In the models of perfect and monopolistic competition, the long-run equilibrium involves firms making zero supernormal profit. The key assumption driving this outcome is that supernormal profits in the short run attract new entrants to the market.
Increased competition then results in lower prices for consumers and firms’ profits fall. Therefore, an important question is how long does it take for this process to take place?
In a recent post on the Freakonomics blog, Daniel Hamermesh describes a situation in which he was actually able to observe this adjustment process taking place amongst buskers in the centre of Madrid.
This interesting example illustrates that, at least in some cases, this process can start even before entry occurs. This is because incumbents are able to make adjustments to their existing strategies, in the case of the buskers by changing their location. Consequently, profitable opportunities start to be eroded away very quickly.
Perfect competition Chillin’Competition blog, (24/10/11)
Questions
- What are the assumptions of the model of monopolistic competition?
- What is the difference between monopolistic and perfect competition?
- Does the market for buskers fit well with the assumptions of monopolistic competition?
- In this market what might be the benefits for consumers of increased competition?
- What are the key strategies incumbents might use in this market?
- How long do you think entry might take in this market?
Banks appearing in the news has become commonplace in the past year or so. Everyday, there has been something newsworthy happening in the banking sector, whether in the UK or abroad. A recent development in this sector is Barclays agreeing to sell its fund management division, BGI, to Blackrock for £8.2 billion. Barclays says that there are strategic reasons for the sale, which undoubtedly add to the 8.2 billion other reasons. This deal will put the bank in a strong position to make acquisitions next year in creating the world’s biggest asset manager. It will also allow Barclays to weather any further storms on the horizon. The articles below look at recent developments.
Blackrock in £8.2 billion Barclays deal BBC News (12/6/09)
Blackrock and a hardplace The Economist (12/6/09)
Bob Diamond: The builder of Barclays Telegraph, Louise Armitstead (13/6/09)
Barclays offloads fund management business BGI to Blackrock for £13.5 billion Telegraph, James Quinn (12/6/09)
Inside Look: Blackrock buys Barclays fund unit for $13.5 billion Bloomberg, youtube (12/6/09)
Sovereign wealth funds back BlackRock move to acquire Barclaysd Global Investors Telegraph, Louise Armitstead, James Quinn (12/6/09)
Blackrock targets Barclays firm BBC News (8/6/09)
Questions
- What are the ‘strategic reasons’ behind Barclays’ decision to sell its fund management division?
- The Blackrock and a hardplace article talks about the benefits of economies of scale. What does it mean by this?
- What are the advantages and disadvantages of combining fund management with banking and creating such a large business?
- Given that Barclays’ fund management, BGI is a successful part of its business, does their agreement to sell it put them in a stronger position?
- What will be the likely impact of this deal on the economy? Consider who will be (a) the winners and (b) the losers.
In the models of perfect and monopolistic competition, the long-run equilibrium involves firms making zero supernormal profit. The key assumption driving this outcome is that supernormal profits in the short run attract new entrants to the market.