Analysis of Sporstwear
Competition hits sportswear group’s profit
Explain why the sportswear industry in JJB operates may be considered an example of monopolistic competition. Textile Intelligence Reports in 2007 indicate that the UK sportswear market was estimated to have a value of 3. 65 bn (US$6. 72 bn) in 2006. The reason behind is that, purchase levels are high. Sportswear items are purchased by almost 90% of people under 35 years of age, and by 76% of the population as a whole according to the research.
UK sportswear industry can be considered a monopolistic competition in the sense that there are only about four leading sportswear retailers in the United Kingdom: JJB Sports, Blacks Leisure. John David Group and Sports World. The dominant player in the market is JJB sportswear given the number of outlets and stores it operates 450 stores, the closest is JDB by around 300 stores. Given the wide gap, JJB at some point has control of the control of the entire market sales and distribution and posed a barrier of entry. Given the above, characteristic of a monopolistic competition exist in this industry. The characteristic of monopolistic market is further expanded on Question 2. In this case of UK sportswear market structure is a pure monopoly. There are quite a number of sellers in the industry and therefore many close product substitutes in existence but nevertheless firms like JJB retain some market power. 2. How does the monopolistic market structure exemplified in the article differ from perfect competition?
This means that a firm making profits in the short run will break even in the long run because demand will decrease and average total cost will increase. Also means that a monopolistic firm’s demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule. See illustration in item #2. Long-run position of a firm in a perfectly competitive industry: In the long run positive profit can not be sustained as there is always arrival of new firms or expansion of existing competitive firms.
This causes the demand curve of individual firm to shift downward and prices to go downward as well. This means that at the same time the average revenue and marginal revenue curve also points downward. Bottom line, in the long run similar to monopolistically competitive industry, the firms in perfect competition in the long run will also make a normal profit. The horizontal demand curve will touch its average total cost curve at its lowest point Conclusion: When the long-run average cost exceeds long-run marginal cost, JJB’s output is not at the minimum point on long-run average cost curve.
JJB can sell sportswear at a lower price in the long run and by taking advantage of economies of scale, such as price discounts. Therefore is not much difference between monopolistically competitive firms vs. Long-run position of a firm in a perfectly competitive industry. The difference lies mainly on the product (homogenous vs. unique) and influence in the market. JJB states that their “profit margins were hit by a vigorous promotional campaign launched in October and a Christmas/New Year sale”.
Illustrate how the promotional campaign is likely to affect their profit margins. Before the promotional campaign:
- Similar to a competitive firm, a monopoly maximizes profit by producing the quantity at which marginal cost and marginal revenue are equal
- Above graph is the scenario of JJB prior to price promotional campaign to ward off growing competition.
After the promotional price campaign:
- During the promotional campaign, the price maybe less than average cost causing the decline in JBB’s profit.
- This gives no incentive for JJB to reduce cost.
References
- McTaggart, Findlay and Parkin (2007), Economics (5th ed. ) Pearson Education Australia Publisher Nicholson, Walter (2005) Microeconomic Theory: Basic Principles and Extensions 9th edition,
- Ceneage Learning India Pvt Ltd Publisher PERFECT COMPETITION, CHARACTERISTICS, AmosWEB Encyclonomic WEB*pedia, [Online], Available: http://www. AmosWEB. com, AmosWEB LLC, 2000-2009. [Accessed: September 12, 2009]
- MONOPOLY, CHARACTERISTICS, AmosWEB Encyclonomic WEB*pedia, [Online], Available: http://www. AmosWEB. com, AmosWEB LLC, 2000-2009. Accessed: September 12, 2009] Antony Davies & Thomas Cline (2005).
- “A Consumer Behavior Approach to Modeling Monopolistic Competition”. Journal of Economic Psychology 26: 797–826
