Many large corporations, such as General Motors and Apple, operate in markets th

Question

Many large corporations, such as General Motors and Apple, operate in markets that are not even close to perfectly competitive. But unlike the products these companies sell, shares of these firms' common stock are bought and sold in what could be described as a perfectly competitive market. Based on the three conditions that make a market perfectly competitive, what characteristics of the purchase and sale of shares of stock of a large company like GM or Apple, are consistent with perfect competition? Your textbook states that, in the long run, representative firms in monopolistically competitive markets will just break even --- that is, earn zero economic profits. Yet some firms in highly competitive markets manage to continue to earn economic profits indefinitely. For example, perfumes, cosmetics, and hair care firm L'Oreal, in business since 1907, remains highly profitable today, despite competing in fiercely competitive product categories. How has L'Oreal managed to stay profitable for so long

Explanation / Answer

1) A perfectly competitive market is characterized by a large number of firms, all behave competitively but each firm’s market share is small enough to influence either price. The entry and exit to such an industry is generally costless. Given these facets, the stock market of Apple and General motors can be assumed as a perfectly competitive one. There are large number of buyers and sellers each of them is unable to affect the stock price (to an extent) and there is free entry and exit.

2) Monopolistic competition has barriers to entry with Patents, Trademarks and Copyrights. Since a monopolistically competitive firm can earn substantial profit in long run, there must be some potential barriers to entry and the credible sources like those mentioned above, enables few firms to be the leader in the market for price determination. The same are used by L'Oreal.

The more likely structure of market suitable for this firm is an oligopolistic market. Here firms aggressively compete for price and quantity. The technology is protected by patents and hence entry is difficult and extremely costly

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