Examining The Market Structure Of Barbershops

E x t e n d e d e s s a y I n h l e c o n o m I c s

T o p I c :

Examining the Market Structure of Barbershops in West Amman

I n t r o d u c t I o n

For a male living in Amman, getting a decent haircut is quite an undertaking. I myself have witnessed this first hand, having tried over ten different barbershops and even trying to cut my own hair at one point but to no avail. The main problem I find here is the lack of expertise in most of these barbershops. None of them seem to have the appropriate training or the skills needed to be able to fully satisfy their customers and give them the "perfect haircut". Looking at it from an economics point of view, I was very interested in finding out the market structure which governed these firms. Is there really only one decent barbershop in the whole of Amman which is dominating the market? Or are they all equally bad at what they do?

The subject of economics has always fascinated me, and I constantly find myself trying to relate economic concepts I have taken in class to real world situations. It is from this eagerness to expand my knowledge of this subject and my love of it that I decided to carry out my Extended Essay investigation in economics.

After giving my topic some thought, I realized that since all of the barbershops I will be investigating are located in West Amman, it might be better for me to narrow down the scope of the investigation and focus it on examining the market structure of barbershops located in West Amman. Thus, I had arrived at my final research question: "What is the market structure of barbershops operating in West Amman?"

And so, throughout this investigation I visited a total of seven barbershops all located in West Amman, and collected all the data I needed for my study from them. In this essay I will illustrate the process of acquiring, analyzing and presenting my findings.

T h e o r e t I c a l b a c k g r o u n d

The way a firm behaves i.e. how much output it decides to produce and the price it sells its products at is known as a firm's 'market power'. The market power of a firm operating in a certain industry is determined by the degree of competition that exists in the industry, which, in turn, determines the 'market structure' of that industry. There are four main types of market structure. On one end of the competition spectrum we find the structure of Ð''perfect competition', and at the other end we find the structure of Ð''pure monopoly'. These two extreme types of market are rarely found in the real world but we may find markets that resemble some of their characteristics. In the real world, there are two prevalent types of market structure Ð'- monopolistic competition and oligopoly.

Monopolistic competition is a type of market structure where there are a large number of firms in the market selling similar but differentiated products. Firms operating in this type of market have very little control over the prices of their products, and so attempt to differentiate their products through product branding and advertising in order to attract customers. Because of product differentiation, firms are able to have a kind of 'monopoly' over their own brand and thus some price control. There are many close substitutes, however, and brand loyalty gives only limited price control. Because there are so many firms, each one operates independently, making little or no consideration for the behavior of its rivals. Another characteristic of this market structure is the fact that consumers and producers have extensive knowledge of prices and technology. This means that consumers have relatively complete information about alternative prices as well as product differences and brand names. This also means that producers have relatively complete information about production techniques as well as their competitors' prices. There is relative freedom of entry into and exit out of the market, which translates into firms not being able to earn supernormal profit in the long run as it will be competed away by other firms entering the market. The demand curve for a monopolistically competitive firm is downward sloping but highly elastic due to limited price control. Firms will operate where their marginal revenue curve meets their marginal cost curve Ð'- at their profit maximization point.

Contrary to monopolistic competition, oligopolies involve much less competition with only a few large firms dominating the market and controlling most of the market share. High barriers to entry are set up which allow these firms to maintain their dominance as well as their profits. This market structure is characterized by the interdependent nature of its firms. In order for one firm to survive, it needs to closely monitor the behavior of its rivals. Each firm must consider the reactions of other firms when making their own decisions on output and price. This interdependence between firms is the main reason why oligopolies rarely compete over price. Firms are afraid of starting a 'price war'. If one firm decides to lower its prices, the others will probably do the same in order to remain competitive, so they each manage to maintain the same market share relative to each other, but each one loses some revenue. Also it is not wise for a firm to raise it prices because consumers will then automatically switch away to buying cheaper substitutes from rival firms, and so its market share will fall drastically. Thus an oligopolistic firm faces not one but two demand curves, each with a different elasticity. The demand curve appears to be 'kinked' which causes a gap to exist between the marginal revenue curves. Oligopolistic industries tend to keep prices relatively rigid in order to maintain their market share, and so inter-firm rivalry takes the form of non-price competition.

On either side of the competition spectrum lie two extreme models of market structure which are not