H&M is one of the largest suppliers of fashion clothes on the Danish market, along with Bestseller and IC Company. The Danish fashion market is a Monopolistic Competition market, and according to the theory, there is free entry barriers (new firms are free to set up a new business, if they wanted to). This is not the case in real life though, since the initial capital can be an issue for some people, the manager simply doesn’t have enough money to set up their company, which can be a barrier.
H&M is differentiating from its competitors, by cooperating with famous designers to make unique clothing lines.Working with a famous designer has also made it possible to reach a broader audience, since there is more “prestige” in wearing a H&M made by a designer like Matthew Williamson than just a “regular” H&M and since it is in fact a H&M, the price is much lower than it would have been if it was one of Matthew Williamsons own clothing lines. H&M has also made themselves one of the major actors on the global market by operating from 1700 stores in 33 different countries – and still expanding! This has given the opportunity to see the different styles of clothing in different countries.H&M expanded to Japan in 2008, where there is a great interest in fashion.
The Japanese style is much different than the most common styles in the western world, and H&M therefore had a possibility to send some of their Japanese collections on the western market and vice versa – with huge success. Question 1. 2 As I’ve just accounted for, H&M is operating in a monopolistic competition market. To understand how the monopolistic market works, I will tell the principles through two different models.
The model for the short run and the long run.What we see here, is the model of the short run. If we look at the graph we know that profits are maximized at the point where marginal cost (MC) = marginal revenue (MR). If we look at that point, we can also see that the average cost curve (AC), is below the average revenue (AR) curve – which means that H&M can make super profits – in the short run.
We don’t know exactly how much profit they are going to make, since that depends on the level of demand. Let’s take an example. If we take a look at the designer collections which H&M are publishing; Those are (most likely) creating a uge demand since it will be the seasons most “hyped” clothes (if we consider the designers own clothing line) but at affordable H&M prices. Since this exact clothing collection is quite differentiated from their core competitors, they might be able to keep the super profits, until the start of a new trend/season, which means that if they want to keep their super profits, they got to be very innovative and come out with new ideas the second the demand starts to fall from the old collection.
If we look at the long run, after some time with making super profits, some competitors will start to enter the industry and try to lure the customers away from H&M, which means the demand for H&M will start to fall. If we look at the graph, we can see that the AR curve is moving to the left, which is a following consequence of falling demand. The demand will continue to fall, until the point where H&M is only making normal profits again. This is not really true in the real world though, since the competitors who might enter the market, can’t be sure that their product will be more tempting for the customer than the already published product.
With H&M this could again be the designer collection. If a competitor wanted to compete with H&M on this market, they would have to hire some famous designer themselves as well, or come up with another idea to lure the customers away (perhaps organic clothes). Customers wouldn’t buy clothing, from a new brand name, that no one knows about at the same price as a designer H&M clothing would cost. That just doesn’t happen.
Question 2. 1 For this question I will try to analyze the correlation between income and consumption. I will try to explain it with the help of a few different models.What we see in this model to the right, is a lot of budget lines (B1,B2 …) with corresponding indifference lines.
If we take the model into correlation with the numbers we have then we could say that the first budget line would be for the Danes who have a disposable income of less than 200. 000 DKK, the second budget line is for the Danes with an Disposable income of 200. 000 – 599. 999 DKK and so on.
If we look at the first budget line, we can see that the consumer buys a fairly small amount of both good X and Y, compared to the other budget lines.If those people suddenly got a salary increase, they would have a bigger disposable income which means their budget line would move to the right – they would consume more of each good, assuming both good are normal goods. There are exception though, for instance if we look at inferior goods contra normal goods, the line would look more like the graph of “Effect of Rise in income on the demand for an inferior good” As we see here, if good X is an inferior good (like vintage clothing) and good Y is a normal good (H&M clothing) the ones having an income of 200. 00 would buy almost all their clothes in a vintage store (I know this isn’t the case in real life, but just for the example) and only a few accessories (perhaps) in an H&M store (see point a).
This was for the poorest people, but if we take a few steps up the rankings (the B2 budget line) we can see that they consume less from the vintage stores (inferior good) and a lot of their clothes from H&M instead (normal goods) (see point b).To sum up: These models make good sense compared to the numbers we have, because if we look at the people with less than 200. 000 DKK there are 43. 7% who would buy more if they had more disposable money.
This is exactly what the first model is indicating, the budget line will move to the right. Looking at the other income groups they would, probably instead of buying more switch to more expensive goods normal goods or luxury goods instead of just buying more of the cheaper good.This is an alternative, or as we can see in the matrix, the more money people make the more they tend to put in savings for the future. This is also because that, you don’t intentionally need more clothes just because you’re wealthier.
Question 2. 2 H&M’s business concept is to apply fashion and quality at the best price globally. This is a good basis to understand how the correlation between income and consumption can affect H&M. As it is now the majority of the H&M clothing lines are quite cheap.
Somewhere in between inferior- and normal goods I would say. These lines are directed against the people with the lowest income, but instead of only covering this segment of the market, H&M has also launched their COS (Collection Of Style) line. This is the clothing line hosted by some of the famous designers that H&M is cooperating with, and that is a bit more expensive than the regular H&M clothes. Since they are covering two different market segments – two different price ranges they are able to cover a bigger part of the entire market.
H&M is focusing on the lower middle class with their prices, which is normally young students – this means that they will make a good customer relation and when they start to make their own money, they will probably still buy H&M clothings until the point where they make so much money that they can move up to normal/luxury goods (like D&G and Versace). Question 2. 3 State possible reasons for following statement: “H&M has not been greatly affected by economic downturns” The reason that H&M hasn’t been that greatly affected by the economic is since they are running this cost leadership strategy.Their clothes are already really cheap for the potential customer, so everyone can afford it and doesn’t have to prioritize to be able to buy it.
Another reason that they haven’t been that affected is that they have expanded a lot through the economic prices, to other countries. Especially in the middle east and Asia. Since it’s a monopolistic market, there are no boundaries for H&M to enter the market, and since they got the capital for it, it is really easy to start up new shops, and fortunately it has turned out well for them – because of their extremely good quality clothings at really low price.
