Question

Hardware stores (excluding Lowe’s and Home Depot) in a large city would seem to be an example of a competitive market, since there are many sellers operating relatively small shops, each seller takes the price of hammers or nails as given, and the products (hammers, nails, etc.) are very similar between different shops.

PART ONE: How could you argue that the hardware store market is not competitive?

Select one:

a. Most hardware stores only serve clients who live or work relatively close by. A hardware store on one side of town usually does not attract clients who live or work many miles away on the other side of town. Thus, hardware stores tend to only compete with the relatively few other hardware stores that are nearby.

b. Each hardware store sells a very differentiated product to its customers, since it is rare that two customers are shopping for the exact same set of products (perfect substitute).

c. Many hardware stores may be locally-owned, but are franchises of a single major corporation. Thus, the market is not competitive since it is ultimately only served by one supplier.

d. Since hardware stores only sell physical or tangible items to customers, the prices charged are not constrained by market forces and can be unusually high or low.

PART TWO: Is it possible that each hardware store could face a demand curve that is not perfectly elastic?

Select one:

a. No; since clients are not willing to accept price changes for their hammers or nails from one month to the next (e.g., $15 hammer this month, $20 hammer next month, etc.), the price will remain constant in the long run and thus demand is perfectly elastic.

b. No; each hardware store in a large city is indistinguishable from the others (i.e., they are perfect substitutes), and so demand for any individual hardware store is perfectly elastic.

c. Yes; demand is only perfectly elastic if the demand curve is upward-sloping, and hardware store demand is downward-sloping.

d. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since customers will not stop at every hardware store in the city to find the cheapest price), then they will not face perfectly elastic demand.

PART THREE: How profitable do you expect hardware stores to be in the long run?

Select one:

a. Since they are usually very small, most hardware stores will be unable to compete with larger firms with higher fixed and variable costs. Hardware stores should expect losses in the long run.

b. Even with a small amount of market power due to attracting only local customers, it is still relatively easy to enter and exit the hardware store industry. Long-run profits will likely be driven down close to zero.

c. Improvements in inventory technology, and the difficulty of new entrepreneurs entering this market, will guarantee above-normal profits for hardware stores for the next few decades.

d. Hardware stores have the ability to set their own price above the market equilibrium price for a considerable length of time given their small size and the sheer number of other hardware stores. Most individual hardware stores will enjoy positive economic profit in the long run.

Answer 1

1. How could you argue that the hardware store market is not competitive?
Ans: A. Most hardware stores only serve clients who live or work relatively close by. A hardware store on one side of town usually does not attract clients who live or work many miles away on the other side of town. Thus, hardware stores tend to only compete with the relatively few other hardware stores that are nearby.
Hence, it is possible that a hardware store may command a higher market share and hence, seek a higher price in an area nearby and the customer may not always have the option to find other hardware stores.

2.  Is it possible that each hardware store could face a demand curve that is not perfectly elastic?
Ans. D Yes; if the store has some degree of market power (e.g., they can charge slightly higher prices since customers will not stop at every hardware store in the city to find the cheapest price), then they will not face perfectly elastic demand.
Rather, the customers would like to stick to the store near them to save on time, resources (to find newer and cheaper stores) and money (on commuting to places farther away)

3.  How profitable do you expect hardware stores to be in the long run?
Ans. B. Even with a small amount of market power due to attracting only local customers, it is still relatively easy to enter and exit the hardware store industry. Long-run profits will likely be driven down close to zero.
So, as the entry of firms is unrestricted, a hardware store charging higher price will face competition from a new player who enters his territory, thus driving down prices.

Hope this helps.
Please let me know in comments if I have missed something or if you feel that any question may have a different answer.