Question

Competitive Markets

The surfboard market has large firms (Channel Islands, Surftech), Medium size firms (Lost,

Firewire), and small “garage shaper” type firms (Pendo, Frye). The boards differ in design, materials, construction type, and custom options.

A. What market type is this? Draw a typical firm for this market making a loss. Show the TR and TC and Loss

B. Also draw the typical firm making a loss assuming perfect competition. Also show TR TC and the loss.

C. Describe the 2 adjustment stories. How would the consumer benefit from perfect competition in this case? How does the consumer benefit from imperfect competition in this case?

Answer 1

solution:

Economies of Scale. When a firm is already in market and start operating at large scale it enjoys lower cost due to economies of scale which makes it very difficult for the competitor who is relatively small in size with low output to compete with already existing firm. If incumbent firms enter, the already established firm will decrease the price so much that they have to exit. Thus higher average costs are one of the barriers to entry.
Access to resources: In this case firm enjoys natural monopoly as it has access to resources which may be scarce in nature. Any new firm may not be able to enter the market because he has no access to resources.