Question

Which one of these markets would definitely not be perfectly competitive? (LO4) a) Foreign currency b) Wheat c) HDTVs d) The New York Stock Exchange

Short answer

The HDTVs market is definitely not perfectly competitive, as it involves significant variations in brand, specifications, technology, and size, leading to producers having power over prices. Additionally, entry and exit to the market are not free due to heavy start-up costs and technological advancements.

Step-by-step solution

Identifying the non-competitive market

Given the characteristics of a perfectly competitive market, one can proceed by elimination. Firstly, Foreign currency market and Wheat market are extremely competitive. They offer products (currency and wheat) that are virtually identical across suppliers. The New York Stock Exchange is also perfectly competitive because it is an open platform with strict regulations to ensure transparency.

Analyzing the HDTVs market

However, the HDTVs market varies greatly depending upon brand, specifications, technology, size, resolution, among others. Therefore, producers do have significant power over prices and consumers can show distinctive preferences. Additionally, entry and exit to the market are not free due to heavy start-up costs and technological advancements. Thus, based on the aforementioned details, the HDTVs market is definitely not perfectly competitive.

Key concepts

Foreign Currency Market

The foreign currency market, often termed as the Forex market, is the largest and most liquid financial market in the world. Traders and investors from around the globe exchange trillions of dollars worth of currencies daily.

Due to its immense size and global reach, the Forex market exemplifies a near-perfect competitive market with high levels of price transparency. There are many buyers and sellers, none of whom have significant enough power to single-handedly influence market prices. Additionally, the product, in this case currency, is homogeneous - one US dollar is identical to another US dollar.

Key Features of Forex Market

• High Liquidity: Transactions can be executed quickly and easily.
• Pricing Transparency: Currency prices are known and visible to all market participants.
• Low Entry Barriers: Individuals can easily enter the market with relatively low capital.

Wheat Market

The wheat market is another example where the characteristics align closely with those of a perfectly competitive market. Wheat, as a commodity, is a staple grain globally and is generally considered to be a homogeneous product. Farmers produce an essentially identical output that they sell to numerous buyers, whether they are consumers, companies, or governments.

Prices in the wheat market are established by global supply and demand dynamics. No single producer or consumer has enough control to manipulate the market price. Moreover, the market is easily accessible for new producers, assuming they have the necessary land and climate conditions.

Characteristics of a Competitive Wheat Market

• Homogeneity: Wheat from different producers is fundamentally the same.
• Many Sellers and Buyers: Preventing price control by any single entity.
• Information Transparency: Prices are widely known and influenced by global factors.

New York Stock Exchange

The New York Stock Exchange (NYSE) is a classic example of a competitive market within the financial sector. It facilitates the buying and selling of stocks, bonds, and other securities. The NYSE is heavily regulated to ensure fairness and transparency, which supports its competitive nature.

On the NYSE, securities are traded in a public auction format. Buyers bid for the lowest price they can pay, while sellers ask for the highest price they can receive. The actual transaction price for a security is a balance of these competing interests. No single buyer or seller can influence the market prices significantly unless they undertake massive transactions, which are rare and monitored.

Attributes of NYSE's Competitive Nature

• Regulated Environment: Ensures transparent and fair trade.
• Multiple Participants: Including individual and institutional investors.
• Standardized Information: All relevant information about securities is publicly disclosed.

HDTVs Market Characteristics

The market for High-Definition Televisions (HDTVs) differs considerably from the usual characteristics of a perfectly competitive market. Unlike homogeneous products like wheat or a currency, HDTVs come in a variety of specifications, brands, and price points. This variety creates product differentiation, which gives manufacturers and sellers pricing power.

Entry into the HDTV manufacturing business is relatively difficult due to high startup costs, technological complexities, and existing brand loyalties. Moreover, consumers may have preferences for certain brands, further eroding the uniformity that characterizes a competitive market.

Divergences from Perfect Competition

• Product Differentiation: Varied features and brand reputations.
• Barriers to Entry: High capital and technological requirements.
• Consumer Preferences: Brand loyalty influences buying decisions.

Based on these points, the HDTVs market cannot be considered perfectly competitive.