How do firms in a perfect competitive market compete? Watch

nadiakms
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If they can't compete on price and differentiated products what are they really competing on ? Can the firms in pc have different costs? As there's perfect information wouldn't technological knowledge be shared and other firms will simply copy and any supernormal profits (TR-TC) will be competed away . Just confused how firms in a so called 'perfectly COMPETITIVE market' are actually competing . Your help will be appreciated , thank you
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Palpatined
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Perfect competition is unlikely to exist in real-world markets. Firms do essentially 'compete' as they have the objective to profit-maximise. Costs can be different, but all firms will make normal profits through (P/AR/MR = AC) in the long run, because if firms are making supernormal profits, new firms are encouraged to enter the market through the profit motive. This causes market supply to shift outwards, reducing the market price until (P2/AR2/,MR2 = AC), as firms are price-takers.
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nadiakms
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(Original post by Palpatined)
Perfect competition is unlikely to exist in real-world markets. Firms do essentially 'compete' as they have the objective to profit-maximise. Costs can be different, but all firms will make normal profits through (P/AR/MR = AC) in the long run, because if firms are making supernormal profits, new firms are encouraged to enter the market through the profit motive. This causes market supply to shift outwards, reducing the market price until (P2/AR2/,MR2 = AC), as firms are price-takers.
So are you saying in the long run they don't actually 'compete' as supernormal profits are whittled away by other firms entering the market, firms will be making ac=ar ?
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Palpatined
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(Original post by nadiakms)
So are you saying in the long run they don't actually 'compete' as supernormal profits are whittled away by other firms entering the market, firms will be making ac=ar ?
Yes, in the long run, firms will always be making normal profit because of that reason. It's not 'competing' as they cannot manipulate price/differentiate their product, and can only hope for profit-maximisation, which always results in normal profits in the long-run.
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nadiakms
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(Original post by Palpatined)
Yes, in the long run, firms will always be making normal profit because of that reason. It's not 'competing' as they cannot manipulate price/differentiate their product, and can only hope for profit-maximisation, which always results in normal profits in the long-run.
Thank you !
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Good bloke
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(Original post by nadiakms)
If they can't compete on price and differentiated products what are they really competing on ?
They can compete by using a superior marketing message. Coca Cola, for instance, have done far better than the vast majority of purveyors of flavoured sugar water, and it all comes back to the brand. It even tastes pretty similar to much of the cheaper competition.
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Palpatined
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(Original post by Good bloke)
They can compete by using a superior marketing message. Coca Cola, for instance, have done far better than the vast majority of purveyors of flavoured sugar water, and it all comes back to the brand. It even tastes pretty similar to much of the cheaper competition.
Coca-cola are however, an oligopoly firm. They are not in perfect competition as they have relative price-setting power and have large barriers to entry. Perfect competition results in no product-differentiation and no marketing.
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Good bloke
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(Original post by Palpatined)
Coca-cola are however, an oligopoly firm. They are not in perfect competition as they have relative price-setting power and have large barriers to entry. Perfect competition results in no product-differentiation and no marketing.
They didn't when they started, did they? How do you think they got where they are today? Their product is essentially identical to all the competition and they had to compete. They saw off much off the competition over a very long period indeed.
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Palpatined
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They didn't when they started, did they? How do you think they got where they are today? Their product is essentially identical to all the competition and they had to compete. They saw off much off the competition over a very long period indeed.
This is only an economic theory that is studied, it isn't applied to the real-world as perfect competition is unlikely to exist in markets now.
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Good bloke
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(Original post by Palpatined)
This is only an economic theory that is studied, it isn't applied to the real-world as perfect competition is unlikely to exist in markets now.
I'm not sure I agree. It certainly did for Coca Cola, and it could easily apply in local markets, between dry cleaners, chip shops or butchers, for instance.
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