J. Wesley Day
GM 545 – Economics
Keller Graduate School
Professor, Suzzette Arnold
March 19, 2011

The Bernard Madoff scandal occurred during a major economic crisis by operating an investment Ponzi scheme that took citizens, companies, and 501c’s for millions of citizens. A time that major banks and other firms performed poorly or failed altogether many bank executives still received high salaries, bonuses and severance. Which is an example of diseconomies of scale. This is all unethical business. While many workers are losing their jobs, taking pay cuts, or having their hours to decline, in part due to diminishing marginal returns.

Authors from a Harvard Business Review article point out that managers are now losing the public trust. The article asks for colleges and universities to address management as a profession governed by codes of conduct that holds managers responsible to society for their unethical behavior.

According to the business dictionary, ethics is the philosophical study of morality or standards regarding good character and conduct. In society when we apply ethical reasoning to decisions made by individuals and teams in organizations, the focus is on moral problems and dilemmas that are associated with the decision-making process that affects our society.

The public image of business has been slipping since the EON scandal due to dishonesty and poor ethical standards. As companies are downsizing, they are putting more responsibility on shared responsibility and teamwork. Production in the short run is the structure of a firm depends on the nature of the production process.

In the coffee industry, there is not much bargaining power for suppliers with implicit costs by sacrificing costs such as equipment. From this statement, it is assumed that Starbucks has a huge impact on the sales of the individual suppliers they buy all of their coffee from. Not exactly a “monopoly”, but more “monopolistic”. Therefore, Starbucks has a long-term relationship with its suppliers and has a lot of input on the prices that they are willing to pay. Starbucks success in their high quality products has a lot to do with the fact that they have such a strong tie with their suppliers.

Starbucks has faced a decline in customer loyalty based on their sales analysis. The number of ‘regulars’ is declining, and the frequency of their visits is on the decline. The decline could be caused by economic pressure on the consumers, the increase use of in-home brew systems, or the switching to other places (Caribou or McDonald’s new McCafe). To encourage regulars to increase their visits, and attract new customers, selective price reductions and frequent visit incentives have been experimented with.

Buyers have more choices for the product that Starbucks offers due to competition. The product is not a necessity other than the potential addiction that caffeine represents. Consumers have a variety of options for the same product, and for substitute products. Further, the company indicates only one strategy for dealing with the decline – a cost based strategy. Starbucks have more sunken costs (leases/mortgages/utilities) than competitors due to all the stores they have, which is a legal obligation.

Starbucks has been experiencing greater direct competition from large competitors in the US quick service restaurant sector and continues to face competition from well-established companies in many International markets and in the US ready−to−drink coffee beverage market.
Today, the number of quick-service restaurants and ready-to-drink beverages is huge. This statement is of great importance to understanding their competitive position as it shows how significant it is for Starbucks to differentiate themselves from all the other types of companies out there, both domestically and internationally. Coffee is an example of elasticity as it’s an option or desire and not an absolute need.

The Internet has the potential to significantly reduce search costs by allowing consumers to engage in low-cost price comparisons online. The last five years have witnessed an explosion in the growth of electronic commerce and Internet marketplaces as alternatives or supplements to traditional retail markets (McQuivey et al., 1998). Consumers can now go online and comparison shop between hundreds of vendors with much less effort than in the physical world. The traditional economic view suggests that, as a result, the Internet should reduce search costs for consumers and thereby reduce prices and make markets more competitive.

References

Burdett, Kenneth and Kenneth L. Judd, “Equilibrium Price Dispersion,” Econometrica, 51, July 1983, pp. 955-970.

Carlson, John and R. Preston McAfee (1983), “Discrete Equilibrium Price Dispersion,” Journal of Political Economy, 91(3), pp. 480-493.

McQuivey, James, Kate Delhagen, Kip Levin, Maria LaTour Kadison, “Retail’s Growth Spiral,” Forrester Report, 1 (1998), Issue 8.

Milyo, Jeffrey & Joel Waldfogel, “The Effect of Advertising on Prices: Evidence in the Wake of 44 Liqourmart,” The American Economic Review, 89, 5, December 1999, pp. 1081-1096.

Nilssen, T. "Two Kinds of Consumer Switching Costs" RAND Journal of Economics, 23, (4), 579-589, (Winter, 1992)

Salop, S. and J. Stiglitz (1977), “Bargains and Ripoffs: A Model of Monopolistically
Competitive Price Dispersion.” The Review of Economic Studies., 44(3), pp. 493-510.

Varian, H. “A Model of Sales” The Harvard Business Review. 70,.4. (1980), pp. 651-659.