Perfect competition Conditions for perfect competition. Looking at the airline industry
- In pretty much all of the vidoes so far we have been asuming an economic ideal.
- And that economic ideal is perfect... perfect competition.
- And perfect competiton is exactly what you think it is... a competition.
- But what I want do in this video is think about in a little bit more exact terms.
- In terms of what are the ground rules we need to have, to really have this ideal perfect competition.
- It's important to realize that there is very few markets
- that are truly perfectly competitive
- and those that are very good for consumers
- but there are, that get very close to being perfectly competitive.
- And if we have time we will discuss those in this video.
- Now to be perfectly competive, you have to have many competitors.
- So one of the first stipulations is
- many players... many... players.
- And they need to be competing for the kind of the same buyer
- and the kind of offering the same thing.
- And so they need to have identical products.
- Remeber this, we are talking about an economic ideal here,
- there is very few markets where the product is absolutely identical or the service is absolutely identical.
- But we are talking about an economic ideal over here.
- The next condition we need is -
- - no barriers to entry -
- no barriers... no barriers to entry.
- So if at any given moment, it looks attractive for other people to go into that market.
- Other people will go into that market and there is nothing that's
- really going to stop them.
- If the firms that are already in the market are already making an economic profit -
- - that means that it's good -
- it's a good option for people to do that.
- You can do better in this market than your opportunity cost.
- And so people will enter into that market.
- In order for this market to be perfectly competitive, we can't have any barriers.
- Nothing stoping those people.
- On top of that there can be
- no advantage for established firms.
- No advantange for existing firms.
- So once someone jumps into the fray
- and they' re going to be and assuming they are somewhat competent,
- they are going to be able to compete on kind of equal terms
- with the people that are already there.
- And at the last one - and this is important -
- is that you have to have really good price information
- that the buyers and the sellers all have to know about each others
- The buyers needs to know all the prices,
- so they can really do good comparison shopping.
- And the sellers needs to know everyones prices,
- so they can really match prices really well.
- So good price information.
- Now there are many different types of markets that
- somewhat approximate perfect competition.
- There are very few that are completely purly perfect competion.
- But one of them does come to mind. One of them does that definitely come to mind,
- is the US airline industry.
- And the US airline and we can think about these bullet points
- and how closely it matches it,
- there are definitely many different airlines,
- they don't offer identical products how do
- i'm sure the airlines would take. Would not agree
- they would say they are differentiating on their service..
- What apple food they give or I guess
- don't give to you.
- How much they are charging for the baggage check in and all the rest.
- But for the most part of consumers it just look like
- they just want an economy class ticket from San Francisco to New York
- and they view them as almost identical products.
- So the airline industry does pretty well in this first point -
- - no barriers to entry -
- Well, there are some barriers to entry in the US airline industry,
- you need a few billion dollars,
- you need to either find or borrow or whatever so you can buy the capital so you can start operating
- planes or I guess you can rent the planes.
- Either way you need a lot of capital to get into this business.
- You need access to airport terminal that you have to lease
- and landing rights and all the rest.
- So there are some barriers to entry,
- but for the most part, at least in the United states, if you are a US,
- a US operator and you know this,
- there are some barriers specific for entry of foreign operators.
- But if you are an US operator and you have the capital,
- you will be able to be the next Virgin America or SWA or Jet blue.
- So for little some barriers to entry, but they are low,
- it is not like the government just saying that no-one else can start a new airlines.
- No advantage for existing airlines.
- Yeah that's somewhat true!
- If i'll start a new airlines tomorrow and it's offering
- comparable rates and comparable service I could imagine people
- would be willing to take to this airlines.
- So the airline industry seems pretty good there
- and good price information,
- this is why the airline industry definitely came to my mind because
- I can't imagine an industry where you have better price information that
- at least now after the internet came about
- that than in the airline industry.
- You want a flight from SF to NY you go to any of these travel sites
- Orbitz, Kayak, Expedia or where ever you go to
- and you get all the flights listed for you and listed by price.
- They can sort them by price and you can actually pick and you know you can and it's no people do they pick a flight that might be 5 or 6 Dollars,
- but they can compare based on few Pennys or on few Dollars. So there is extremely good...there is extremely good price information.
- Now we'll see the sellers have all of the IT systems to keep track of the airlines pressure is going as well.
- So their air travelling discreet like most discreet is not absolutely perfect competition but they gets pretty close to
- perfect competition. And you even see that in real world
- that's very hard for the airlines to make really a lot of profit and the really and you know what do you know about accounting profit or even economic profit.
- And you could see that when I've from this supply-demand curve right over here, so on this axis,
- the horizontal axis, this is the quantity, this is a measure of quantity of kind of airline service
- and we're measuring in billions of seat miles per week and
- I don't know, it sounds like the strange thing. But really what the strange, Ok, give me a week, tell me all of the seats
- that are any use and multiply those number of seats, so the number as seat miles and give a weak number of seats
- times the miles that be or the average miles per seat in a given week and that gives you how much aircraft, this is air measure of air travel in the scene of US in that week.
- And on this axis, this is the price, this is price per, and we should actually say price per seat miles.
- Price per seat mile. And of course you have your supply curve right over here - this is your supply curve. At first
- they start providing those first few miles, it's relative to the airlines doing and willing to do that relatively inexpensively
- maybe they are finding most ABS airports, that maybe their landing rates are cheaper or it's cheaper to lease things or whatever,
- but I'll say start doing running more and more routes between smaller and smaller cities, maybe smaller in
- less efficient planes. It's nice to come more and more expensive for them to supply those incremental miles.
- And we'll see on the demand side if air travel is very very expensive, very few people are going to want to travel,
- they're going to be very low travel and it happens, if it's very cheap many people are going to want to travel.
- Now let's say this is where the market is right now, and now we'll see we have an equilibrium price, we have an quilibrium price
- right over there, and we have an equlibrium quantity of seat miles. But let's say, let's say that the price level
- in order for the players that actually have an economic profit is over here. So it is right over here.
- So this is the price needed, this is the price needed for zero economic profit, or you could say for neutral economic profit or you could even say for normal profit.
- For economic profit to be equal to 0. So that point if that was, if that is the price,
- than the firms are offering airline travels, they are a kind of neutral between shuting down and continuing to offer service. But note this,
- the way I draw it here, there is substantial lower than the current equilibrium price. So what this is saying, is the current equilibrium
- price is good behind this or just higher at all, these firms in the market right now are generating an economic profit.
- Definitely positive economic profit. So what's happening, there is a positive economic profit, that means there is an accent in for other firms to enter into,
- to enter into this industry. So what's going to happen is, this is going to be supply curve right at the moment,
- but as soon as other carrier realizes that they can or any of the carrier realizes they can offer a more,
- it doesn't mean to have new carriers entry, it could be existing carriers just offering maybe buying more planes or offering more routes.
- Than maybe a little bit later the supply curve shifts like this, the supply curve shifts like that and this would be our new equilibrium price.
- And we're still making an economic profit, because new equlibrium price is still, is still higher than the price needed for zero economic profit.
- So still more people will continue to enter and so than you might have a new supply curve that looks like this.
- And this is our new equlibrium price and what's happening, we're travelling, we're travelling down to the right along the demand curve.
- As more supply comes on, we're seeing the decreasing quantity and the price is going down. But still, the equlibrium price is higher than this line right over here,
- so even more people will enter, even more people will enter till we get to the point right over there, and that point
- now the equlibrium price is the price in which all of the players are having zero economic profit, and there is no incentive
- for more people to enter into it, because than the equilibrium price will go down,or there, essentialy right now, the economic profit is zero.
- So everyone is neutral in this scenario. So I'll want to leave you there, so this is what happens
- when perfect competition, that there is no barriers to enter, there is more people to enter in in in, the price goes down,
- the quantity is dropping. In this scenario, we're willing to do next interesting. But if we didn't have a perfect competition, especially what happens if something like,
- something like, I don't know, something like a monopoly?
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