Page 161 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes future demand, replenishment, inventory and sales will simply never be available under
our channels current state of perfect competition.
The best example of perfect competition that I have heard recently is in my own backyard...
Madison Wisconsin, one of the best specialty bicycle retail markets in the country. As
most of the industry knows there are two Trek company stores in Madison, and one of

them, located on the East side has been identified as the company’s flagship store. Erik’s

Bike Shop is a successful multi-store retailer headquartered in the Minneapolis-St. Paul
Minnesota market. Erik’s established a store in Madison several seasons ago, and carries
Specialized, as what I understand is its marquee brand.
Several weeks ago, according to the buzz among bicycle dealers, Specialized announced
to its dealers in Madison that Erik’s will open a second store, reportedly directly across

the street from the Trek flagship store on the city’s East side. By the way, both the Trek

flagship and the new Erik’s that will carry Specialized are both in direct competition with
an established bicycle dealer that has carried both the Trek and Specialized brands for
many years - and is just one-mile away!

To make this market situation even more “perfect,” the Trek flagship and new Erik’s store
are located almost within sight of a large new Dick’s Sporting Goods that opened last
year.

This is, I suggest to you, much more than just two brand competitors going head-to-head in
one of the best specialty bicycle markets in the country. It is also a clear example of perfect
competition at its best, or should I say worst. The most competitive market imaginable...
where output will be maximized and price minimized. Consumers, particularly adult

enthusiast cyclists have been and will continue to be the clear beneficiaries of this most
competitive of markets.
The retailers, including the two backed by deep pocket bicycle brands, will beat on each
other and will become more efficient to survive, and as a result prices in the market will

be kept surprised. Keep in mind that in a state of perfect competition a firm that earns

excess profits will experience other firms entering the market and driving the price level
down until there are only normal profits to be made - the bare minimum profi t necessary

to keep them in business. All of the retailers in this scenario, when it comes to full fruition,
including those backed by the big brands, will still only have a negligible impact on the
market, including the market pricing.
This all raises the question - at least in my mind, of the big guy that was there fi rst, Trek
Bicycle, erecting or creating some type of barrier to entry. I am sure they will think about
such a thing - and they may actually try several potential barriers to another new store,
which might very well also be a brand “concept,” entering their geography, and market
space. At the end of the day...there is no real barrier to entry that can be put in place, or
actually exists for that matter, because the largest brand seller in our channel of trade still
doesn’t have enough mass or leverage to dominate through a monopoly, and I am not
talking about the board game.
Most markets exhibit some form of imperfect or monopolistic competition. There are fewer
firms in this imperfect competition than in a perfectly competitive market and each can to

some degree create barriers to entry. Such barriers would allow the existing firms to earn

some degree of excess profits without a new entrant being able to compete to bring prices

down.
So far, the consolidation in the U.S. specialty bicycle retail channel of trade hasn’t reached
a point where there are a small enough number of brands and /or manufacturers with
enough product differentiation to allow the creating of barriers to market entry. The

Contd...

156 LOVELY PROFESSIONAL UNIVERSITY