To what extent is the hotel industry in Torquay monopolistically competitive?
Introduction
Torquay is a seaside resort town on the English Channel in Devon, south west England. Until the early 19th century Torquay’s economy was mainly dependent on agriculture and fishing; it then started developing into a seaside resort and over the coming centuries, due to its welcoming climate and beautiful views, it became known as the English Riviera. Torquay’s population is clocked at 62,245 people. In 2014 the Telegraph published an article where it focused on how Torquay had become the third best destination in Britain after London and Edinburgh.
Torquay has over 100 hotels and B&Bs with prices ranging from £49 per night to £265 per night dependent on season and location. Due to the large number of hotels in Torquay I shall be concentrating only on the 5 star hotels in Torquay according to Expedia.co.uk. The Hotels included in this paper will be The Somerville; The Marstan Hotel; Elmdene Hotel; Kingston House; The Albaston; Tyndale B&B; Cary Arms; The Berburry; The 25 Boutique B&B; Hesketh Crescent Apartment. The restriction to only the 5 star Hotels according to Expedia.co.uk allows me to narrow the number of variables that I should consider as well as increases the specificity of my research.
The method in which I will respond to my research question “To what extent is the hotel industry in Torquay monopolistically competitive?” is by categorising the features that make an industry monopolistically competitive. I became interested in the hotel industry when I first moved to Torquay as it surprised me how many hotels and B&B’s were present in such a concentrated area and furthermore how they all competed to survive in the market.
Approach
In assessing the extent to which the hotel industry in Torquay is monopolistically competitive I will focus on the assumptions, implications and features of the form of imperfect competition known as monopolistic competition. I will examine the characteristics of the 10 five-star hotels mentioned in specific detail as well as a more general investigation in the rest of the hotel industry present in Torquay.
In order to aid my investigation I will conduct a number of primary and secondary research regarding my question. My primary research will consist of conducting a number or surveys and interviews relating to the prices of staying in hotels each night as well as the costs that the different hotels incur. Furthermore, they will also focus on the initial entering into the hotel industry and the difficulty, or ease, in doing so. Moreover, primary research shall be conducted on both producers and consumers. Therefore, I will be including and engaging the relevant consumers, producers and other parties. My secondary research will consist of various internet websites, news articles and textbooks.
The way I will interpret the extent to which the hotel industry in Torquay is monopolistically competitive is through analysing and evaluating the different features that are outlined in this form of imperfect competition. Therefore, I will be specifically looking at/for large numbers of buyers and sellers, barriers of entry, product differentiation, selling cost, lack of perfect knowledge, less mobility and a higher elasticity of demand.
Theory
The theory of monopolistic competition states that there may be a large number of firms that are in competition with each other but each firm sells a slightly different product. For example the restaurant industry is one where each restaurant offers the same general service and they are all competing for the same general customer. However, each restaurant has an element that gives them a unique aspect compared to its competitors.
A.Characteristics of the Theory
The chief characteristic of the theory of monopolistic competition is that the industry consists of a large number of buyers and sellers and that the “industry concentration is low”.
The second characteristic is that of slight product differentiation. Product differentiation means that consumers are able to tell one firm's product from another as well as it gives the firms a USP (Unique Selling Point) compared to its competitors. Product differentiation can be split into two main types of differentiation.
Physical product differentiation is linked to the actual physical product itself. This means the design, colour, shape, size etc. that make the product unique from its competitors.
Marketing product differentiation means the advertising of the product compared to its competitors. This means the packaging or “other promotional packaging” techniques that allow the consumer to distinguish the product. This can also link into how the product is distributed in that some products are distributed on specific internet sites such as Amazon or the actual product’s site.
Barriers to entry and Exit. These are factors that make it hard for “potential firms to enter and industry and compete with existing producers”. There are a number of forms in which barriers to entry and exit can present themselves. For example, high fixed costs generally reduces competitions as less firms would be willing and/or able to enter the market. Another example of a barrier to entry would brand loyalty for the incumbent product or service. High brand loyalty means that entering firms must provide significant expenditure on attracting customers through advertising.
A characteristic of monopolistic competitions must be low barriers to entry and exit, which means that the entrance to the market in question must be of high accessibility and wide feasibility.
When looking back to the first assumption mentioned we can draw the fourth assumption of independence. Because there are a large number of buyers and sellers the firms are small, relative to the size of the industry. This means that each firm is unlikely to have a great affect towards its rivals which as a result means that firms can and are able to act independently from each other. In this way, to a small extent, firms can be said to be price makers.
B.Implications of the Theory
In addition mentioning the main characteristics above, its important to outline implications to for the behaviour of firms operating in a monopolistically competitive industry. Most importantly, “in the long run, normal profits can be made”.
Normal Profits
Normal profit is “the minimum level of profit needed for a company to remain competitive in the market”. Additionally, normal profits is the the profit required to keep the firms in question in production while at the same time not attract new entrants. This is when the average cost (AC), which is the cost per unit of output, is equal to the average revenue (AR), which is the revenue per unit.
Diagram 1
As we can see from the diagram AC=AR at point Q1 and Q2, which is where competitive pricing is being produced. What is important to understand is that the firm is making abnormal profits when AR>AC. Conversely, when AC>AR, the firm is making a loss. Abnormal profits are profits which are greater than the normal profits. These profits attract new firms to enter the market. However, in order to prevent this, firms that are already in the market will accept the normal profits instead as this will help avoid new firms from “hurting” their market share.
Therefore, the threat from new firms will push prices down and instead of producing where MC=MR (the profit maximising output), firm will produce at AC=AR (where normal profit is being made). As we can is in Diagram 2 producing at Q1, the profit maximising output, will create abnormal profits which are represented by the shaded area. However, as I mentioned previously firms will instead choose to produce at Q2 with the corresponding price P2.
Diagram 2
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