can efficiently come up with new products. In so doing, the level of competition will be low and the profit margins high in the short-run.

Additionally, having fewer competitors will enable KFC to increase prices without necessarily loosing all its clients. Alternatively, KFC may decide to lower its prices due to the fact that the few competitors that exist cannot afford to get into a price war with an already established brand. Conclusively, it is only through innovation and creativity that KFC can eliminate competition, thereby ensuring that its market power is increased.

References

Lambin, J., & Schuiling, I. (2012). Market-Driven Management: Strategic and Operational Marketing. Chicago: Palgrave Macmillan.

Mankiw, N. G. (2011). Principles of Economics. New York: Cengage Learning.

Taylor, J., & Weerapana, A. (2007). Economics. New York: Cengage Learning.

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