Question

You are thinking of setting up a coffee shop. The market structure for coffee shops is monopolistic competition. There are three Starbucks shops and two other coffee shops very much like Starbucks in your town already. In order for you to have some degree of market power, you may want to differentiate your coffee shop. Thinking about the three different ways in which products can be differentiated, explain how you would decide whether you should copy Starbucks or whether you should sell coffee in a completely different way.

Short answer

Explain your answer based on the analysis of product, service, and marketing differentiation.

Step-by-step solution

Understand the market structure of coffee shops

Monopolistic competition is a market structure in which there are a large number of sellers producing differentiated products. In this case, there are three Starbucks shops and two other coffee shops similar to Starbucks. A new coffee shop would be entering an already competitive market, so it needs to find ways to differentiate its product to have some degree of market power.

Analyze the three ways to differentiate products

There are primarily three ways to differentiate a product or service in the coffee industry: (1) Product differentiation - changing the actual physical product or the way it is marketed; (2) Service differentiation - improving the overall customer experience through superior service; (3) Marketing differentiation - finding unique ways to promote the brand and reach customers.

Consider product differentiation

A new coffee shop can differentiate itself in the product by offering a unique coffee blend, exclusive flavors or using specialized brewing methods. This could make the new coffee shop stand out from Starbucks and other similar cafes. Analyze the current Starbucks offerings and decide whether copying those products would allow for differentiation or whether a completely new approach is required.

Consider service differentiation

A new coffee shop could focus on providing a superior customer experience than Starbucks, such as offering faster service, more personalized options, or a more comfortable ambiance. Analyze the current service standards of Starbucks and other similar cafes and decide if there is room for improvement and differentiation in this aspect.

Consider marketing differentiation

A new coffee shop could find unique promotional methods or target customer segments that Starbucks and other similar cafes have not yet reached. Develop a marketing strategy that sets the new coffee shop apart from its competitors and creates a strong brand presence in the town.

Making the decision

After analyzing the three ways to differentiate products, decide whether copying Starbucks' approach would be beneficial to gain market power or if taking a completely different approach in product, service, or marketing would be more effective. Keep in mind the goal is to attract customers and compete effectively with existing coffee shops in the town.