“Growth and Profitability: a Tale of Two Competitive Industries”

CASE 2: “Growth and Profitability: A Tale of Two Competitive Industries”

Question 1

No, it is not possible to make profits in the bagel industry in the long run because it exemplifies a perfectly competitive market.  There are minimal barriers to entry and exit (ovens, store rental space, and workers are all cheap and require little knowledge), minimal product differentiation, and there is no increasing returns to scales.

It is possible to earn profits (abnormal returns) in the cranberry industry because it behaves more closely an oligopoly in that it has high barriers to entry – limited supply of land in which cranberries can be grown, long and expensive lead-time for land transformation.

Question 2

The key problem that growth solves is in the short-run about whether to operate a loss, in which Revenues are less than Total Cost.  Growth can create the situation in which fixed costs are recovered and it is worthwhile to remain open.  Growth does not solve any problem once fixed costs have been recovered and marginal costs equal marginal revenues. 

Question 3

Yes, George should enter the cranberry market. It appears that prices are continuing to grow in spite of increased production.  In addition, George has an opportunity to acquire land in which the cost of production is favorable (Virginia) in comparison to other producers.  Therefore, George’s marginal costs should be less than many of his competitors (and less than the marginal revenues). 

On the other hand, one of the key risks in cranberries is that Ocean Spray and other large buyers are an Oligopoly, in which case the buyers can eliminate the potential for manufacturers to profit.

Because of the likelihood that George will profit from the farm, the risk from large buyers is not sufficient to deter an investment for the medium term – a 3 year time frame which is shorter than the time for new entrants to enter the market en masse.