Question

Please answer in 1-2 pages with examples. Suppose that a firm is in an industry which...

Please answer in 1-2 pages with examples. Suppose that a firm is in an industry which has a very rapid rate of growth (in sales and output), and is characterized by technological change and innovation. Firms attempt to maximize profits causing new firms to enter the industry attracted by profit potential. The result is that profits are competed away, leading to even greater innovation and change. Is there a limit to this continuous change? Will the structure of the market change? Explain.

Homework Answers

Answer #1

Ans...
This market structure corresponds to monopolistic competition.
In this market, firms compete by selling similar yet differentiated products (which can be due to technological improvements, packaging etc.) and operate for profit maximisation.
However due to low entry exit barriers, many new firms keep on entering the market to make use of high profits, which eventually leads to a fall in profits to zero in the long run.
There is no limit to this continuous change because all firms eventually want to innovate and keep on holding to their market share. They are aware that if they stop innovating, consumers would swift away to their competitors and thus their sales and profits would drop.
Eg Apple and Samsung

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