Competitive market assumptions - men's ball caps

Phil Ruder, Pacific University,
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Summary

In this activity, students are asked to use their intuition and their familiarity with an everyday item sure to be present in the classroom to determine which of the assumptions of the perfectly competitive model are reasonable approximations for the market for men's ball caps.

Context for Use

This activity is suitable for use as a principles of microeconomics class begins its long consideration of various market structures. Most texts begin with an extensive exposition on competitive markets (the supply-demand applications in early chapter(s) followed by chapters on firm costs and a more thorough exposition of the competitive model). I like to begin the discussion of market structures by bringing students' attention to the assumptions of the model and asking them to use their intuition about the markets in which consumer goods are traded to assess whether the competitive framework is likely to be a useful approximation. In drafting this AE, I thought about having students assemble information about 4-firm concentration ratios and/or Herfindahl-Hirschman indices for a number of goods represented in the classroom. However, that exercise takes away the surprise for most students -- and perhaps instructors, too -- that the industries producing many items of clothing are so concentrated. Instead, I reveal the 4-firm concentration ratio as part of the debriefing process. This exercise provides students some perspective on the applicability of the competitive model and sets the stage for the subsequent (in most texts) consideration of the monopoly, oligopoly, and monopolistic competition models.
This activity is useful for both principles and intermediate micro courses. There is no limit on class size. The exercise should take approximately 30 minutes, including student work in teams, the debriefing conversation, and closing comments by the instructor. Students should have read and completed a readiness-assurance process (RAP) on the textbook material on competitive markets and firms before this exercise. The exercise works well as the first AE in the sequence for this unit of the course.

Overview

In this activity, students are asked to use their intuition and their familiarity with an everyday item sure to be present in the classroom to identify which assumptions of the perfectly competitive model are likely to reasonable approximations and which are not likely to be reasonable approximations. This activity intends to get students to examine critically the assumptions of the models under study and to develop skills at deciding which market structure model likely applies to a particular industry.

Expected Student Learning Outcomes

Upon completion of this learning activity students will be able to
*describe the market conditions that make highly competitive markets possible.
*evaluate the level of competitiveness in a market by analyzing market conditions and data on 4-firm concentration ratios.

Information Given to Students

Consider the market for ball caps. Rank the assumptions of the competitive model from least appropriate to most appropriate for analyzing the market for ball caps in the United States.

A. All firms sell the same standardized product.
B. The market has many buyers and many sellers, each of which buys or sells only a small fraction of the total quantity exchanged in the market.
C. Productive resources are mobile; that is, firms face little difficulty in entering or exiting the market.
D. Buyers and sellers are well informed.

Report your team's ABCD ranking in large Sharpie ink on a sheet of scratch paper.






Teaching Notes and Tips

No prefatory remarks are necessary to set up this AE.
The debriefing process can take the following course:
Ask reporters from various teams how they chose the assumption that was most appropriate for the market.
Ask reporters from various teams how they chose the assumption that was least appropriate for the men.s cap market.
Facilitate a discussion among the reporters for teams whose most reasonable assumption coincides with the least reasonable assumption.
If it has not yet come out in the discussion among team reporters, ask a reporter to assess the evidence regarding product standardization from the sample of caps in the room.
Students are using their sense of the economy to make their choices. This would be a good time to ask team reporters what information they would seek in order to be more sure of their rankings.
At this point I mention the typical measures of the number of sellers in the market -- the four-firm concentration ratio and the Herfindahl-Hirschman Index. I ask a few team reporters to guess what the four-firm concentration ratio is. Their guesses are generally much lower than the actual, which is 54.5% (2007 Census of Manufactures, the latest available data, as the 2017 census results have not yet been released.)
I conclude the debriefing process by asking a few team reporters to assess whether it would be appropriate to use the competitive model to analyze this market.
In my closing remarks, I discuss the questions for which the competitive model would be a useful approximation for this market. The model is useful for predicting the direction of short-run movements in market price and quantity as a result of various economic events. On the other hand, if the market is highly concentrated, one could surmise that there are barriers to entry and that the competitive market prediction that firms pass along any cost savings or cost increases to consumers in the long run are not as useful. Likewise, I point out that our conclusions about price ceilings that emerged from the supply-demand analysis early in the course are more complicated -- and more interesting -- when firms have market power.
This AE could easily be modified to include student work with Census of Manufactures data. Students could be given a worksheet that includes one or two industries chosen by the instructor and several blank rows for products the students select. Students then can be directed to the 2007 Census of Manufactures tables and asked to identify the industry category that includes each product and the 4-firm concentration ratio. The AE could then follow that student work.

Assessment

Suppose an industry under study consists of just a few firms selling differentiated products. Which predictions of the competitive model would be likely to hold for such an industry? Which predictions of the competitive model would be unlikely to hold for such an industry?

References and Resources

The link to the 2007 Census of Manufactures tables on market concentration is https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?fpt=document