Answer to Question #165086 in Microeconomics for Juliana

Question

Consider the following goods and services. Which are the most likely to be produced in a perfectly competitive industry? Which are not? Explain why you made the choices you did, relating your answer to the assumptions of the model of perfect competition. Please address all of the examples below in your discussion.

1.   Coca-Cola and Pepsi

2.   Potatoes

3.   Private physicians in your local community

4.   Government bonds and corporate stocks

5.   Taxicabs in Lima, Peru—a city that does not restrict entry or the prices drivers can charge

6.   Oats

Answer 1

1. Coca-Cola and Pepsi - These products would not be produced in a perfectly competitive industry. This is because a product produced in a perfectly competitive market is homogeneous in nature that is products of two firms operating in a perfectly competitive industry are identical in nature. Since, Coca-cola and Pepsi are not identical on account of their taste, packaging, branding, etc., and can easily be differentiated they could not be produced in a perfectly competitive industry.

2. Potatoes - These can be produced in a perfectly competitive market. This is because just like the existence of a large number of firms in a perfectly competitive market, the potato market is also characterized by the existence of a large number of firms or farmers. Secondly, the product is homogenous that is potatoes grown by two or more firms that are identical to each other. Entry and exit are also relatively without any barrier and firms acts as price taker as fairly good information exist about prices.

3.Private physicians in your local community - These could not be produced in a perfectly competitive market. A perfectly competitive market assumes firms to be price takers but private physicians in a local community based on their experience and expertise can charge differently and thus acts as price-maker rather than price takers. Secondly, within a local community, the relationship between physicians and residents is more of a family-type or friendly type. This type of relations acts as an entry barrier for any new physician to set shop in the local community as people tend to go to their regular physician based on an established relationship.

4. Government bonds and corporate stocks - These can not be produced in a perfectly competitive market because the quality of stocks of two companies is not identical or of bonds issued by two governments are not identical. Many factors such as financial health, market structure, fiscal deficit, the quantum of revenue impact the quality of stocks and bonds issued. Thus, on account of differentiated nature, these can not be produced in a perfectly competitive market.

5. Taxi cabs in Lima, Peru - One of the foremost assumptions of a perfectly competitive industry is that perfect information exists about prices and it compels the buyers and sellers to be price takers rather than price makers. However, in the given case, it has been stated that taxi drivers can charge their own price and hence are not acting as price takers. Thus, on account of being price taker characteristic, given service cannot be produced in a perfectly competitive market.

6. Oats - These can be produced in a perfectly competitive market. This is because just like the existence of a large number of firms in the perfectly competitive market, the oats market is also characterized by the existence of a large number of firms or farmers. Secondly, the product is homogenous that is oats grown by two or more firms are identical to each other. Entry and exit are also relatively without any barrier and firms acts as price taker as fairly good information exist about prices.