Economics Case study

PRIMARK ASSESSMENT
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Primark Assessment
Question 1. What is the type of market structure for fashion clothing?
Market structures are divided into perfect markets and imperfect markets which include monopoly, oligopoly, and monopolistic competition (Adlakha, Johari, and Weintraub, 2015, 280). The fashion clothing is categorized as a monopolistic competitive market structure. It is characterized by the following;
a. There are many sellers and many buyers. In a monopolistic competitive market structure, there are many competing firms and many consumers in the market (Malerba, Nelson, Orsenigo, and Winter, 2007, 392). Consumers tend to perceive that there are no price differences in the market.
b. Products are differentiated. The fashion clothing is characterized by products which are not identical (Besanko, and Wu, 2013, 168). Products sold in the market have distinctive features, and consumers differentiate products regarding designs, packaging, and material used.
c. The firms face a downward demand curve. In the fashion clothing, firms face a downward sloping demand curve implying that more quantity is demanded at lower prices and low quantity of fashion clothes is demanded at a high price (Teather, and Wood, 2010). For a firm to sell more, it must reduce its price.
Demand Curve
18383258763100 Price
2209800-63500
18383256413500
0 Quantity demanded
d.

Firms influence the price. In fashion clothing, firms influence the price of their commodities. Although firms produce differentiated products, they tend to have monopoly power over their own products (Mazzeo, 2002, 226). This helps the firms in influencing the prices of their goods in the market.
e. No barriers of entry and exit in the market. Monopolistically competitive firms can freely enter the market when it is profitable to do so or exit when it is no longer profitable to stay in the market. If the existing firms are making abnormal profits, this will act as an incentive for new firms to enter the market (Li, Zhao, Shi, and Li, 2014, 829). As more firms enter the market, supply increases and in the long run, the abnormal profits will be eroded.
Question 2. What are the implications of this for the profits of retailers?
5810252667000Raw materials and transport costs are increasing, and there is also an increase in value-added tax (VAT) (Li, Choi, and Chow, 2015, 350). There exists a shortage of supply of cotton following devastating floods in Pakistan and China. Prices are projected to increase by about 5% to 8% in the coming year as warned by Next.
Increase in the cost of raw materials and transportation cost implies an increase in the cost of production which also increases the marginal cost (Dunne, Klimek, Roberts, and Xu, 2013, 480). Increase in cost of production further results higher prices as the firms shift the cost to consumers. Since demand is elastic, the increase in price will reduce the quantity demanded (Marx, and Mezzetti, 2013, 321). Retailers’ profits are maximized when MC=P=MR. at this point, the retailers are making shown by the area PXYAC.

10763254127500117157514541500 P, MC, MR MC
107632517843500107632520129500
AC
107632513462000189547513843000 P X
107632510223500 AC Y

D=AR
MR
107632521844000
Q Quantity
If price increases, the margin obtained by retailers from selling fashion clothes reduces. This will mean that the retailers will have lower profits if there is going to be an increase in price as forecasted by next (Lueg, Pedersen, and Clemmensen, 2015, 346). This is because an increase in price will reduce the quantity of fashion clothes demanded and thus lower revenues to the retailers.
As prices continue to increase, profits will be eroded and in the long run, firms will be at break-even point.
References
Adlakha, S., Johari, R. and Weintraub, G.Y., 2015. Equilibria of dynamic games with many players: Existence, approximation, and market structure. Journal of Economic Theory, 156, pp.269-316.
Besanko, D. and Wu, J., 2013. The impact of market structure and learning on the tradeoff between R&D competition and cooperation. The Journal of Industrial Economics, 61(1), pp.166-201.
Dunne, T., Klimek, S.D., Roberts, M.J. and Xu, D.Y., 2013. Entry, exit, and the determinants of market structure. The RAND Journal of Economics, 44(3), pp.462-487.
Li, W.Y., Choi, T.M. and Chow, P.S., 2015. Risk and benefits brought by formal sustainability programs on fashion enterprises under market disruption. Resources, conservation and recycling, 104, pp.348-353.
Li, Y., Zhao, X., Shi, D. and Li, X., 2014. Governance of sustainable supply chains in the fast fashion industry. European Management Journal, 32(5), pp.823-836.
Lueg, R., Pedersen, M.M. and Clemmensen, S.N., 2015. The role of corporate sustainability in a low‐cost business model–A case study in the Scandinavian fashion industry. Business Strategy and the Environment, 24(5), pp.344-359.
Malerba, F., Nelson, R., Orsenigo, L. and Winter, S., 2007. Demand, innovation, and the dynamics of market structure: The role of experimental users and diverse preferences. Journal of Evolutionary Economics, 17(4), pp.371-399.
Marx, L.M. and Mezzetti, C., 2013. Effects of antitrust leniency on concealment effort by colluding firms. Journal of Antitrust Enforcement, 2(2), pp.305-332.
Mazzeo, M.J., 2002. Product choice and oligopoly market structure. RAND Journal of Economics, pp.221-242.
Teather, D. and Wood, Z. (2010). Primark follows fashion rivals as it warns of rising costs. [online] the Guardian. Available at: https://www.theguardian.com/business/2010/sep/13/primark-sales-results-warning-fashion