Question

For each of the following, is the industry perfectly competitive? Referring to market share, standardization of the product, and/or free entry and exit, explain your answers in detail.

1. Aspirin
2. Lady Gaga Concerts
3. SUVs

Also, come up with your own example of a competitive market. What would you expect to happen to profits in this market over time (short-run versus long-run outcomes in perfect competition) and why? Use this industry as an example to explain the competitive process in detail.

Answer 1

Aspirin: Yes, perfectly competitive.
Aspirin is a generic medication sold under many brand names. There are many producers/ sellers of Aspirin and they are priced more or less same. They are identical too. Therefore, Aspirin is under perfect competition.

Lady Gaga concerts: No, it is not perfect competition.
It is monopoly as Lady Gaga is the only person who can perform at Lady Gaga concerts.

SUVs: No, not perfect competition.
SUV manufacturers have large market share. They are more oligopoly than perfect competition.

Example of perfect competition market: pizza industry.
In the short run, the pizza joint will make profits if the price is greater than its average total cost. When the pizza joint is making profits, more pizza makers open shops and start selling pizza. Now the quantity of pizza available increases and puts downward pressure on price. Price decreases.

If the price falls below ATC, but is above average variable cost, pizza joints still run. They don't recover the fixed cost, but recover the variable cost, or the cost of production. But if the price falls further and below the AVC, then firms shut down temporarily till price increases. This shutting down production is done to save variable cost. (They still have to incur fixed cost, but they save at least variable cost.) In the long run, these loss-making pizza joints may exit the pizza industry. And enter some other industry where their opportunity cost is lower.

When some pizza joints exit, quantity of pizza in the market decreases, exerting upward pressure on price. Price increases. If firms are making profit due to his increased price, some more pizza makers will enter the industry.