The dairy farmers operate in a perfectly competitive market. The market has many buyers and sellers of the same product, and none can influence the market price. Similarly, it is hard for the consumers to tell the difference in the product to determine its origin. Dairy products sold by the various farmers are homogenous products. Contrary, Starbucks operates in a monopolistic market structure. The firm can differentiate its products from what other coffee houses offer. The consumers can tell the difference in the products and services offered.

Others suppliers include MacDonald’s, Peet’s Coffee and Tea and Dunkin’ Donuts. These firms compete under Monopolistic market hence facing a downward sloping demand curve. The firms under this market structure sell differentiated products (Lipsey, & Chrystal, 2015). The downward demand curve implies that the firms have market power that would allow them to increase prices for goods without losing all customers. Similarly, the firms must lower their prices if they want to sell more output.

Monopolistic firms have face downward sloping demand curve because of the presence of close substitutes. Therefore, the greater the product differentiation, the less elastic is the demand (Lipsey, & Chrystal, 2015). It means that the advertising budget for the firms is high if they want to attract more customers. Conversely, in a perfectly competitive market, there are no advertisement costs because buyers and sellers have perfect knowledge about the market.

Barriers to Entry and Competition

Barriers to entry entail situations that prevent competitors from entering the market (Besanko, Braeutigam, & Gibbs, 2011). In circumstances when the market has barriers to entry, not many firms would have the ability to operate in that market. Therefore, the level of competition in the market would be low.

With greater barriers to entry, the level of competition fall and this will create more powers to the existing firms, which will behave like a monopolist. Since the firms focus on maximizing profits, they will charge higher prices and produce less output. Being a sole seller, the monopolist will consider what price to charge its customers (Besanko, Braeutigam, & Gibbs, 2011).

The government-imposed barriers to entry give the business owner an exclusive right to prevent other firms from using patented product. Therefore, others sellers would not have the chance to operate in this market unless they get a license from the government. With market power, the firms will charge higher prices and produce less output thus affecting the consumers.

References

Besanko, D., Braeutigam, R. R., & Gibbs, M. (2011). Microeconomics. Hoboken, NJ: John Wiley.

Lipsey, R., & Chrystal, A. (2015). Economics. Oxford: Oxford University Press.

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