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A Case Study In Perfect Competition:
The U.S. Bicycle Industry
And How Independent Retailers Can Thrive!
I had an epiphany, as in a sudden insight into reality, in May at a meeting where a long time friend in the industry offered the opinion that the U.S. bicycle industry is in a classic state of perfect competition. My immediate response was “…that sounds like a good thing!” My friend, who went back to graduate school after working in a bike shop, for a major component manufacturer and prominent bicycle brand quickly responded with “…no, you don’t understand.” He went on to explain that when he studied economics in graduate school he became aware of perfect competition which is a term of art in economics for the most competitive market imaginable – one where the companies and businesses realize the bare minimum profit necessary to keep them in business.
At the time we were in a meeting together with six other people from the bicycle industry – and the room went silent for a time. As the group started to discuss the notion of perfect competition it became apparent that no one strongly disagreed, and in fact there seemed to be more agreement than not that our industry was indeed in perfect competition.
We ended our meeting, and went our separate ways, but the concept of perfect competition stayed with me, kind of like the dull pain of a toothache. When I got back to my office I did a search on the web and found quite a lot about this subject. Here is a summary of what I learned.
Perfect competition, according to economists, is the most competitive market imaginable. In the real world, it is rare, and there are even some economists that feel it may not even exist in its purest (I take this as worst) form. The example of a market in perfect competition that is referenced by those economists that believe it does exist - is agriculture.
Competition is … competition, so what makes perfect competition different from all other forms or kinds of competition? According to economists – because it is so competitive that any individual buyer or seller has a negligible impact on the market price. Products are homogeneous, or composed of parts that are all of the same kind. Product and pricing information is also perfect in that everyone, including the ultimate purchaser knows everything about the products, including the best prices available in the market.
In a market in perfect competition everybody is a price taker, producing and selling essentially identical products and each seller has little or no effect on market price, and is unable to sell any output at a price greater than the market price.
Firms earn only normal profit, or the bare minimum profit necessary to keep them in business.
If firms do earn more than normal profit, which is called excess profit, the absence of barriers to entry mean that other firms will enter the market and drive the price level down until there are only normal profits to be made. Manufacturing output will be maximized and price minimized.
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