Page 158 - DECO405_MANAGERIAL_ECONOMICS

Unit 9: Market Structure – Perfect Competition

Notes
of perfect competition it became apparent that no one strongly disagreed, and in fact there
seemed to be more agreement than not that our industry was indeed in perfect competition.
We ended our meeting, and went our separate ways, but the concept of perfect competition
stayed with me, kind of like the dull pain of a toothache. When I got back to my office I did
a search on the web and found quite a lot about this subject. Here is a summary of what I
learned.
Perfect competition according to economists, is the most competitive market imaginable.
In the real world, it is rare, and there are even some economists that feel it may not even
exist in its purest (I take this as worst) form. The example of a market in perfect competition
that is referenced by those economists that believe it does exist - is agriculture.
Competition is ... competition, so what makes perfect competition different from all other
forms or kinds of competition? According to economists - because it is so competitive that
any individual buyer or seller has a negligible impact on the market price. Products are
homogeneous, or composed of parts that are all of the same kind. Product and pricing
information is also perfect in that everyone, including the ultimate purchaser knows
everything about the products, including the best prices available in the market.
In a market in perfect competition everybody is a price taker, producing and selling
essentially identical products and each seller has little or no effect on market price, and is
unable to sell any output at a price greater than the market price.

Firms earn only normal profit, or the bare minimum profit necessary to keep them in
business.
If firms do earn more than normal profit, which is called excess profit, the absence of
barriers to entry mean that other firms will enter the market and drive the price level
down until there are only normal profits to be made. Manufacturing output will be
maximized and price minimized.
This sounds very familiar to me - and I am sure you can also relate to real world examples
of the U.S. bicycle industry as you read through this explanation of perfect competition.

Component manufacturers scramble to get the latest designs and functionality to market
in a timely fashion. Bicycle suppliers struggle mightily to craft and specify bicycle products
that have more value than the competition and sweat over the timing and dealer programs
to introduce them. Bicycle retailers lose sleep over how much to commit for and what to
bring to market - and whether to become a concept store or remain independent, and
which suppliers to do business with. And with all this activity, no buyer or seller has a
negligible impact on the market price, and everybody in the channel of trade is a price
taker, earning the bare minimum profit necessary to stay in business.
Last year and this season are good examples. In 2005 we had our best year ever for the sale
of high-end road 700c bicycles selling above $1,000. And in 2005 the typical bike shop lost
5 margin points on the sale of new bicycles, continuing an unfortunate trend of losing
money on the sale of new bicycles that has plagued our channel of trade for over a decade.

High-profit bike shops, while they performed much better than the typical shop, also
came in just below their cost of doing business on the sale of new bicycles in 2005, the first
actual loss for high-profit shop on the sale of new bicycles in a decade.
Despite the continuing, and apparently growing losses on the sale of new bicycle, the U.S.
bicycle industry posted one of its best years for apparent market consumption in 2005 -
second only to the record set in 2000.
Contd...

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