Market Structure

Characteristic	Perfect Cometition	Oligopoly	Monopoly	Contestable Market/ Monopolistic
Number of Firms	Many	Few Dominant Firms	One with Pure Monopoly. Effective Duopoly in Many Cases.	Many
Type of Product	Homogenous	Differentiated	Limited	Differentiated
Barriers to Entry	None	High	High	Low Entry and Exit Cost
Supernormal Short Run Profit	Yes	Yes	Yes	Any Profit Possible
Supernormal Long Run Profit	No	Yes	Yes	Supernormal Invites Hit and Run Entry
Pricing Power	Price Taker	Price Maker but Interdependent Behaviour	Price Maker-Constrained by Demand Curve and Possible Regulation	Price Maker-but Actual and Potential Competition Limits Pricing Power
Non Price Competition	No	Yes (Important)	Yes	Yes (Important)
Economy Efficiency	High	Low Allocative but Scale Economics and Innovation	Low Allocative but Economies of Scale and Reinvested Profits. Risk of X-Inefficiency due to Lack of Competition	High Depending on Strength of Contestabilty
Innovative Behaviour	Weak	Very Strong	Potentially Strong	Strong

Table 1: The Characteristic of Market Structure (Riley, 2012)

Beside Starbucks, there is always many competitive firms in coffee industry, such as Old Town White Coffee, Ambrosia Coffee, Caribou , Dunn Bros Coffee, The Coffee Bean & Tea Leaf, Paparich, Chinese Restaurant (Cha Can Sat) witlh the most traditional Chinese coffee and Mamak stall with the most local taste. Fast food restaurant even promote the breakfast coffee, such as Mc Donald’s and Subway.  The number of firms in coffee industry is many and they are having intensive competition among the firms. This can be compare between Row 2 of Table 1.

The coffee shop needs to differentiate among the others due to they are providing the similar products, such as latte, expresso, capucino and tea.  Starbucks has a simple idea on setting their price which is customer willing to pay if they satisfy and enjoying the good quality (Demand Media, 2013). The quality control of Starbucks is strict to ensure that the source of coffee, customer service and the coffee products are always maintain a high standard (Demand Media, 2013). Besides, Starbucks has an intentionally to form their coffee lingo, such as “tall” for large, “grande” for medium and “venti” for small (O’ Connell, 2008). When the customer use the Starbucks’ coffee lingo to place order, the customer may feel an escape from the urban life and experience a charge of European sophistication. Besides, Starbucks is the only coffee firm which provides the drive-thru services to customers. Hence, Starbucks has differentiated itself among the competitors. This can be compare between Row 3 of Table 1.

There is no significant barrier of entry for coffee industry due to low entry and exit cost. Everyone who is interested in coffee industry may just start selling any kinds of coffee at anytime and anywhere. They can even start selling coffee at their own house.  As the entry cost is low, even though the one want to exit the industry, there has no significant sunk cost. The entry and exit cost for the coffee industry is low as compare to others industry, such as agriculture, manufacturing, petroleum and gas and real estate. This can be compare between the Row 4 of Table 1.

Firms may make any possible profit for short run due to they are not at mature state due to the changes of variable input. As firms in the industry are making a supernormal profit (Graph 1), it will attract new firms to come in the industry because there is still have place for others to venture as well. However, if the firms of the industry are making a subnormal profit (Graph 2), it means, the firms is suffering a loss, some of the firms may leave the industry and venture other industry which is more attractive and profitable. This can be compare between the Row 5 of Table 1.

Graph 1: The Supernormal Profit of Monopolistic Firm.  Graph 2: The Subnormal Profit of Monopolistic Firm.

As the market has regulate itself by the entering and leaving of the firm, the firm in the market will only earn normal profit (Graph 3) in the long run. This is tabulate at Row 6 of Table 1.

Graph 3: The Normal Profit of Monopolistic Firm

Starbucks has strong non-price strategy to do branding. The white and green Starbucks coffee cups are specially designed as a walking advertisement for itself. It has more penetration than advertisement on boards or TVs because the others can SEE the people are enjoying the Starbucks coffee. It is a solid evidence and prove that it is a worth customer buy coffee. It has evidenced by more than two trillion customers each year (O’ Connell, 2008). Besides, Starbucks also approaches customer by celebrating festival together. Starbucks will decorate their stores to lift up the festive spirit. The workers will also greet the customers with the element of the festival (Starbucks Corporation, 2013). Starbucks will offer customers beverages that attract the local example during the major festive seasons such as National Day (Merdeka) (Freebies Land Malaysia, 2013). Hence, Starbucks has strong non-price competition strategy. This can be compare with others at Row 8 of Table 1.

Figure 2: Starbucks is celebrating National Day with Malaysian by offer free upsize while buying a Grande Frappucino. (Freebies Land Malaysia, 2013)

As Starbucks as a firm in the coffee industry has many firms to compete, products are differentiates, low entry and exit cost, very important at non-price competition. Hence, it is a monopolistic market structure. This can be proved by Column 5 of Table 1.