It is a typical Christmas electronics shopping season, and makers of flat-panel
ID: 1186500 • Letter: I
Question
It is a typical Christmas electronics shopping season, and makers of flat-panel TVs are marketing the latest available models through their own Web sites as well as via retailers such as Best Buy and Wal-Mart. Each manufacturer offers its own unique versions of flat-panel TVs in differing arrays of shapes and sizes. As usual, each is hoping to maintain a stream of economic profits earned since it first introduced these most recent models late last year or perhaps just a few months before Christmas. Nevertheless, as sales figures arrive at the headquarters of companies such as Dell, Samsung, Sharp, and Sony, it is clear that most of the companies will end up earning only a normal rate of return this year.
a) How can makers of flat-panel TVs earn economic profits during the first few months after the introduction of new models?
b) What economic forces result in the dissipation of economic profits earned by manufacturers of flat-panel TVs?
Explanation / Answer
a) When makers of flat-panel TVs introduce a new model they earn some economic profits because of product differentiation. Because of product differentiation, there is an increase in the demand for this new model of flat-panel TVs. This increase in demand raises the price of this new model. This new price is above the average total cost so the firm will earn economic profits in the short run.
b) As there is positive economic profit, new firms will enter the market of flat-panel TVs. As more and more new firms enter the market the demand for flat-panel TVs of existing firms will decrease. As demand decreases, the price will also decrease to the level towards the average total cost. So because of entering of new firms there is the dissipation of economic profits earned by manufacturers of flat-panel TVs.
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