Answer :
Final answer:
Starbucks operates in a monopolistically competitive market, not in a purely competitive market, selling differentiated products with some degree of price-setting power. If Starbucks increases prices, due to product differentiation, they may not lose all customers.
Explanation:
The question seems to be under the misconception that Starbucks operates in a purely competitive market. However, Starbucks operates in a monopolistically competitive market, where a large number of firms sell differentiated products and each has some degree of price-setting power.
In such markets, if Starbucks were to increase its prices, it's unlikely that they would lose all their customers because its product is differentiated (in terms of brand, quality, and experience) from its competitors. Customers may be willing to pay slightly more for their preferred brand's product.
If the price of lattes at the campus coffee stand goes up, people are likely to respond by either reducing the quantity they purchase or by switching to a cheaper alternative.
When demand for products like iPads rises and the price goes up, other firms in the market may respond by increasing production to capture some of the increased demand or by introducing new or improved products.
The monopolistic competition differs from a monopoly in that, in monopolistic competition, many firms are competing and each has some power to set the price for its differentiated product, whereas, in a monopoly, there is only one firm that dominates the market, leading to higher prices and lower quality.
Final answer:
Starbucks does not belong to a purely competitive market but operates in a monopolistically competitive one where it can exercise some price-setting power due to product differentiation. An increase in the prices by Starbucks may cause some customers to switch to alternatives, yet their strong brand may mitigate significant loss.
Explanation:
The notion that Starbucks belongs to a purely competitive market is incorrect. A purely competitive market is characterized by products which are perfect substitutes for each other, where no single firm has any price-setting power, and there is free entry and exit in the market. By contrast, Starbucks operates in a monopolistically competitive market.
Monopolistic competition entails differentiated products, and firms have some degree of price-setting power. This is evident from microbreweries, as highlighted in one of the reference passages, which, despite selling beer, offer distinct flavors and experiences. Hence, like microbreweries, Starbucks offers a differentiated product through its various coffee blends and customer experience.
If Starbucks raises its prices by $1, the business must consider the elasticity of demand for its product. Coffee consumers have various alternatives, and if the price rise makes Starbucks significantly more expensive than competitors, some customers might switch to other coffee providers. Nevertheless, Starbucks' strong brand may cushion the loss as loyal customers are less price-sensitive.
For example, an independent trucker and a microbrewery both operate in markets resembling perfect and monopolistic competition, respectively. Independent truckers provide a service that is essentially undifferentiated, and they must compete on price. They lack the ability to set prices above the market rate because their service is very similar to others' offers. On the other hand, where differentiation exists, as with microbreweries or in Starbucks' case, firms can charge a premium based on the perceived value of their unique product or service.
Overall, the structure under which Starbucks operates allows it to set its prices to some extent, unlike a purely competitive market wherein the market is so competitive that firms take on prices as given and have no influence over it.
