Questions for thought questions 1, 2, and 3 located in the upper right hand corner

456 | PART 7 MARKET STRUCTURE BEYOND PERFECT COMPETITION So here's a metaphysical question: even if perfume buyers really hate a fra. >> Quick Review stance in a blind test, but advertising convinces them that it smells wonderful who are we to say that they are wrong to buy it? Isn't the attractiveness of a seem One customer, Rob Springer, used to buy Gillette . In industries with product in the mind of the beholder? QUESTIONS FOR THOUGHT differentiation, firms advertise in Fusion 5-bladed cartridges. "The Gillette razors were order to increase the demand for wonderful, but the problem was that they were around > > Check Your Understanding 15-4 $20 for a pack of four." Now he pays $6 monthly for a set 1. What explains the complexity of and high rate of their products. of four cartridges from DSC. innovation in razors by Gillette and Schick? . Advertising is not a waste of or at back of 2. Why is the razor business so profitable? What explains resources when it gives consumers I. In which of the following cases is advertising likely to be economically useful DSC has been so successful that in 2016 Unilever (a the size of the advertising budgets of Schick and Gillette? useful information about products. large company like Proctor & Gamble) bought it for $1 Economically wasteful? Explain your answer. billion-a remarkable price for a five-year-old start-up 3. What explains the popularity of the Dollar Shave . Advertising that simply touts a. Advertisements on the benefits of aspirin a product is harder to explain In the meantime, Gillette and Schick have started their Club? What dilemma does Schick and Gillette face b. Advertisements for Bayer aspirin in deciding to create their own lines of inexpensive Either consumers are irrational C. Advertisements on the benefits of drinking orange juice own inexpensive subscription-based lines of razors to compete with DSC. subscription-based razors? What does this indicate or expensive advertising d. Advertisements for Tropicana orange juice in razors? about the welfare value to customers of the innovation communicates that the firm's products are of high quality e. Advertisements ents that state how long a plumber or an electrician has been in business Some firms create brand 2. Some industry analysts have stated that a successful brand name is like a barrier in names. As with advertising, the entry. Explain the reasoning behind this statement. SUMMARY economic value of brand names can be ambiguous. They convey 1. Monopolistic competition is a market structure in real information when they assure which there are many competing producers, each produc- 4. In long-run equilibrium, firms in a monopolisti- consumers of product quality ing a differentiated product, and there is free entry and cally competitive industry sell at a price greater exit in the long run. Product differentiation takes three than marginal cost. They also have excess capacity main forms: by style or type, by location, or by quality. because they produce less than the minimum-cost Products of competing sellers are considered imperfect BUSINESS The Dollar Shave Club: output; as a result, they have higher costs than firms substitutes, and each firm has its own downward-sloping in a perfectly competitive industry. Whether or not CASE How to Avoid a Case of Razor Burn demand curve and marginal revenue curve, monopolistic competition is inefficient is ambiguous 2. Short-run profits will attract entry of new firms in because consumers value the diversity of products the long run. This reduces the quantity each existing that it creates. producer sells at any given price and shifts its demand 5. A monopolistically competitive firm will always prefer It's the latest develop- curve to the left. Short-run losses will induce exit by to make an additional sale at the going price, so it Until recently, the leaders in the American razor indus- ment in a long-standing some firms in the long run. This shifts the demand will engage in advertising to increase demand for its try, Schick and Gillette, had settled into a comfortable strategy undertaken by curve of each remaining firm to the right, product and enhance its market power. Advertising if competitive long-term relationship, one spanning both companies: to sell 3. In the long run, a monopolistically competitive and brand names that provide useful information to over 95 years. King Gillette invented the safety razor in 1901, and in 1921 Colonel Jacob Schick introduced cheap razor handles, and industry is in zero-profit equilibrium: at its profit- consumers are economically valuable. But they are another version of the safety razor. Now owned by large make money on expen- maximizing quantity, the demand curve for each exist- economically wasteful when their only purpose is to companies (Proctor & Gamble and Energizer, respec- sive cartridge refills. ing firm is tangent to its average total cost curve. There create market power. In reality, advertising and brand names are likely to be some of both: economically tively), the razor business has been incredibly profit- The two rivals created are zero profits in the industry and no entry or exit. valuable and economically wasteful. able. Razor cartridges are the most profitable category an arms-race dynamic in of packaged goods. So much so that Gillette and Schick the market-going from KEY TERMS shared a $3.7 billion dollar industry in 2016. two blades to three, then To keep those profits rolling in, Schick launched four and five to six- Monopolistic competition, p. 442 its new Schick Hydro 5 razor in 2016. Priced at $9.99, which forces customers Zero-profit equilibrium, p. 448 Excess capacity, p. 452 the five blade razor combines a hydrating gel reser- to upgrade their razors Brand name, p. 454 voir with patented technology for a smoother, less every few years. irritating shave. As part of the product launch, Schick Then along came the startup Dollar Shave PROBLEMS teamed up with Sports Illustrated magazine to market its new line. Club (DSC) in 2011. It interactive activity was based on a simple 1. Use the three conditions for monopolistic competi- Competing head to head is Gillette's Pro-Glide Flex- 2. You are thinking of setting up a coffee shop. The mar- Ball. Using a swiveling ball-hinge, it promises an easier, premise: a DSC sub- tion discussed in the chapter to decide which of the following firms are likely to be operating as monopo- ket structure for coffee shops is monopolistic competi- cleaner shave. With a $200 million ad budget, Gillette scriber sets up a regular monthly order online, to be listic competitors. If they are not monopolistically tion. There are three Starbucks shops and two other boasted that "its blades miss 20% fewer hairs with shipped to his home in plain cardboard wrapping, at competitive firms, are they monopolists, oligopolists, coffee shops very much like Starbucks in your town each pass and can cut each whisker 23 microns shorter a fraction of the $10 to $20 retail cost of razors from or perfectly competitive firms? already. In order for you to have some degree of mar- (about a quarter of the width of a human hair)," the Schick or Gillette. DSC grew exponentially, surpassing Pro-Glide FlexBall sells for $11.49 to $12.59, depending Schick in volume of cartridges sold in 2015. By 2016, its a. A local band that plays for weddings, parties, and so on ket power, you may want to differentiate your coffee shop. Thinking about the three different ways in which upon whether you choose the battery-operated version sales exceeded $15 million per month, a tripling of its b. Minute Maid, a producer of individual-serving juice boxes products can be differentiated, explain how you would or not rate of sales growth in just one year, decide whether you should copy Starbucks or whether c. Your local dry cleaner you should sell coffee in a completely different way. d. A farmer who produces soybeans 3. The market structure of the local gas station industry is monopolistic competition. Suppose that currently each