Barber shops in a large city would seem to be an example of a competitive market

Question

      Barber shops in a large city would seem to be an example of a competitive markets, since there are many sellers operating relatively small shops, each seller takes the price of haircuts as given, and the products (haircuts) are very similar between different shops.

a.   How could you argue that the barber shop market is not competitive?

b.   Is it possible that each barber shop could face a demand curve that is not perfectly elastic?

c.   How profitable do you expect barber shops to be in the long run?

Explanation / Answer

a)

Products offer by the Barbers are very similar but not identical. These can be said to be close substitute products. Hence, we can say that barber shop market is not competitive.

b)

Since these barbers are providing very close substitute products, hence, demand curve shall be downward sloping. Demand curve shall not be perfectly elastic.

c)

Shops can earn abnormal profits in short run, but in long run, entry of new firm will increase supply and profits will fall. All shops would be getting only normal profits in long run.

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