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.

A. Cite as many examples as you can of these types of businesses.

B. Explain why the profits of such firms tend to increase when there is an excess supply of the inputs they use in their production process.

Answer 1

A. Beverage industry, Like Starbucks or Costa. Clothing industry like Forever 21, GAP.

B.These companies mainly operate in a monopolistic competition or an oligopoly.

When supply of inputs are in high supply, the cost falls. This need not necessarily make the final good prices fall. This decrease in cost , without any change in revenue increases the profit. These firms intentionally do not lower prices, because of the fact that these makets have a relatively inelstic demand, and/or these markets do not cost a high share of the consumers disposable income. For industries which are dealing in luxury goods, a decrease in the price of the final good could actually be a bad thing for them.

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