Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, study questions, solutions to the study questions, and suggestions for the most effective ways to work this case into your course.

Length
This case is 6 pages in length and its case teaching package is 6 pages.

Abstract
Are competitive industries with faster growth rates in market demand more profitable than those with slower growth rates are? George Bailey thinks so. That is why he entered the bagel industry in 1994 and expanded into a 10 store bagel chain. His bagel chain is profitable for three years as the bagel market explodes, but rivals enter in 1997 and store profitability declines sharply. Fearing a continued decline in profitability, George sells his chain. In 1998 he faces another entry decision -- whether to enter the cranberry market where growth is slower but where growers have received record prices in each of the last three years. George is tempted because rivals will have more trouble finding suitable land to enter but wonders if higher profits can be earned in a slower growing industry.

This case is a convenient vehicle to analyze and challenge the commonly held view that growth in market demand and profitability are inseparable twins. It forces the student to distinguish between anticipated and unanticipated demand growth and to consider how the supply side of the market adapts to the growth rate in demand. The case stimulates a deeper examination of the mechanism through which growth affects firm profitability. It requires a student to use the competitive model and to explain why the profitability of two growing, competitive industries differs. The case revolves around the bagel industry, an easy to enter constant cost industry, and the cranberry industry, an increasing cost industry where specialized land is required. Students must explain why firms in the easy to enter but faster growing bagel industry do well initially but then experience a decrease in profitability. They must also explain why entry into the slower growing cranberry industry does not assure profits even though growers have received record prices for cranberries in the last three years.

This case can be used for class discussion, in a review session, or as a take-home exam.

Study Questions

1. Economists classify competitive industries with (1) a horizontal long run supply curve (a constant cost industry), (2) a upward sloping supply curve (an increasing cost industry), or (3) downward sloping long run supply curve (a decreasing cost industry). In which category would you put the bagel industry? The cranberry industry? Explain your selections.
2. What is the key disagreement between George and his associate, who said "You'll never make profits in an easy to enter market"? What difficulties do managers face in adopting an " enter early - earn profits - exit when rivals enter?
3. In the case, George said, "Growth solves many problems." What problems was George referring to? Does it matter if demand growth is anticipated or unanticipated?
4. How would you explain the stock price behavior of bagel chains up to the last quarter of 1996? In 1997?
5. Since land prices appear to be increasing in the last three years, would you expect growers like George will earn profits if they enter the cranberry industry?
6. If you were in George's shoes, would you enter the cranberry market? Explain why or why not.

Key Words Constant versus Increasing Cost Competitive Industry, Short versus Long Run Profits, Economic Rent, Market Demand Growth and Firm Profitability.

The downloadable file for this case is in Microsoft® Word 7.0 for Windows®.

If you do not have Microsoft Word, you can download the free Microsoft® Word Viewer 97 right here:   For Windows 3.x   For Windows 95

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