Question

The issue of attaining efficient market outcomes is central to economics, as you’ve seen in this class. You have also seen that perfect competition produces the most efficient and, from the society’s perspective, desirable outcome. By contrast, other market structures – such as a monopoly – result in loss of efficiency.

Consider the apparel industry. It has lots of producers and lots of product differentiation, so it can be reasonably described as monopolistically competitive. What would be some advantages and disadvantages of a world where clothing is made by firms operating in a perfectly competitive market?

Answer 1

Advantages:

If clothing is made by firms operating in a perfectly competitive market, then the resulting advantages would be:

1) If clothing is made by firms operating in a perfectly competitive market, then the firms do not need to invest on advertising and sales promotion because all the clothes produced are homogeneous and consumers have perfect knowledge of the market.

It saves production cost and thus provides benefit to customers in the form of selling at lower prices.

2) In a perfectly competitive market, firms always achieve efficient production. It means the ability of firms to produce goods at the minimum average cost. Clothing companies will achieve efficient production by producing at minimum average cost.

Disadvantages:

1) In perfect competition, firms do not get any encouragement to conduct research and improve product quality. If clothing companies operate in a perfectly competitive market, then they will not get enough incentives to conduct research and bring improvements in their product quality and design.

2) In a perfectly competitive market, consumers can not get the variety of same products, in terms of design, brand and quality. If clothes firms operate in a perfectly competitive market, then they have to offer homogeneous products which restricts consumers to get variety. Clothing firms can't offer various designs, brands at a low price to consumers.

3) In a perfectly competitive market, firms can't enjoy the benefits of economies of scale that can lower production costs. Individual clothing firms when operating in a perfectly competitive market, can't produce on a large scale because the output of a firm is very small compared to the whole market. Thus the cost of production and price in a perfectly competitive firm may be higher than the monopolistic firm.