Competing as Starbucks - Perfectly Competitive Market

If (1) there are a great number of sellers and buyers of the product, so that the actions of an individual cannot affect the price of the product; (2) the products of all firms in the market are identical, or undifferentiated; (3) New firms are free to enter and existing firms are free to leave – no significant obstacles; legal, technical, financial, or other; and (4) consumers, resource owners, and firms in the market have same market information available to all, then the market is said to be perfectly competitive. In a perfectly competitive market, since the price of a product is decided only by the intersection of the demand curve and supply curve, therefore a firm is a price taker. Even if perfectly competitive market is theoretical, it is primarily used as a benchmark against which other market structures are compared. Considering four conditions above, Starbucks would be considered a part of a perfect competition Market; in the market, as a price taker, Starbucks does not have enough market power to affect the price and the quantity.

According to articles (see links blow), Starbucks let as many as 12,000 workers out when the company began closing 600 stores in U.S. in 2008 because these closed down 600 stores could not make a profit and were not expected to do so in the future. Starbucks has struggled with, externally, the faltering U.S. economy and, internally, its own rapid expansion; especially, its rapid expansion caused the loss of total profit.

For the better status of Starbucks' long-run costs and its profit, it needs to maximize its profit or minimize its losses by adjusting its output (sale).  Therefore, as Starbucks closed 600 stores, it minimized its loss by reducing its profitless sale. Reducing a price is another option to maximize its total revenue, attracting more customers. However, when we consider reducing a price of a product, in a perfect competition market, we have to accept a lower profit. Furthermore, we have to also consider how much the price of a product will be reduced. For this, Starbucks, as a competitive firm, shall consider break-even price and shutdown price as shown at the following graph.

 

   At P_BE, If the price is above this level, Starbucks is able to cover its average costs (AC), and thus make a profit; but below this, it will make a loss. However, if the price is to fall to P_SD, Starbuck would not cover all costs and thus operate its business at a loss. If the price is above the minimum of average variable costs (AVC), it will still produce; but below this, it will shut down.

http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html, http://seattletimes.nwsource.com/html/businesstechnology/2008028854_starbucks02.html,

http://www.cbc.ca/news/business/story/2008/07/01/starbucks-closures.html