Across the globe there are new businesses forming each day. Goods and services that ambitious entrepreneurs believe are what society is missing, goods and services that new business owners believe they can make better, and goods and services whose booming industries draw new ventures in. One service in particular that has always been a thriving industry is the hair care industry. The author will discuss this market, which has been around since the early 1800s, and has changed, improved, and evolved from an industry that began as a way to showcase the wealth of kings and queens to an industry who now caters to the everyday client.
Structure and Elasticity
The market structure of providing the service of cosmetology is a monopolistic competitive market and here’s why: in this market there are a large number of independently operating sellers, differentiated services promoted by heavy advertising, and easy entry into the market and out of the market. Due to there being a large number of sellers in the cosmetology industry each firm has a small percentage of the total market and also has limited control of the market price. Also, “with numerous firms in an industry, there is no feeling of interdependence among them; each firm can determine its own pricing policy without considering the possible reactions of rival firms.” (McConnell, Brue, & Flynn, 2009, p. 223).
The differentiated services offered in the cosmetology industry are showcased to consumers through heavy advertisement. From the outside looking in, those who are not a part of this industry may think that each salon offers the same services, however, services are offered based upon the decision of the salon owner and what one firm has, another will not. Services are offered based on the locations of the facilities, and what the clients who frequent the facility demand. It would not be cost efficient for an owner to offer facial services to a clientele who wants pedicures. One thing that is known across this industry is that if there is not sufficient product differentiation, there may not be a wide range of clientele frequenting an establishment and because of this businesses will have to close their doors, which brings the author to the next characteristic of a monopolistic competition.
Entry into this industry is relatively easy because, “monopolistic competitors are typically small firms, both absolutely and relatively, economies of scale are few and capital requirements are low.” (McConnell, Brue, & Flynn, 2009, p. 224). Monetary barriers may arise due to the need to improve techniques for servicing clients and the need for advertising a service that differs from competitor’s services. Exit from monopolistically competitive industries is relatively easy. There are no legal or technological obstacles that prevent a firm in this market from closing up shop and shutting down. To prevent the letter from occurring it is crucial for businesses to inform the public of what they have to offer.
Advertising is an expense involved in operating in this industry because the monies and time spent in developing a better service would be time wasted if consumers are not made aware of service differences. The goal of non-price competition is, “to make price less of a factor in consumer purchases and make product differences a greater factor.” (McConnell, Brue, & Flynn, 2009, p. 224). If this is done successfully, the seller’s demand curve will shift right and become less elastic.
The demand curve that a monopolistic competitive firm has is very elastic; however it is not perfectly elastic. This demand curve is highly elastic because, “the demand faced by the monopolistically competitive seller has many competitors producing closely substitutable goods.” (McConnell, Brue, & Flynn, 2009, p. 225). However, the demand is not perfectly elastic because there are fewer rivals and the products are differentiated, in essence they are not perfect substitutes. The price elasticity of demand in the cosmetology industry depends on the number of competitors and how different the services provided are. McConnell, Brue, and Flynn, assert that, “the larger the number of rivals and the weaker the product differentiation, the greater the price elasticity of each seller’s demand.” (2009, p. 225).
Pricing and Non-Pricing Strategies
The firms in the cosmetology market maximize their profits by ensuring that marginal revenue equals marginal cost, the point in which the profits gained from the service provided equals the cost of providing the service. However, loss of profits may happen in the short run because of the start-up costs involved in establishing a business in this market, and the time it takes to gain a clientele, or a large enough clientele to cover all costs of operation. In the long run most of the sellers in this industry will only break even. This is because profits draw many sellers into the industry which causes the demand curve to shift left, in other words demand falls because there are more firms meeting the once higher demand for service. As firms see the loss of profits there is now the exit of firms from the market, which raises demand back to an equilibrium point so that remaining sellers can break even.
Changes in the quantity supplied as a result of pricing decisions affect MC and MR because if prices are reduced MR will fall below MC. This isn’t economically smart because the costs of training new stylists, paying for the required yearly continuing education courses for cosmetologists, and the costs of purchasing materials and products, all do not change. Therefore, lowering the price of providing the service will place the firm in a deficit. On the other hand, increasing the price will have negative impacts as well. Consumers will seek services from other competitors whose prices stayed the same or whose prices are lower than the increased price of a service in one’s own establishment, and this will also place MC above MR.
The non-pricing strategy used by a salon is product differentiation. As mentioned earlier placing funds in advertisement, employee continuing education classes, trips to conventions and other cosmetologist shows will all contribute to increasing the barrier to entry because new sellers will have to not only focus on establishing every other part of their business but, new business owners will have to find monies to contribute to setting themselves a part one way or another.
Changes in business operations alter the mix of fixed and variable costs because if the business were to expand, there would be new fixed costs for a larger facility, higher utilities, and opportunity costs for the other avenues the money could be used for. New variable costs will be more advertisement, the addition of new hires and ensuring their knowledge is that of the other stylists in the salon, and so on. The fixed and variable costs will change within themselves; however they will not switch from one category to the other. If business changes involved downsizing, the fixed costs would decrease if the location is moved to a smaller building, and if the number of stylists in the company was also reduced because if there are less stylists in an establishment there are less utilities and other salon essentials being used. Variable costs that may change are the costs of travel for stylists to get to conventions and the cost of advertising may also increase because there will be a need for more clientele to cover the loss of profit coming in from the services the now eliminated stylists were providing.
Conclusion
In summation, the hair care industry will always be a thriving market because of the constant demand for the service, however too many sellers in this market will cause a loss of profit for the firms. As profits are realized more sellers are drawn into this industry which lowers demand, and as more entrants come, the profits decrease which leads to quick exit of some firms and for the remaining businesses allows them to break even. The determining factor in success in this industry is advertising, to show customers that one’s service is better than one’s competitors. What is seen here is that successful advertising and pricing are the key strategic elements needed for longevity in the cosmetology industry.
References
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, and
policies (18th ed.). Boston, MA: McGraw-Hill.
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