Adidas is an example of a firm that operates in a monopolistic competitive market. The first characteristic is that the sportswear industry has many numbers of firms which compete with Adidas; the firms include Puma and Nike brands. In 2013 Nike held 31% of the global market share, Adidas had 16% of the market whereas Puma, New balances and Rebook had 6% of the market shares (Fanaroff 2013). Also, Adidas offers sports shoes that are similar to those of rival companies. However, Adidas products are never a perfect substitute for the other firms’ product as the physical appearance of the goods is differentiated (Colorado.edu 2018). The product differentiation enables Adidas to invest heavily in advertising to attract new customers using the unique features of the product. Selective advertising empowers the company to mitigate considerable risks associated with high operating expenses which reduces the overall net income (Jayawardhana 2016, p. 79). In 2016 the company spent over four million dollars in advertising across the United States. Thirdly, there is resource mobility which makes it easy for new entrants to enter the market. Therefore, Adidas has established brands across Europe and America. The British administration also allows franchising whereby rebook use the Adidas brand to market their products. Adidas Company generated revenue of 1.77 billion euros from the sale of Rebook product in 2016.
Short run analysis
In the short-run, the firm wants to maximise profits thus, continue production so long the marginal revenue exceeds the minimal cost. A monopolistic firm realises either abnormal gains or losses. When it is making abnormal profits, new firms fail to join the industry in the short- term. Also, the firm has maximum benefit in the short run and engages in innovation and product differentiation to continue earning profit. Also, the firm strives to ensure that its average total cost remains less than the market price to make an economic profit.
Figure.1. Illustration of the short-run analysis of oligopolistic structure, economic profit (Spaulding 2018)
D is the Market Demand
ATC = Average Total Cost
MR = Marginal Revenue
MC = Marginal Cost
The profit = (Price- Average total cost)*quantity
Figure.2. Illustration of the short-run analysis of oligopolistic structure, short run loss (Spaulding 2018)
D is the Market Demand