Respond to these points below
1) Give an example of a perfectly competitive market (or one that closely approximates one).
I had to think long and hard about this question since I don’t believe perfectly competitive markets are common using the definition from the reading. After some thought I came to the conclusion that self-service laundromats would likely fit the bill though. For this example, self-service laundromats are the facilities that provide self-service washing and drying machines to customers. In addition, they likely provide, at an additional cost, the peripheral items used for washing and drying like detergent and softeners. There are many suppliers and consumers of this service, especially in larger cities where space is unlikely to be available in a resident’s abode for a washer and dryer. The barrier to entry is fairly low; lease a property with an adequate water/power supply, lease or purchase coin driven washers/dryers, and lease or purchase coin driven vending machines for the extras. Specialized permits or licenses are not required, nor specialized technical knowledge. The product is the same in the marketplace from competitor to competitor; providing the customer with a facility to wash and dry their laundry. The manager/owner of the facility can easily investigate the services and pricing of the competition through simple observation. The transaction costs for a laundromat are low; cleaning, maintenance, stocking vending machines, and coin collection are likely the most time intensive tasks related to such a business. All of these tasks are localized to the facility, minimizing transaction costs.
2) Give an example of a market that is not currently perfectly competitive but could become one, or at least more competitive, under certain possible circumstances. What are those circumstances and how will they make a market (more) competitive?
I feel the mobile phone market may shift toward perfect competition over time if certain events were to take place. The current mobile phone marketplace in the United States consists of fairly commodity phones being sold by many manufacturers like Apple, Samsung, Sony, LG, and Motorola. There is currently a high entry barrier to enter the mobile device construction marketplace. This is not due to the technology that is commodity and easily replicated, but due to government regulation and licensure requirements. Should the government ease regulations and licensure requirements on mobile device manufacturing, this would lower the entry barrier for new manufactures. Even though there are quite a few manufactures there is only a choice, for the most part, of two operating systems: Apple IOS and Google Android. Apple IOS is proprietary while Google Android is open source, both operating systems pin the consumer of the mobile device to using application stores that are approved by and specific to the manufacturer. This limits the choice of available applications and allows the manufacturer to monetize and “lock in” the consumer. This creates a heterogeneous marketplace. Should the state or federal government pass laws that would inhibit manufacturers from locking consumers into specific application stores, the effect would be to even the playing field for new entries and potentially end innovation stifling requirements levied by manufacturers on applications. The final area that comes to mind would be the government potentially easing intellectual property regulations. Many of the high-end mobile devices on the market today do not offer a significant technology advantage versus their competitors, as stated above. Their main advantage is their brand and/or “look and feel”. I do advocate brand protection but many of the features or functions of mobile devices that are protected under intellectual property regulations are quite minor and serve to only inhibit competition in this marketplace. For instance, how applications are presented on the screen and the user interaction with them falls under this protection. Easing of government regulations in this area would serve to create additional competition and innovation in this marketplace. I do believe the above changes would result in the mobile device manufacturing marketplace moving toward a more perfectly competitive state that would be beneficial to new entries and the consumer.
3) If (perfectly) competitive firms are price takers, how can such a firm make any economic profit in the short run? Can such a firm continue to make economic profit in the long run/ Why/how/why not? Explain.
Lowering total costs versus price through the introduction of technology is an effective short run approach to creating a temporary economic profit. For example, the introduction of technology that allows a firm to reduce the amount of labor needed to maintain or increase the quantity of production. In a perfectly competitive market, the firm will not be able to maintain an economic profit, the firm will eventually return to a state of competitive return. This is due to existing, or new entry, firms utilizing the same or similar cost savings technology.
Respond to these points below