Page 159 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes

Case Study Perfect Competition: The U.S. Bicycle Industry
— J Townley
I
had an epiphany, as in a sudden insight into reality, in May at a meeting where a long
time friend in the industry offered the opinion that the U.S. bicycle industry is in a
classic state of perfect competition. My immediate response was “...that sounds like a
good thing!” My friend, who went back to graduate school after working in a bike shop,
for a major component manufacturer and prominent bicycle brand quickly responded with
“...no, you don’t understand.” He went on to explain that when he studied economics in
graduate school he became aware of perfect competition which is a term of art in economics
for the most competitive market imaginable - one where the companies and businesses
realize the bare minimum profit necessary to keep them in business.

At the time we were in a meeting together with six other people from the bicycle industry
- and the room went silent for a time. As the group started to discuss the notion 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
Contd...

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