Comparison of Costa Coffee and Netflix within The Market

I am going to compare and contrast both Costa Coffee and Netflix, each competing in a different market structure and explain why I feel these organisations belong to one of them in particular. I will be discussing each of the organisations in relation to: price theory, elasticity of goods, cost curves and competitive pressures. Then I will conclude with an overview of both business organisations within their market structure and how they are similar but yet different.

Out of the four major market structures, I believe Costa Coffee (the nations favourite coffee shop 2017) functions as monopolistic competition (imperfect competition), in terms of the whole market for coffee (The Guardian, 2018). Costa has slightly more differentiated products to its competitors such as its major one, Starbucks. Therefore, Costa will use this market structure to their advantage as they know that a change in their prices will only effect demand by a very small percentage if anything, due to holding strong brand loyalty. Costa are confident that any business decisions made by their competitors i.e. Starbucks, Café Nero or even insignificantly to them, the smaller coffee chains, will not be due to the business decisions made by themselves and vice-versa, meaning that Costa will not have to stress about any decisions made by its competitors (Davison, 2012). Costa tries to promote its ‘Mocha Italia’ blend as a saviour from the worlds mediocre coffee and uses this as a way to increase its brand loyalty rather than competing solely on price with its competitors (Costa Coffee, 2018).

Netflix on the other hand, I believe operates as an oligopoly. It is a video streaming service that allows customers to watch a wide variety of TV shows, movies, documentaries etc (Netflix, 2018). There are not many organisations that offer this type of service in the market other than Amazon and YouTube who offer an identical/undifferentiated service to Netflix, meaning that the competition is extremely high. When you consider that an Oligopoly has only a few firms with a restricted entry and the nature of the product is either undifferentiated/ differentiated, it is almost certain Netflix would fall under this structure (Davison, 2012). Unlike monopolistic competition, firms within the structure of oligopoly are particularly affected by their rivals’ actions/decisions due to being characterised by interdependence, firms cannot afford to ignore other firms’ decisions (Davison, 2012). These could be: price, advertising output etc. Take for example the amount Netflix may decide to spend on advertising. If Netflix decides to spend £10M, then its main competitor (Amazon) should typically respond to this almost straight away. In this case Amazon may then decide to spend £15M, but then Netflix would have to spend £20M. It would be an ongoing situation but both firms would only gain the same amount of awareness.

We know already that Costa had been voted the nations favourite coffee shop 2017, so it is obvious that the demand for their coffee is high, therefore Costa will have had to increase its supply in order to meet demand. But how would Costa respond to a higher increase in demand? Well, an increase in demand may result in a shortage (as demand would exceed supply) meaning that the price of the coffee would rise, it would then alarm producers to supply more but at the same time may alarm consumers to buy less (Davison, 2012). However, as Costa has a very significant brand image and customer loyalty base, holding the UK’S largest coffee chain title, consumers are more likely to justify paying the price for the goods, so the change in the quantity demanded I believe will only be an insignificant amount (ITV News, 2018).

Similarly, if the demand for Netflix subscriptions was to rise then the price for a subscription will rise too. Netflix had justified the reasons for its price rise last year in 2017, they had related it to adding ‘’more exclusive TV Shows and movies, introducing new product features and improving the overall experience to ensure members find something interesting to watch even faster than normal’’ (Esquire, 2017). Netflix’s consumer base will more than likely view the justification for the price rise as sufficient as they are seen to be gaining a greater service as stated, so the change in the quantity demanded again I believe will only be an insignificant amount.

In contrast, there isn’t a substitute for Netflix like there is for Costa Coffee if we are relating it to the whole market. If for instance the price of Netflix were to rise significantly, and there were seen to be a large decrease in demand, people would simply just have to watch traditional tv or spend more time socialising. However, If the prices of coffee increased significantly, customers could therefore choose to buy tea (Davison, 2012).

Costa Coffee (again, based on the whole market for coffee) I believe is price elastic. This Is because if for instance the price of a coffee where to go up, the quantity demanded would go down a lot more. Costa is sensitive to a change in price, it has a number of substitutes, this is maybe why it has occasional offers. According to Daniel Jones, (consumer editor of The Sun newspaper), in early 2017, customers were found to be furious at a change in price due to Costa wanting to increase staff wages, Costa had promised to raise staff wages and not prices, but they increased both despite their promise to consumers (The Sun, 2017). You can assume from this that demand would have decreased, and after looking at the published full year results from the main company holder ‘Whitbread’ in relation to Costas alone statistics, it was proven that there was a continuous increase in return on capital from year 2014 – 2016 however there was shown to be a 4.5% decrease in return on capital from the year ending 2016 to the year ending 2017 (Whitbread, 2018). This would make sense as the specific business activity had taken place within that timeframe, and the profitability ratio had shown to be a lower percentage in comparison to previous years. The decisions made by Costa within that year such as increasing costs as well as general capital investment decisions have proven that costa were not very efficient that year and can be sensitive to these factors if they do not choose the right decisions or invest capital where necessary.

On the other hand, Netflix I believe is price inelastic (based on the whole market), this is because if for instance the price where to go up for a subscription, quantity demanded would only decline a small amount. Netflix is insensitive to a change in price as It only has a few substitutes. Netflix had shown to increase its prices in 2017 as explained earlier, thus to compensate for extra movies and tv shows etc. and even by doing this it was proven in the annual report that Netflix actually increased its net income for 2017 despite the price increase. Netflix’s net income for year ending 2016 was ‘’£186,678’’ and the year ended 2017 was ‘’£558,929’’ so there was actually seen to be a ‘’199%’’ change within those years which proves that Netflix Is very price inelastic (Netflix Investors, 2017).

Where Costa and Netflix are seen to be different is that Costa is sensitive to a change in price and Netflix isn’t.

Profit maximisation for Costa Coffee is simply when MR = MC, however monopolistic competition is very much at the competitive end of the spectrum this is due to differentiation of products meaning that they have some control over price – price makers (Davison, 2012). There are two types of equilibrium that organisations operating in imperfect competition can reach, these are: the long run and the short run, often referring to profits. In the short run Costa will maximise its profits when simply MR = MC, however if more people enter the market due to the low barrier of entry, there will be more substitutes, so demand will shift to the left causing no profit maximisation in the long run. For example; for Costa to produce one more additional unit of coffee, it will cost them (usually in labour), whilst the price for producing the additional unit will remain the same for the customer, however at the equilibrium point of when MR = MC, profits will be maximised.

Whereas Netflix which operates as an Oligopoly, can be very unpredictable with how they/ firms may react due to being price makers. Decisions made tends to depend on the reactions of rivals to a change in price. Therefore, an organisation like Netflix may decide to maximise profits by either colluding with its major rival Amazon, ‘’where both firms will act as a monopoly to maximise industry profits’’ or it may compete with its rival ‘’to gain a bigger share of industry profits for themselves’’ (Davison, 2012). On the other hand, as Netflix is supposedly the ‘’market leader with a 50 million+ stronger user base’’ according to Forbes online newspaper article, they may be more likely to choose tactic collision in relation to dominant firm price leadership (Forbes, 2017). Netflix, the dominator of the market, would set a price that all firms will then have to follow, however similar to Costa, it will profit maximise when MR=MC. For example; for Netflix to produce one more additional unit of a film, it will cost them (usually in production), whilst the price for producing the additional unit will remain the same for the customer, however at the equilibrium point of when MR=MC, profits will be maximised. Netflix however, tend to lose revenue due to more than one person being able to watch one film at one time on one screen, compared to if you were to go to a cinema and would have to pay separately to watch one film at one time on one screen.

In contrast, were Costa are price makers and have some form of market power due to differentiated products, Netflix’s prices depend on its reactions of its rivals.

In addition to this, if Costa were to compete majorly on price for example; offering a good (coffee) for £3 but then its main competitor Starbucks were to offer a good (coffee) for £2, Costa wouldn’t lose all its market share since the products are differentiated. There is less competitive pressure in this case therefore, Costa would only lose a small amount of demand. Similarly, if Netflix were to charge £15 for a service (subscription) but then Amazon were to offer a good (subscription) for £10, Netflix would lose market share, except they would loose significantly more. Netflix would therefore have to lower its prices due to large competitive pressures, or they may decide not to change anything if competing on content. They may instead decide to collude rather than compete as explained earlier.

In conclusion, out of the four major market structures I believe Costa Coffee functions as monopolistic competition whilst Netflix functions as an Oligopoly each within the whole market for coffee and video-streaming for the reasons explained. There are a number of similarities when analysing these particular market structures and a number of differences that make them unique and the reason for why they are either one of the four structures. The main similarities are: both companies have slightly differentiated products which put them at an advantage when competing with their rivals, they are also similar in the sense that if demand was to rise for both goods/services provided, the price would rise for them too. However the main differences are: Costa is price elastic whereas Netflix is price inelastic, Costa would be particularly effected by a change in price whereas Netflix would not.

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