The Closest Model Of Monopolistic: Kar Heong Restaurant

I have a good experience conversing with the manager of Kar Heong Restaurant, Mr .Tong over some issues pertaining to food business. By the way the restaurant is very popular in Subang (front of Metropolitan college) & now they are opening the branch in Sunway Damansara, very near to my place though

Among the issues he brought to me were:

“There are so many restaurants in such a small area, all providing different range of food & some are famous brands. The business is so competitive & there are several restaurants which have gone bankrupt in recent months (pointing to the latest casualty, the corner one). Some attempt to salvage whatever they can, to new tenants”

This quickly reminds me of monopolistic competition:

(a) Market with many sellers, but not as many as in perfect market

(b) Each sells goods (food in this case) that are differentiated by branding (Kar Heong in this case)

(c) There is some price making ability. Each restaurant operators charge the price they want for different types of food they serve

(d) Normal profit in the long run. Earlier, this area was not so developed. There were barely few restaurants that occupy most of customers. That time they earn supernormal profits. But after a year or so, the believe that the area is prosperous have attracted more new comers, given the costs of setting up business is not that high. This means freedom of entry. As such short run supernormal profits are competed away & some may begin to make normal profits (AC = AR) in long run. Therefore they decide to leave industry

“Salvage whatever they can”- reminds me of sunk costs. Businesses with low entry barriers will normally have low exit barriers. This means, some of the fixed capital could be sell of for second hand usage, thus recovering some of the losses. This lower down the sunk costs

Says who Economics are merely textbook theories?