Competitive Market

A perfectly competitive market is by definition a market “that’s highly fragmented and in which no single seller or buyer has sufficient clout to affect the market price” (Frank and Bernanke). The suppliers in such markets are price takers. They may not achieve an economic profit, only an accounting profit. Therefore, owners of such firms are earning returns on their investment of time and money commensurate with what they could earn from their next best opportunity. In such circumstances, a supplier’s marginal revenue must equal the market price. In the market of computers, there are so many competitive businesses that one firm alone cannot change the overall market price of the good being sold. Keeping in mind that any firm’s basic goal is to maximize profit, let’s analyze the competitive advantages of the computer market using the case provided, Dell vs. HP in the PC Market.

Every personal computer consists of the similar parts which is why companies employ the same production techniques to produce them. Although aesthetically, every computer differs, these internal components are assembled in the same way. Because production techniques are essentially the same when it comes to building a PC, the PC market has a perfect knowledge of technology. Every producer knows how much it costs for them and their competition to make and sell a PC. Seeing how the mother board is not better in a Dell computer than in an HP, every computer is essentially equal no matter what brand. As a result of this high substitutability, the demand curve is very elastic. If Dell decides to raise its prices why should consumers pay more for a Dell than an HP when the internal components accomplish the same tasks? If Dell were to shut down and close operations, consumers will just buy computers from other firms. If Dell’s absence happens to be a big blow to the market, the barriers of entry for the PC market are so low that anyone can buy the components of a PC, assemble them, and...