Explain why thefollowing example is not a perfectly competitive industryand be s

Question

Explain why thefollowing example is not a perfectly competitive industryand be sure to justify your answer: Eventhough one firm produces a large portion of the industry’stotal output, there are many firms in the industry, and theirproducts are indistinguishable. Firms can easily exit and enter theindustry. Explain why thefollowing example is not a perfectly competitive industryand be sure to justify your answer: Eventhough one firm produces a large portion of the industry’stotal output, there are many firms in the industry, and theirproducts are indistinguishable. Firms can easily exit and enter theindustry.

Explanation / Answer

A perfectly competitive industry is one in which the firm must takethe price as given, and cannot themselves affect the marketprice. A necessary condition is that there be many firms, allquite small. This is clearly not true in this casehowever. There is one very large firm that produces themajority of the industry's total output. If this firm were toraise its prices, it would likely lose some business. Still,there would be demand remaining for its products, and many peoplewould pay the higher price for their products. Imagine this scenario. There are two firms selling a total of100 products for $50. Firm A sells 95 products and firm Bsells 5 products. All 100 products are bought. Firm A could raise the price to $55 quite easily. Peoplewould rather buy from firm B, but firm B is only selling 5products. Any of the remaining 95 who still wanted theproduct would be forced to buy from A. This means therecannot be perfect competition, as firm A does not need to take theprice as given

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