"Grocery stores and gasoline stations in a large city would appear to be examples of competitive markets: there are numerous relatively small sellers, each seller is a price-taker, and the products are quite similar."
Can someone explain the following three questions?
1) How could we argue that these markets are not competitive?
a. Most grocery stores and gas stations have a relatively small geographic range; they do not attract consumers from very far away, and thus do not compete with the grocery stores or gas stations across town.
b. The individual grocery stores or gas stations do not have the power to control the price of many items that they sell, so they are not able to compete on price.
c. They usually purchase products from the same distributor: i.e., all grocery stores and gas stations buy their Coke products from the same Coke distributor. Thus, individual grocery stores do not really compete with each other; the same for individual gas stations.
d. Each grocery store or gas station is so small relative to the size of the market that their actions do not affect the rest of the market, therefore they do not have to behave in a competitive way.
2) Could each firm face a demand curve that is not perfectly elastic?
a. No; since customers aren't willing to spend their morning visiting each grocery store or gas station in a large city to find the best deal, then each firm's demand curve will be perfectly elastic since consumers do not have full information.
b. No; the conditions mentioned (many small sellers, price-takers, homogeneous products) guarantee that each of these industries will be perfectly competitive. Demand will always be perfectly elastic.
c. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since consumers will not stop at every grocery store in town to find the cheapest beef jerky), then they will not face perfectly elastic demand.
d. Yes; if the individual firm demand curve is horizontal, then demand is not perfectly elastic. This will often be true for small sellers.
3) How profitable do you expect grocery stores and gasoline stations to be in the long-run?
a. Even with a small amount of market power, it is still relatively easy to enter and exit these industries. Long-run profits will likely be driven down close to zero.
b. Because of the rising prices of both food and gasoline, each of these industries is expected to suffer long-run losses for the foreseeable future.
c. Grocery stores would be expected to enjoy long-run positive profits since they sell a wider variety of products; gasoline stations would be expected to break even or take losses in the long run because of their more limited range of products.
d. Since these firms retain considerable market power (ability to set price), then they are expected to enjoy long-run positive profitability for the foreseeable future.
