New Firms Entering a Perfectly Competitive Market: Information Related to It
One of the biggest challenges for firms entering into a perfectly competitive market is that in order to survive, they must produce goods at costs below those of their competitors. This might seem like an impossible task but with some creativity and clever thinking, it can be done! In this article, we will explore information related to new firms entering a perfectively competitive market and how they can best succeed in such an environment.
In our previous article on “perfect competition” when writing about what makes markets non-competitive or uncompetitive (i.e., monopolistic), one point discussed was that if there are several producers who sell identical products, then prices are determined by supply and demand, often following the law of supply and demand.
So when new firms enter a perfectively competitive market, what are some challenges they may face?
While there is no set price for perfect competition because it depends on how many sellers in the industry (and whether any particular seller’s product has qualities that make it more desirable than others), we can assume that since each firm will be producing at costs below those of their competitors then prices must fall to meet these levels or cease production altogether. In other words, if one company was selling its product for $100 but another company came along and sold theirs for $95 then eventually both companies would have to lower their prices until someone couldn’t produce at such low cost without incurring losses.
This would cause a shake-up in the industry. The old, established companies would be forced to cut prices and become less profitable while the new entrants might achieve some success with higher margins for their cheaper products!
A big problem that most new firms are likely to face when entering such an environment is whether they have sustainable competitive advantages which can allow them to last long enough without having sacrificed all of their profits or even go out of business. For example, if one company had created a brand name that was recognizable but another firm came along who offered something similar at a lower price then it’s likely that this buyer may switch because the quality difference isn’t worth paying more for due to its own preferences. Another common challenge faced by many firms when entering such an environment is the tendency to develop a “me too” strategy when it comes to competing against other firms.
This strategy is when a firm simply copies the strategies of other firms without adding anything new or different to it.
This approach may seem like an effective way to compete but in reality, this can have some serious negative consequences such as higher costs and lower profits because these companies are trying to replicate what others are doing instead of innovating their own ideas. A recent example of this was when Amazon introduced its Kindle Fire tablet which competed with Apple’s iPad, Google’s Nexus Tablet, and Barnes & Noble Nook Tablet. The Kindle Fire offered features similar to those found on all three competitors yet at prices that were significantly less expensive than either the Samsung Galaxy Tab (the second most popular Android-based device after the Apple iPhone) or even for iPads themselves since they have been found to be about 18% cheaper on average.
The Kindle Fire, which was introduced by Amazon in 2011 as a competitor for Apple’s iPad and Google’s Nexus Tablet, has had some negative consequences when it comes to the company entering a perfectly competitive market where there is no limit of entry or exit. This becomes problematic because these firms are trying to replicate what others are doing instead of innovating their own ideas, which leads to higher costs and lower profits due to prices being driven down quickly by lowering competitors’ minimum profit margins while at the same time building up competition between sellers driving them towards bankruptcy. A recent example of this is when Amazon released its Kindle Fire tablet that competed with Barnes & Noble Nook, which led to Barnes & Noble’s stock price falling by a third when Amazon was able to undercut them on pricing.
The New York Times calls this trend “Selling Yesterday,” where firms enter markets that are already saturated with competition and quickly lose market share because they cannot differentiate themselves from the rest of the crowd. This is problematic for consumers as it may lead to higher prices due to fewer suppliers in each industry while also leading towards lower quality products since there will be fewer competitors driving them towards innovation rather than replication or imitation. A potential solution would be for these new entrants into competitive industries to focus more on what sets their company apart from others, like how Apple made its iPod stand out when entering an MP player market that had been dominated because the firms entering are often larger than their competitors, so when they go under it’s harder for small businesses to compete with them.
