Page 160 - DECO405_MANAGERIAL_ECONOMICS

Unit 9: Market Structure – Perfect Competition

To make this market situation even more "perfect," the Trek flagship and new Erik's store Notes
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 profit 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 first, 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
number of bike shops has kept falling over the last seven years, but here again, no retail
organization has grown to the point that it can create barriers to market entry.
And what about the current independent bicycle retailer that has been in the market the
longest? He is clearly at a dangerous place, but is the only one of the players who can
break away from the state of perfect competition that has a strangle hold on the rest of the
industry and the specialty bicycle retail channel of trade. By the way, this retailer was
made aware in advance by the brands, first that the Trek flagship store was going in a mile
from him, and next that Erik's Bike Shop was going to locate a new store within about the
same distance from him. He has reacted by remodeling the interior of his current location.
I have not spoken with this particular retailer since the news about the location for the
new Erik's store, but I have E-mailed, and when I do talk to him, here is what I am going
to suggest.
1. Hyper-differentiate your store. This is a term coined by Mike Basch, former CEO of
YaYa! Bike, and it means differentiate your store totally from any other bike shop or
bicycle retailer in your market so that you stand out as the brand in your market. It
will be important to keep the adult enthusiast cyclists that are now customers - but
the key will be crafting and marketing features and benefits to retain them as clients
Contd...

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