A new competitor has circumvented the entry barriers and entered in the former monopoly that Starfire Coffee chain has held for 12 years. In this case the entry barriers were double.
On the first hand, the potential competitor had to be able to produce at a low cost to compete in prices with the already established firm. It was able to achieve so by offering the same product for 3 instead of 5.
Moreover, it had to compete with a firm that counted with the loyalty of customers. This loyalty is actually the base of its monopoly. In such case, the potential competitor needs to develop a high quality product that is able to attract and change the consumption habits of consumers who were loyal to the former monopolist.
Options for this question include:
A. Non-price competition in a monopolistic market
B. Non-price competition in a purely competitive market
C. Price competition in a purely competitive market
D. Price competition in a monopolistically competitive market
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The actions of Reindeer Brews in reducing its prices below that of Starfire means that this is D. Price competition in a monopolistically competitive market.
Price competition:
Reindeer Brews reduced their prices in order to gain customers from Starfire Coffee so this is price competition.
It is happening in a monopolistically competitive market which is a market with few participants where products are only slightly different - Reindeer Brews offers coffee and Starfire offer peppermint coffee.
In conclusion, the actions of Reindeer Brews is consistent with price competition.
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