SEMESTER 1, ACADEMIC SESSION 2023/2024 (A231)

SUBJECT:
SMG1013 MICROECONOMICS

TITLE:
MONOPOLISTIC COMPETITION (H&M)

LECTURER:
DR. ASMAH BINTI MOHD JAAPAR

GROUP:
GROUP 8 (KSB)

GROUP MEMBERS:

NO NAME STUDENT ID E-MAIL

1. PUTERI AINA SAADAH BINTI 1232672 [email protected]

YUSOFF

2. ABDAH FAQIHAH BINTI ABDUL 1232680 [email protected]

MUTTALIB

3. SITI NUR KHADEJA BINTI 1232681 [email protected]

MOHD SHARIF

4. KHAIRINA AMEERA BINTI 1232682 [email protected].

KHAIRUL ANNUAR my

5. NIK NOR NAJWA NATASYA 1232683 [email protected]

BINTI NIK AZIZ
Table of Content
Table of Content .................................................................................................................... 2
1.0 Overview of the firm and its core activity .......................................................................... 4
1.1 Overview ...................................................................................................................... 4
Figure 1 : Erling Persson , Founder of H&M. .............................................................................. 4
2.0 Definition and General Characteristics .............................................................................. 5
2.1 Definition...................................................................................................................... 5
2.2 General Characteristics ................................................................................................. 5
3.0 Production cost curve and revenue curve........................................................................... 6
3.1 Production cost curve .................................................................................................... 6
Figure 2 : Production cost curve. ............................................................................................... 6
3.2 Revenue curve .............................................................................................................. 7
Figure 3 : Revenue curve. ......................................................................................................... 7
Figure 4 : H&M’s Cost of Sales for its fiscal quarter ending in June of 2023. .................................. 8
4.0 The pricing strategy to maximize profit. ............................................................................ 9
4.1 Introduction ................................................................................................................. 9
4.2 Monopolistic Competition Market Pricing Strategies ..................................................... 9
Figure 5 : H&M Stocked SKUs And New In Products. .............................................................. 10
4.3 H&M versus UNIQLO ................................................................................................ 11
4.3.1 H&M ................................................................................................................... 11
Figure 6 : H&M design example.............................................................................................. 12
4.3.2 UNIQLO .............................................................................................................. 12
Figure 7 : Uniqlo offer poster. ................................................................................................. 13
5.0 Equilibrium conditions in the short-run and long-run ...................................................... 14
5.1 Short-run.................................................................................................................... 14
Figure 8 : Economic Profit. ..................................................................................................... 15
Figure 9 : Economic Loss. ...................................................................................................... 16
5.2 Long-run .................................................................................................................... 16
Figure 10 : Normal Profit........................................................................................................ 18
5.3 Illustration.................................................................................................................. 18
6.0 Advantage and Disadvantage .......................................................................................... 19
6.1 Market of firms........................................................................................................... 19
Table 1: Characteristics of market structure. ............................................................................. 19
Figure 11 : Sales of major apparel manufacturers and retailers worldwide in 2022. ........................ 20
6.2 Advantages ................................................................................................................. 20
 6.3 Disadvantages ............................................................................................................. 21
7.0 References ...................................................................................................................... 22
1.0 Overview of the firm and its core activity

1.1 Overview

Swedish multinational apparel retailer H&M (Hennes & Mauritz AB) is well-known for

the concept of “Fashion and quality at the best price”. The company's success and worldwide

recognition of its brand may be attributed to its global expansion. The fast-fashion business is

their core activity. Fast fashion is the term used to describe the rapid production of inexpensive,

affordable apparel in the market in reaction to current trends in fashion. H&M also revolves

around the fast-fashion business model, in which the firm excels in designing, manufacturing

and shipping a wide variety of affordable and fashionable products to a worldwide customer

via both physical and online stores platform.

Figure 1 : Erling Persson , Founder of H&M.

2.0 Definition and General Characteristics

2.1 Definition

The definition of monopolistic competition is imperfect competition refers to those

market structures that fall between perfect competition and pure monopoly.

2.2 General Characteristics

There are three general characteristics of monopolistic competition:

1. Many sellers

Many firms sell products that are similar but not identical and competing for the same

group of customers.

2. Product differentiation

Each firm produces a product that is at least slightly different from those of other

firms.

3. Free entry or exit

Firms can enter or exit the market without restriction

3.0 Production cost curve and revenue curve

3.1 Production cost curve

Figure 2 : Production cost curve.

With H&M's cost of production being $2.86B (converted from SEK29.88B), the

production cost curve consists of marginal cost (MC) curve, average total cost curve (ATC)

and demand (D) curve. The marginal cost curve intersects at the minimum of the average total

cost curve. The average total cost curve is U-shaped as it reflects both average fixed cost and

average variable cost. Average total cost is calculated by dividing total cost by the total quantity

of output. Meanwhile, the marginal cost curve is upward-sloping because of diminishing

marginal product. Marginal cost curve also shows that total cost rises when the firm increases

production by 1 unit of output. Marginal cost is calculated by dividing change in cost by change

in quantity.
3.2 Revenue curve

Figure 3 : Revenue curve.

With H&M's cost of production being $2.86B (converted from SEK29.88B), the revenue

curve consists of marginal revenue (MR) curve and average revenue (AR) curve which equals

the demand curve. The marginal revenue curve is downward-sloping because firms lower its

price to sell each additional unit. Marginal revenue is calculated by the change in total revenue

from an additional unit sold. Meanwhile, the average revenue curve is downward-sloping and

more elastic than the marginal revenue curve. Average revenue is calculated by total revenue

divided by the quantity sold. The demand curve is also the average revenue curve, and the

firm's price is equal to its average revenue.

Figure 4 : H&M’s Cost of Sales for its fiscal quarter ending in June of 2023.
4.0 The pricing strategy to maximize profit.

4.1 Introduction
In a monopolistic competitive market, companies have the autonomy to determine prices

for their products, as each firm offers goods similar to those of others. The pricing decisions

are influenced by the production quantity preferences of individual companies. Given that

multitude of producers, the impact on the overall market is limited. Companies employ

branding, advertising and packaging to create the perception of distinct products, leading to a

variety of prices in the market due to product differentiation. The presence of numerous

competitors means that a firm’s pricing strategy is independent of others and one company’s

approach does not significantly influence another’s. Consequently, firms have the freedom to

control and set their own prices.

4.2 Monopolistic Competition Market Pricing Strategies

Firstly, product differentiation and branding play a crucial role in monopolistic

competition. As companies invest in creating unique features, distinctive designs and effective

marketing to make their products stand out from other competitors. This differentiation is

crucial in monopolistic competition, as it allows companies to command higher prices by

offering products with perceived added value. Pricing strategies in this context often reflect the

perceived value associated with these unique product attributes.

 Figure 5 : H&M Stocked SKUs And New In Products.

Additionally, price discrimination involves setting different prices for different customer

segments based on their willingness to pay. This strategy recognizes that different consumers

may attribute different values to the same product. This strategy requires effective market

segmentation, identifying various customer preferences and price sensitivities, is essential for

successful price discrimination.

Moreover, firms use promotional pricing to stimulate short-term demand and boost sales

volume. This can be achieved through periodic sales events, discounts or other promotional

strategies. However, careful management is necessary to prevent any negative impact on the

perceived value of the product. Also, to avoid customers questioning the true value of the

product.

Furthermore, dynamic pricing is implemented as firms adjust prices in real-time based

on changing market conditions, fluctuations in demand, and competitive actions. This strategy

is facilitated by the use of algorithms and data analytics, allowing companies to respond quickly

to shifts in the market environment. Dynamic approach often involves the use of algorithms
and data analytics. Also, dynamic pricing helps optimize revenue by ensuring prices align with

current market dynamics.

In addition, product bundling is utilized as a strategy to encourage customers to purchase

more by offering combinations of products that provide perceived value. This strategy

leverages the complementary nature of bundled items, creating a perceived value that

encourages consumers to buy more than they might have with individual products. This

approach can be particularly effective when customers appreciate the synergy between bundled

items. It can also enhance the overall shopping experience.

Lastly, in monopolistic competition, firms pursue cost leadership alongside product

differentiation. Lowering production costs allows a firm to offer competitive prices while

maintaining a unique selling proposition. This cost advantage can lead to increased market

share and overall profitability, especially if the firm can balance cost efficiencies with

maintaining product quality and differentiation.

4.3 H&M versus UNIQLO

4.3.1 H&M
The first point, fast fashion and trend focus. H&M is recognized for its swift adaptation

to current fashion trends, operating on a fast-fashion model. This enables the company to keep

prices relatively low, facilitating regular inventory turnover and attracting a diverse customer

base.
 Figure 6 : H&M design example.

Next, promotional pricing. The strategic use of promotional pricing by H&M, marked by

frequent sales and discounts, plays a pivotal role in dynamically responding to seasonal shifts

in consumer preferences. By fostering a sense of urgency and encouraging more frequent

purchases, H&M effectively navigates the competitive landscape of fast fashion.

Lastly, collaborations and limited editions. Collaborations with esteemed designers

represent a cornerstone of H&M's strategy to create exclusivity and drive profitability. Limited-

edition collections resulting from these partnerships not only elevate the brand's image but also

allow H&M to command higher prices, appealing to fashion enthusiasts seeking unique and

exclusive pieces.

4.3.2 UNIQLO
Firstly, quality and timeless design. Uniqlo's commitment to delivering high-quality,

timeless designs positions it as a stalwart in the realm of wardrobe essentials. By emphasizing

value for money, Uniqlo slightly elevated its prices compared to fast-fashion counterparts,

underscoring the brand's dedication to providing enduring styles and durable products that

transcend fleeting trends.

 Plus, everyday low prices. Uniqlo's steadfast adherence to an "everyday low prices"

strategy goes beyond a mere pricing approach; it is a commitment to providing customers with

consistent value. By minimizing reliance on frequent sales or promotions, Uniqlo fosters a

sense of trust and loyalty among its customer base, ensuring a stable profit margin while

delivering reliable, affordable fashion.

Figure 7 : Uniqlo offer poster.

Last but not least, innovation and technology. Uniqlo's dedication to innovation extends

to the incorporation of cutting-edge fabrics and technologies in its product lineup. By investing

in advanced materials, Uniqlo not only justifies slightly higher prices but also resonates with

consumers who appreciate the functional aspects and technological advancements incorporated

into their clothing choices, adding an additional layer of value to the brand.
5.0 Equilibrium conditions in the short-run and long-run

5.1 Short-run

Firms in Monopolistic Competition in the Short-run can be called monopolies since they

sell slightly differentiated products and face a downward-sloping demand curve. Due to their

differentiated products, they have some market power on their products which makes it

possible for them to determine their price. Similar to monopolies, businesses in monopolistic

competition make short-term judgments about their prices and output. Conversely,

monopolistic enterprises experience some kind of competition since, like perfect competition,

there are many firms operating in the market and low barriers to entry. Dynamic shifts and

intense competition are present in the short term. As a result, although some businesses may

turn a profit, others will lose money and have to leave the market.

H&M firms maximize profit or minimize loss by producing that quantity where marginal

cost (MC) equals marginal revenue (MR). Equilibrium conditions in the short run divide into

two, which are economic profit and economic loss. In figure 1, there is economic profit. We

can see that output quantity is illustrated on the x-axis, while price and cost are indicated on

the y-axis. First, we examine the equilibrium point, or MR equal to MC. This point aids in

defining the equilibrium output of the firm as well. This indicates the output quantity in the

short-run equilibrium in this, as can be seen by examining the corresponding value on the x-

axis. The price should be found next. Suppose we create an imaginary vertical line that meets

the demand curve at the equilibrium output. The price's value is determined by the equivalent

price on the y-axis. In a similar way, we may determine the equivalent ATC value at the

equilibrium output. We can see that price is more than average total cost (ATC) and total

revenue (TR) is more than total cost (TC). Therefore, we can know that this is economic profit.
 Figure 8 : Economic Profit.

Not every business is fortunate enough to turn a profit in the short-run. The monopolistic

competition scenario shown in Figure 2 below results in losses rather than short-run profits. In

Figure 2, the average total cost curve does not intersect the demand curve. As a result, the

demand curve is never below the ATC curve. As a result, the price that corresponds to each

amount is always lower than the average production cost. As a result, the company cannot

manufacture in a number that would keep it from losing money. Producing at the precise

quantity where MR=MC is the only way for the company to minimize the loss. Losses will still

be minimized by producing that quantity where MR=MC. The price is less than ATC and the

TR less than TC.

 Figure 9 : Economic Loss.

Firms in monopolistic competition, like those in monopolies, make short-term judgments

about their prices and output. In the short-run, businesses should produce at a level where

marginal revenue and marginal cost are equal in order to maximize profits and minimize losses.

At the equilibrium output level, the business will turn a profit if the market price is higher than

the average total cost; if the average total cost is higher than the market price, the firm will lose

money, with the loss being reduced at the point when marginal revenue equals marginal cost.

To calculate a firm’s profit or loss in the monopolistic competition in the short run, we should

take the difference in price and the average total cost and multiply it by the equilibrium

quantity.

5.2 Long-run

Businesses that compete monopolistically offer unique items to their customers. They

have some market power over their products because of how differently they create theirs,

which allows them to set the price. However, because there are many businesses operating in

the market and few barriers to entry, they must contend with competition. Firms in
monopolistic competition always make zero economic profit when the market is in equilibrium

over the long term. When the market is in equilibrium, neither existing companies in the sector

nor prospective companies desire to enter it. Since it is assumed that the market is open to new

entrants and that certain businesses are profitable, other businesses will seek to join it. Only

when new businesses enter the market and reduce profits will the market reach balance. In the

long run, the businesses that are losing money are not in equilibrium. Businesses must

eventually leave the market if they are losing money. The market is only at equilibrium, once

the firms that are incurring losses will be eliminated.

In the long-run equilibrium, the firm illustrated in Figure 3 is experiencing monopolistic

competition and making zero profit. It is evident that the crossing point of the MR and MC

curves defines the equilibrium quantity. At the equilibrium output level, the price and quantity

can be read. The demand curve is tangent to the average total cost curve at the matching output

level, which is called equilibrium. Normally, we take the difference between the average total

cost and the demand curve, multiply it by the equilibrium production, and use that result to

determine the profit. But since the curves are tangent, there is no difference. In the equilibrium,

the firm is profiting zero, as we would expect. We can see that market price equals average

total cost.
 Figure 10 : Normal Profit.

Monopolistic competition is a form of imperfect competition in which monopolistic and

perfect competition characteristics exist. To maximize profits or minimize losses, businesses

should produce at the level where marginal revenue equals marginal cost. The new businesses

will enter the market if the current businesses are profitable. As a result, there is a leftward shift

in both the marginal revenue curve and the demand curve of the current firms. The new firms

stop entering until the firms start making zero profit in the long run. Some of the current

enterprises will leave the market if they are incurring loss. As a result, the current companies'

marginal revenue curve and demand curve both move to the right. Until the companies begin

to turn a loss, they stop leaving the market. Long-run market equilibrium can only be reached

when there are no longer any entries or exits.

5.3 Illustration

To illustrate, the other firm will enter the same industry, then will reduce the profits of

the other firms. More firms, then they gain normal profit if there are too many firms, then they

will incur losses, especially the inefficient one, which will cause them to leave the industry.
 6.0 Advantage and Disadvantage

6.1 Market of firms

CHARACTERISTICS OLIGOPOLY MONOPOLY PERFECT MONOPOLISTIC

COMPETITION COMPETITION

NUMBER OF SELLERS Few sellers Single seller Many sellers Many sellers

TYPE OF PRODUCT Either similar or No close substitute for Homogenous Differentiated

differentiated of the product / unique (style, service,

product quality)

SIZE OF FIRM Average / large Large Small Medium to small

BARRIERS TO ENTRY High barriers Barriers to entry for new Free barriers Low barriers

AND EXIT firms

PRICING POWER Price maker Price maker Price taker Price maker

EXAMPLE Motorcycle: Yamaha, Eggs, plastic bottle H&M

KTM, TNB
Suzuki

Table 1: Characteristics of market structure.

 Figure 11 : Sales of major apparel manufacturers and retailers worldwide in 2022 .

6.2 Advantages

The advantages of the monopolistic competition market in H&M firms are low barriers

for entry and exit in the retail clothing industry. This includes the cost for the production of

products, the packaging and the worker. Same as monopoly, H&M emphasis on the advertising

but H&M does not operate in monopoly because H&M have a small control over the price due

to the differentiation in design or style of their products. Marketing over the online platform

such as Instagram and TikTok or advertising in magazines and public advertisement can gain

a lot of consumers because consumers can easily find and make a price comparison between

other retailers.

Other than that, the differentiated products in style and type influence brand loyalty

among consumers. This can maintain a group of consumers even H&M raise the price on their

products. But oligopoly markets are the markets that produce similar products and completely

differentiated products that have a serious number of barriers to entry and exit even though this

market is a price maker.

6.3 Disadvantages

For the disadvantages, H&M is a balanced size of firms which is small to medium sized

with 3500 stores in 57 countries, and a total of 13200 employees. They only had an extremely

small size of industry. There’s a high number of competitors in the clothing retail industry that

sell similar but slightly differentiated products. So, H&M needs to compete with other

companies. If they increase the price of their products, the demand of consumers will decrease

because they will easily find other substitutes. The power over price control that they have is

not as strong as monopoly market firms.

7.0 References

Annual and Sustainability Report 2022 - H&M Group. (2023, August 2). H&M Group.
https://hmgroup.com/investors/annual-and-sustainability-report/

H&M | HMB - Cost Of Sales. (n.d.). TRADING ECONOMICS.

https://tradingeconomics.com/hmb:ss:cost-of-sales

Hargrave, M. (2022, March 29). Maximizing profits in a monopolistic market. Investopedia.

https://www.investopedia.com/ask/answers/041315/how-profit-maximized-
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Ingrid Giertz-Mårtenson [email protected] (2012) H&M – documenting the

story of one of the world's largest fashion retailers, Business History, 54:1, 108-
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Masibo, B. (2021, December 5). Pricing strategy different market structures: CFA Program
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pricing-strategy-under-each-market-structure/

Monopolistic Competition in the Long Run: | StudySmarter. (n.d.). StudySmarter UK.

https://www.studysmarter.co.uk/explanations/microeconomics/imperfect-
competition/monopolistic-competition-in-the-long-
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Roberts, J., & Sonnenschein, H. (1977). On the Foundations of the Theory of

Monopolistic Competition. Econometrica, 1, 101. https://doi.org/10.2307/1913289

Selection of Market Structure. (n.d.). H&M. https://hmmarketstructure.weebly.com/selection-

of-market-structure.html

Salop, S. C. (1979b). Monopolistic Competition with Outside Goods. The Bell Journal
of Economics, 1, 141. https://doi.org/10.2307/3003323