South-Western EconNews

The Monopolistically Competitive “Death-Care” Market

Topic

Monopolistic Competition

Key Words

funeral homes, price, corporations, services.

Full Article

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Reference ID: A167940354

News Story

Of the 22,000-some funeral homes in the US, only about 3,000 are part of larger corporations. The remaining 85% of the funeral homes are owned by smaller firms or families. The difference, they say, and the reason why it is so difficult to conglomerate in this market, is in the services provided.

This market, for obvious reasons, is not a growth business, so any attempts to increase profits will occur through consolidating with other funeral homes, hoping to minimize costs. Revenues can also increase by altering the pricing structure: moving away from a la carte pricing to a one-price bundling of services, one large company indicated that in 2005, average price per service rose by 9%, while the number of services fell by 5.8%.

Moving toward profitability is not always that simple, though. Even after consolidation, some companies have found it necessary to break away from the corporation, citing an unwillingness to focus on profitability alone. Some firms emphasize the service and attention received at the smaller funeral homes as the way toward increased profitability. Some firms offer a 24-hour Compassion Hotline—even in Spanish—as well as 24-hour viewing, information on obtaining bereavement fares from airlines, etc.

All firms will need to be concerned about cremations, though, which are becoming increasingly popular. Currently about one-third of all funerals involve cremations, and it is estimated that by 2025 about half of all funerals will involve cremations. What’s more, they are significantly less expensive than regular burials, averaging about $2,800 nationwide compared to $6,400 for a burial.

And there’s one more hamper on growth in this industry: family funeral homes are going the way of family farms. It’s difficult to convince children growing up in a mortuary family that they should carry on the family business. Children are finding it gloomy, and grueling, as they are effectively on-call 24 hours a day. Perhaps that consolidation between firms may work out after all.

Questions

Discussion Questions:
1.	What are the qualities of this industry that cause us to describe it as monopolistically competitive?
2.	What do you think will happen to the cost of funeral services as family members no longer want to continue the family mortuary business?
3.	What do you think will happen to prices for funerals as the trend toward cremation rather than burial continues?
Multiple Choice/True False Questions:
1.	According to the article, when price per service rose, number of services fell. How can demand be described there? Elastic Inelastic Unit elastic Not enough information in the article to answer.
2.	In the summary, the fact that firm consolidation was actually reversed afterward indicated that the consolidated firm experienced: Economies of scale Diseconomies of scale Sunk costs External costs
3.	In monopolistic competition, the provision of additional services should serve to make demand for that product More elastic More inelastic More negative More vertical

Source

“Profiting from Loss,” The Economist, August 23, 2007.

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