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Commentary Number 1

A monopolistic competition is a market structure, which is characterised by a large number of firms competing with each other and freedom of entry (it is not difficult to establish a new firm and start production). At this stage it is very similar to another market structure – perfect competition. The main difference between these two is that, when in the second case firms offer products, which are very similar, in monopolistic competition products are differentiated, so each producer introduce something new and distinguishing. This affects the price elasticity of demand, which shows how responsive is the quantity demanded to the given price. In perfect competition, if one producer increases the price, consumer merely chooses the product of rival (demand is perfectly elastic). In the monopolistic competition this change cannot occur so swiftly, since it is connected with some disadvantages for consumer (for example rivals’ products are not what he exactly need). As a result quantity demanded decreases, as the price goes up, however not so drastically as in perfect competition (the demand is more inelastic, but still less then in monopoly, where the market is occupied by one firm and there are no close substitute goods – goods which can be treated as alternatives – for example supplier of electricity).

The position of demand curve can be also changed by product development and advertising. First of these make product better, the second makes it to be believed better. The effect of both is the same: they cause the demand curve shift to the right, because people want to buy more for the same price. Additionally they make it less elastic (roots of this fact are the same as above: consumers think, that there is a large difference between 2 products and they are more determined to buy a better one).

The position of demand curve is essential for profit maximising. All firms will try to increase an output, until the marginal costs (costs of producing one more extra unit of output) is not higher then the marginal revenue (the revenue, which they gain from selling it). For this quantity (let say ‘q’) profit is maximised. Now it can be calculated with the formula: Profit = Q(AR-AC), where AR is average revenue (price) for quantity q; AC are average costs for quantity q. As a consequence the value of profit depends on demand curve, since it reflects average revenue curve and is linked with marginal revenue curve. As it is shown in Fig. 1, 2 and 3 the more the demand is inelastic and the demand curve is shifted to the right, the higher the profit (shaded area).

High percentage beer market is under oligopoly (is dominated by few firms). Their clients, usually men, used to buy brands well-known for them. This determines the highly inelastic demand and higher profit, but for new firm it is not easy to enter. Contrary to this, market of low percentage beer designed for teenagers and women, who are not so addicted to one brand, is characterised by the elastic demand. Browary Belgia decided to enter this market with the product which was completely new for the Polish – ginger beer. The facts that the product was well-developed, well-advertised and quite different then the others caused that a lot of people quickly recognise it as their favourite one; they will drink it even if the price goes up. An inelastic demand and shifting demand curve to the right provide large supernormal profit. The situation was nearly the same, as this showed in Fig. 3, although in this case the profit was reduced by advertising and product development costs. This appeared, however, only at the beginning.

There are two points which can limit this enthusiasm.

In my opinion firstly demand for ginger beer is so high, because it is popular and fashionable. This, in turn, is a consequence of emission of the commercials. When the advertising campaign is over, the high demand will depend only on the true quality of Ginger. Tests proved that Poles like it, but tastes are unstable, especially if rivals offer something new and start another advertising campaign.

Additionally, in the long run high profits and low barriers of entry (especially for existing brewers) can attract other firms and encourage them to produce similar drinks. This will significantly increase the elasticity of demand, shift the demand curve to the left and hence reduce the profit of Browary Belgia. Probably the best solution for the firm is to look for the other new kind of beer.