Discuss whether the coffee shop market is contestable

Edexcel A-Level Economics Paper 1 June 2022 Extract

With reference to the information provided, discuss whether the coffee shop market is contestable. (15 marks)

Paragraph 1

1. On the one hand, the coffee shop market is not contestable.
2. This is because existing coffee shops like Starbucks are able to benefit from significant economies of scale.
3. Economies of scale are when firms are able to reduce their average costs as they increase output.
4. For example, coffee shops like Starbucks are able to save money as they can buy coffee beans in bulk.
5. This means it is more difficult for new coffee shops to compete in the market.
6. Therefore, conestability is reduced as barriers to entry are higher.

Evaluation

1. However, large firms will also experience diseconomies of scale which means they have higher average costs as output increases too much.
2. For example, larger coffee shops like Starbucks may be slow at taking on feedback from customers due to bureaucracy, whereas a small coffee shop can respond very quickly.
3. This means there is a chance that new firms can enter the coffee market and gain a local presence, as seen by the 3748 other chains in the UK in 2021.

Paragraph 2

1. Another reason why the coffee shop market is arguably not contestable is because of the strong branding by the market leaders.
2. In an oligopoly, firms know that they cannot raise prices too much as they would get undercut and lose market share.
3. They also tend not to lower prices as it can start a pointless price war.
4. Therefore, firms focus on non-price competition, such as improving their branding.
5. As the market leaders have incredibly strong branding, it makes it really difficult for new firms to enter.
6. For example, Starbucks became popular for spelling customer's names on their cups.

Evaluation

1. However, recently due to social media platforms like Tiktok and Instagram, it has become far cheaper for local coffee shops to implement strong marketing.
2. If local businesses are creative, they are able to gain attention with a small budget, proving that it is possible for new firms to enter the market.
3. Additionally, extract A line 8 mention that customers are putting coffee quality as the most important factor, meaning that high quality can allow small local shops to keep customers, despite the strength of the large brands in the coffee shop market.

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