Question

In certain industries, firms buy their most important inputs in markets that are close to perfectly competitive and sell their output in imperfectly competitive markets. Cite as many examples as you can of these types of businesses. Explain why the profits of such firms tend to increase where there is an excess supply of the inputs they use in their production process.

Answer 1

Perfectly competitive market is characterized by:

• All firms sell identical product without any differentiation. All products are treated as commodity and buyer is indifferent between product selection.
• Sellers are price takers; they cannot influence the price of product.
• Market share does not influence the price , Buyers use to carry complete information about product, No entry or exit barrier for the firm.

Examples:

• Farm products market is closest example of perfectly competitive market. It is a homogeneous market with no differentiation between product. Seller have no control and are just price takers. Presence or absence a farmer does not impact the supply of price in market.
• Foreign currency market: All currencies are homogenous and traders have access to number of sellers.
• Market of unbranded cheap products

Imperfectly Competitive market is characterized by:

• Under Imperfectly competitive market, firms sell differentiated products or services and control their own prices.
• Here, firms compete to acquire market share and effect prices through market control
• Market is usually protected due to high barrier to entry or exit.
• Market is found under common structure are: Monopoly is dominated by single seller, oligopoly – market is dominated by few sellers.

Examples:

• Microsoft and windows – are sole provider of their product. They can control their price as per their will.
• Government electricity supplier – They are alone supplier and customers can not switch to others even in case of price increase.

When a firm source inputs from perfectly competitive market, price of inputs is governed by supply and demand only. As supply increases price of product will decrease. Here firm will be able to buy cheaper inputs for their product.

At the same time as firm sells product in imperfectly competitive market, firms control their prices. So, they do not pass the benefit of lower inputs price to customer.

So, here firms profit increase with fall in input price and constant or higher selling price.

Walmart is a suitable example here. it gets inputs in perfectly competitive market from small farmers or vendors. But walmart has created a brand ,differentiated product identity for itselft.