Semester A-2020

Title of Assignment Assignment 3 – Structure – Conduct – Performance Analysis

Name and Student ID

Nguyen Huynh Minh Thu – s3818271

Signature

Location RMIT Vietnam – Saigon South Campus

Class Group Group 09

Lecturer Jain Upasana

Word Count
(Main content without list of 1941
references, cover page, etc.)

Table of Content
I. Analysis……………………….………………………………......……..p. 2
Question 1: Coffee House market structure….…………………………….………………..p. 2
Question 2: Non-price competition……………………………......................……………..p. 3
Question 3: Price discrimination ………………..………………………............................p. 4
Question 4: Game Theory………………………………………………………………….…..p. 5
Question 5: Negative externalities in consumption and government intervention…......p. 6
II. Appendix....……………………..………………………………............p. 8
III. References……………………………………...…………….………p. 14

1
I. Analysis
Question 1: Coffee house market structure
I do not agree with the statement since the Coffee service market in Vietnam is defined as a
monopolistic competition market rather than an oligopoly due to the three characteristics which
will be analyzed in this paper.
a. Low concentration level
Low concentration is the first characteristic of the monopolistic competition market. Besides
the three leading firms namely Highlands, The Coffee House and Starbucks with the market
share of 18%, 7.1% and 6.8% respectively (Appendix A), there are more than 13,000 other
outlets of coffee chains (Appendix B). This data indicates there are a huge number of firms in
the market and each firm takes a small market share (Gans, King & Mankiw 2014). This
condition is different from the oligopoly in which few firms drive the market (Gans, King &
Mankiw 2014). Moreover, the concentration level of the four largest firms in this type of market
is 37.6% (see Appendix C for the formula) while that of oligopoly is 60% and above (Hayes
2019). Therefore, the coffee shop industry in Vietnam is considered to be in monopolistic
competition rather than oligopoly market.

b. Differentiated product
Product differentiation is a characteristic implicating the monopolistic competition market
(Hunt 2011, p.75). Although the main product is coffee, each firm tries to make their menu
unique by adding various products categories such as tea and cakes in different versions.
Specifically, Highlands Coffee’s suggestion in the coffee line product is black strong coffee
which is different from that of Starbuck - Western style Latte. Besides that, the former offers
the ice blended beverage and the Vietnamese signature Banh mi (see Appendix D), while the
latter attracts their customers with different types of Latte and sandwich (see Appendix E and
F). The Coffee House also differentiates itself with the product line of flavoured tea besides
the coffee drinks (see Appendix G). Furthermore, packaged coffee is another option provided
by Highlands Coffee and The Coffee House so customers can enjoy their product at home (see
Appendix H and I). Cong Ca Phe is an example of an independently owned coffee shop firm
that serves different types of beverage with coffee is the main ingredient (See Appendix J).
From another perspective, firms in the coffee house industry compete with each other by added
value. Knowing that Starbucks’ weakness is that customers need to purchase another drink
after three hours to continue using the wifi, The Coffee House creates a comfortable

2
atmosphere so that customers can stay long unconditionally. In short, firms in the coffee
catering industry in Vietnam not only sell slightly differentiated products but compete on non-
price factors.

c. Free Entry and Exit

Aside from the two mentioned characteristics, the absence of entry and exit barriers are also
used to determine the type of market. According to Mai (2019), Vietnamese market is fertile
and attractive to many firms. With an annual growth rate of 32 percent, coffee chains is one of
the fastest growing start up models in Vietnam (Duong 2018). Yet, the rivalry made the profit
generated was limited and plenty of players had to leave the market (Mai 2019). The leave of
both domestic foreign brands namely Gloria Jean’s Coffee and The Kafe (Asia News Monitor
2017) meaning there are still ways out for firms. In short, there is restriction in the entry and
exits of firms and the economies of scale in this market type is low. These features are opposite
to the significant barriers and large economies of scale of the oligopoly market (Le 2020).

In conclusion, based on the three characteristics namely low concentration level, product
differentiation and low entry barriers, it is ensured that the coffee chains industry in Vietnam
is a monopolistic competition market.

Question 2: Market structure and non-price competition

I do not agree with the statement since some of the main features of the monopolistic
competition market are the relation between its structure and non-price competitions. Firstly,
monopolistic competition is a combination of pure monopoly and perfect competition
(Tsoulfidis 2009, p.29). While monopoly indicates that firms have no rivals selling perfect
substitutes, perfect competition means that customers care more about price rather than quality
as products are homogenous (Arnold 2008). Therefore, the demand of monopolistic
competition market tends to be price sensitive and sellers compete on non-price factors or
differentiated products. Due to that reason, firms need to make their products different on either
physical or intangible aspects (BCcampus n.d.).
Firstly, firms can make the menu diverse with different versions of drinks or selling snacks so
customers can have more choices and more reasons to visit their shops. The Coffee House is a
fine model which is successful in offering a rich menu and becoming the fastest-growing chain
in Vietnam (Ha 2019). Secondly, providing an open space and decorations is also a way to

3
differentiate products. According to a survey from Q&Me (2018), more than 30% of
Vietnamese customers spend at least one hour staying at the coffee shop per visit. It means
Vietnamese go to coffee shops not only to drink coffee but to enjoy their time relaxing there.
For instance, the first ranked coffee chain Highlands Coffee also shows their strength in
competing on non-price factors as a market survey reported that customers choose this coffee
chain due to the diversity of drinks and large space (DNNN 2015). The second ranked player
The Coffee House is also successful in delivering customers added values such as free, high-
speed wi-fi and cozy space. Furthermore, advertising is also a tool to make the products become
different. Specifically, customers in monopolistic competition may have imperfect information
(Lumen n.d.), advertising is a useful method to fulfill that information gap. Advertising can
provide customers some justifications about the products’ quality (Phlips 1988), then firms can
build the beliefs of customers and relationships with them. More differentiated products can
lead to less elasticity in demand as they can raise prices without losing market share thanks to
the brand loyalty (Dewar 2017). In short, differentiating by innovating products is not a waste
of production resources, but to help firms improve performance on sales which make the rivalry
become fiercer.

Question 3: Price discrimination

Price discrimination is a marketing strategy which applies different prices of a product or
service on different group of customers (Twin 2020). There are three types of price
discrimination. The first one called perfect discrimination, the firm charges the customers
equally to how much they are willing to pay for the product. The second degree is based on
buyers’ choices. And the third degree is based on their unique demographics (McAfee 2008,
p.468). Monopolies have market power to set a high single price and produce little output, and
they have to face deadweight loss as customers who highly value the products still cannot get
them. Therefore, price discrimination will be a strategy eliminating that ineffiency (Lumen
n.d.) and firms can maximise profit.
Monopolies can apply price discrimination strategy if firms have market power, the ability to
group customers into different segmentations and must prevent reselling a good bought from
one market to another market with a higher price, this process is called arbitrage (Le 2020).

Case 1: The third degree of price discrimination is applied on movie tickets. Children, students
and senior citizens have low and elastic demand for movies. Therefore, a lower price offered

4
to them would increase the revenue for the firm. In contrast, patrons have the ability to create
money, and because of their hard work, they are more willing to pay more for entertainment.
In result, price discrimination helps the company to reach more segments of customers.

Case 2: Firstly, the two services provided are not the same. Moreover, the fees vary based on
the consultation time, medical consumables, not the willingness of patients. The difference
between the two types of consultation may be due to the cost of transportation. Therefore,
doctor’s consultation fee does not constitute price discrimination.

Question 4: Game theory

Figure 1: Game Matrix of ABC and XYZ

If each firm pursues their own-interest, they will follow the maximin strategy. Maximin
strategy explains when the firm chooses ‘best of the worst’ in order to minimize their loss. In
this case, if ABC chose to cheat, their minimum payoff would be minus $3000. If they chose
not to cheat, their minimum payoff would be minus $5000. Because -$3000 is greater than -
$5000, ABC’s maximin strategy would be ‘Cheating’. Similarly to XYZ, their minimum payoff
when they choose to cheat and play fair would be -$3000 and -$5000 respectively. Since -
$3000 is better than -$5000, their strategy is also ‘Cheating’.
In this case, the dominant strategy for ABC is ‘Cheating’ as regardless whether its opponent
cheats or not, ABC can reduce the loss and gain more money (lose $3000 and earn $2000 is
better than lose $5000 and earn $10000). Also XYZ, their dominant strategy is ‘Cheating’ since
losing $3000 and earning $2000 is more beneficial than losing $5000 and earning $10000.

5
The Nash equilibrium is when players make their best choice and have no incentive to change
their strategy after considering that of their competitor, the change will only lead to worse
results (Policonomics n.d.). According to the two strategies possibly applied, the outcome or
Nash Equilibrium of this game is ABC and XYZ both cheat and make a loss of $3000.

Pareto Optimum of the game is when a firm can be better off without making any other firm
worse off (Chappelow 2019). In this case, the Pareto Optimum occurs when both firms do not
cheat and they will earn $10000 economic profit for every year. Collusion is the best strategy
they can pursue to be better-off, which helps to fix the price setting and avoid price war.
Additionally, engaging in non-price competition would generate more profit rather than lower
price (Le 2020).

Question 5: Negative externalities in consumption and government

intervention
Externality is a cost or benefit affecting the third parties (Callahan 2001) who are not directly
involved in the transaction and uncompensated for the effect. As the negative externality in
consumption adds the external cost to the private cost, it will cause the social value less than
private value. Thus, the output quantity would be less desired by society, in other words, the
socially optimal quantity is smaller than the quantity determined by the private market (Gans,
King & Mankiw 2014) and witnessed over-allocation. In this case, market failure may occur
as the outcome is not satisfactory for the society and the equilibrium is not reached (Islam 2019,
p.277). There are positive externalities and negative externalities. While the former imposed
benefits, the latter are affected by the cost from the exchange in the market (Kenton 2019).
The alcohol beverage industry is an example with negative externality in consumption causing
the market failure. The social impacts of consuming alcohol are analyzed in figure 3. As
consuming alcohol has adverse impacts on external parties, society will value it less than it is
by the private market. Consequently, the market outcome is not efficient due to the over-
allocation of resources which is illustrated in figure 2.
In this case, corrective tax should be applied so that negative externalities which is the adverse
impacts on society could be internalized. When tax is imposed on customer side when they buy
each unit of alcohol products, they need to pay more because of the rise in price (Pmarket to Ptax).
Since then, the quantity demanded will in turn decrease (Qmarket to Qmarket), which can to reduce

6
the risk for the society. In a nutshell, negative externalities in consumption would be corrected
if government applies tax incidence on buyers.

Figure 2: Illustration graph of externalities and government intervention

Figure 3: Social impacts of consuming alcohol beverage

Alcohol beverage industry Consumption

Positive

Negative ● Alcohol consumption affects the

drinkers’ family both physical and
mental well-being since it may bring
up family conflict, violence and
potential divorce.
● Drunk driving can kill or injure
people on the road and they will live
with consequences.
● Economic loss to due alcohol abuse
and alcoholism which leads to low

7
 productivity and lost employment.

Adapted from: Rodriguez, Knee, and Neighbours (2013, p.295); Juergens (2015); Burke
(1988, p.566); NHTSA’s National Center for Statistics and Analysis (2017).

II. Appendix
Appendix A: Brand Shares in Chained Cafés/Bars: % Foodservice Value 2016-2019
(Euromonitor 2020)

Appendix B: Cafés/Bars by Category: Units/Outlets 2014-2019 (Euromonitor 2020)

8
Appendix C: Concentration Ratio calculation
CR4 = (R1 + R2 + R3 + R4) / Total market share
CR4 = (18% + 7.1% + 6.8% +5.7%) / 100% = 37.6%
R1: Highlands Coffee’s Brand Share; R2: The Coffee House’s Brand Share; R3: Starbucks’
Brand Share; R4: Phuc Long’s Brand Share

9
Appendix D: Highlands Coffee’s Menu (Highlands n.d.)

10
Appendix E: Starbucks’ Beverage Menu (Starbucks n.d.)

Appendix F: Starbucks’ Food Menu (Starbucks n.d.)

11
Appendix G: The Coffee House’s Beverage Menu – Tea (The Coffee House n.d.)

12
Appendix H: Highlands Coffee Packaged Coffee (Highlands n.d.)

Appendix I: The Coffee House Packaged Coffee (The Coffee House n.d.)

13
Appendix J: Cong Ca Phe’s Beverage Menu (Cong Ca Phe n.d.)

III. References
‘Monopolistics Competition and Oligopoly’ n.d., BCcampus, viewed 26 May 2020,
<https://opentextbc.ca/principlesofeconomics2eopenstax/chapter/monopolistic-competition/>.

14
An, H 2019, ‘Which are highest-grossing coffee chains in Vietnam’, The Hanoitimes 11 July,
viewed 24 May 2020, <http://hanoitimes.vn/which-are-highest-grossing-coffee-chains-in-
vietnam-46453.html>.

Arnold, R 2008, Economics, 8th edn, Thomson Higher Education, Ohio.

Asia News Monitor 2017, ‘Vietnam: Well-known café chains beat retreat from Vietnam’, 25
September, viewed 25 May 2020, ProQuest database.

Burke, T 1988, ‘The economic impact of alcohol abuse and alcoholism’, Public Health
Reports, vol. 103, no. 6, pp. 564-568.

Callahan, G 2001, ‘What is an Externality’, The Free Market, vol. 19, no. 8, viewed 26 May
2020, <https://mises.org/library/what-externality>

Chappelow, J 2020, Monopolistic Competition, posted 7 April, viewed 25 May 2020,

<https://www.investopedia.com/terms/m/monopolisticmarket.asp>.

Cong Ca Phe n.d, Drinks Menu, viewed 22 May 2020, <https://congcaphe.com/menu>.

Course Lumen Learning n.d., homepage, Lumencadela, viewed 22 May 2020,

<https://courses.lumenlearning.com/>.

DNNN 2015, ‘Which are highest-grossing coffee chains in Vietnam’, Vietnamnet, 15 June,
viewed 26 May 2020, <https://english.vietnamnet.vn/fms/business/133084/coffee-chains-
fight-for-market-share.html>.

Duong T, 2018, ‘The rise and fall of coffee houses in Vietnam’, Vietnam Economic News, 23
November, viewed 26 May 2020, <http://ven.vn/the-rise-and-fall-of-coffee-houses-in-
vietnam-36161.html>.

Euromonitor 2020, ‘Cafes/Bars in Vietnam’, table, Euromonitor, viewed 24 May 2020,

<https://www-portal-euromonitor-com.ezproxy.lib.rmit.edu.au/portal/analysis/tab>.

15
Gans, J King, S & Mankiw, G 2014, Principles of Economics, 6th edn, Cengage Learning
Australia, London.

Highlands Coffee n.d., Delivery Menu, viewed 21 May 2020,

<https://www.highlandscoffee.com.vn/en/delivery-menu.html>.

Hunt, S 2011, ‘The Theory of Monopolistic Competition, Marketing’s Intellectual History,

and the Product Differentiation Versus Market Segmentation Controversy’, Journal of
Macromarketing, vol. 31, no. 1, pp. 73-84.

Islam, Md 2019, ‘Market Failure: Reasons and Its Accomplishments’, International Journal
of Economics and Financial Research, vol. 5, no. 12, pp. 276-281.

Juergens, J 2015, Drunk Driving, Addiction Center, viewed 27 May 2020,

<https://www.addictioncenter.com/alcohol/drunk-driving/>.

Kenton, W 2019, Externality, posted 26 May, viewed 23 May 2020,

<https://www.investopedia.com/terms/e/externality.asp>.

Le, T 2020, ‘Monopoly (narrated)’ course note for ECON1194 Prices and Markets, RMIT
University, Vietnam.

Le, T 2020, ‘Oligopoly – Game Theory (narrated)’ course note for ECON1194 Prices and
Markets, RMIT University, Vietnam.

Mai, T 2019, ‘Vietnamese-owned coffee chains show strong rise’, Vietnamnet, 18 July,
viewed 25 May 2020, <https://vietnamnet.vn/en/business/vietnamese-owned-coffee-chains-
show-strong-rise-549754.html>.

McAfee, R 2008, ‘Price Discrimination’, ABA Section of Antitrust Law 2008, vol. 20, no. 1,
pp. 465-484.

16
National Center for Statistics and Analysis 2017, Alcohol-Impaired Driving, NHTSA’s
National Center for Statistics and Analysis,
<https://crashstats.nhtsa.dot.gov/Api/Public/ViewPublication/812450>.

Phlips, L 1988, The Economics of Imperfection Information, The Press Syndicate of

University of Cambridge, New York.
Dewar, D 2017, Essentials of Health Economics, Jones & Barlett Learning, Massachusetts.

Policonomics n.d., homepage, Policonomics, viewed 23 May 2020,

<https://policonomics.com/>.

Q&Me Vietnam Market Research 2018, Milk tea and coffee shops perception differences
among Vietnamese, SlideShare, viewed 28 May 2020,
<https://www.slideshare.net/asiaplus_inc/milk-tea-vs-coffee-image-in-vietnam>.

Rodriguez, L Knee, C and Neighbours, C 2013, ‘Problematic alcohol use and marital distress:
An independence theory perspective’, Addiction Research and Theory, vol. 22, no. 4, pp.
294-312.

Starbucks n.d., Drinks, viewed 22 May 2020, <https://en.starbucks.vn/menu-list/beverage-

list/>.

Starbucks n.d., Food, viewed 22 May 2020, <https://en.starbucks.vn/menu-list/food-list/>.

The Coffee House n.d., Menu, viewed 21 May 2020, <https://www.thecoffeehouse.com/>.

Tsoulfidis, L 2009, ‘The rise and fall of monopolistic competition revolution’ International
Review of Economics, vol. 56, no. 01, pp. 29-45.

Twin, A 2020, Price Discrimination, posted 3 February, viewed 21 May 2020,

<https://www.investopedia.com/terms/p/price_discrimination.asp>.

17
18