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Homework answers / question archive / Firms in the market will be price-takers when the following conditions are met: 1
Firms in the market will be price-takers when the following conditions are met:
1.All firms in the market produce an identical product.
2.A large number of firms (buyers and sellers) exist in the market, so that no single firm dominates the market.
3.Each firm supplies only a very small portion of total output supplied to the market.
4.No barriers limit entry into or exit from the market, and firms and resources are fully mobile.
Identify whether or not each of the following scenarios describes a competitive price-taker market, along with the correct explanation of why or why not.
a) In a small town, there are two providers of broadband Internet access: a cable company and the phone company. The Internet access offered by both providers is of the same speed.
b) Scholastik, Inc., owns the U.S. copyright to a popular book series. It is the only company with the legal right to publish books in the series in the United States.
c) Dozens of companies produce plain white socks. Consumers regard plain white socks as identical and don't care who manufactures their socks.
d) In a major metropolitan area, one chain of coffee shops has gained a large market share because customers feel its coffee tastes better than that of its competitors.
a. This is not a competitive price taker market. It does not respect condition two: a large number of firms in the market. This might lead, for example, to collusion between the two firms to push the price higher and turn in greater profits.
b. This is a natural monopoly since there is only one supplier of the product. Condition 4 is also violated since the copyright held by Scholasik presents a formidable barrier to entry.
c. This is a competitive price taker market. The product is identical, there are many firms in the market without one dominating and no barriers to entry are mentioned.
d. This is not a competitive price taker market. Companies like the chain of coffee shops that can differentiate their product in consumers minds have pricing power. Condition 2 is violated since one firm dominates.