Perfect Competition: Starbucks

Starbucks has been considered to be a part of a perfect competition market as it meets the four conditions; many sellers and buyers, no preferences, easy entry and exit and market same information available to all.

(First Starbucks store located across the street from Pikes Place Market in Seattle, WA)

During the global recession of 2007/2008 Starbucks planned the closure of stores in America which meant exiting the market in those areas.  The plan was to boost the bottom line and to increase stock prices.  Starbucks also discovered that some technological changes had affected more than just the efficiency of the product – it also affected a cornerstone of the Starbucks experience which is the interaction with the barista.

So what is the impact of this decision?  Initially, this decision will result in higher short-run costs for the company due to pre-tax charges and costs associated with severance packages, breaking lease terms, etc.  By “trimming the fat” so to speak, Starbucks is looking at the long-run costs associated with operating the stores and able to plan how they want to expand the experience.

I personally enjoy Starbucks whenever I go into a larger centre and do not perceive that the coffee is too expensive.  Drinking a Starbucks is more than just what you are drinking – it is about the experience, knowledge that I am supporting an ethical company and the prestige associated with the brand.  Starbucks provides quality coffee, uses premium ingredients and also provides a company image of being environmentally responsible.

The following graph illustrates what would happen if Starbucks was to decrease the price for their products.  As you can see, there is no chance since Starbucks is part of a perfect competition market and does not have control of the prices.