Tuesday, April 03, 2012

Perfect Competition - Water

In Principles of Micro textbooks, the first form of a competitive market introduced is always the perfectly competitive one-- a theoretical construct where the goods are homogenous, there are no barriers to entry/exit, and there is no long-run economic profit (not the same as accounting profit). The equilibrium quantity produced is socially optimal and the price is exactly equal to marginal cost.  While markets approach this equilibrium in theory, they actually never reach it.

But in Turkey I see more examples of markets resembling perfect competition than anywhere else I've traveled. A person might open up a pastry shop and soon eight more people within a one block radius do the same thing, driving profits closer to zero. The goods they sell are well-known local fare, it's impossible to distinguish one sellers eclairs or tulumba from another's. Eventually a couple sellers will close down and move on to another idea.

A better example of this would be bottled water. H20 is H20, no matter what spring it comes from. Tap water isn't very safe to drink as-is here, so most people buy bottled water which is conveniently delivered in large jugs by several local competing services. But they attempt to differentiate and market (a characteristic of monopolistic competition). Hence, we had people going door-to-door in our building on Sunday trying to talk up the virtues of using a Nestle bottled water as opposed to other brands. The next day, we had two new flyers in our mailbox advertising two other water delivery services-- all of them for the same price. 

Given that gas prices here are about $10/gallon, the price these services charge are pretty low and must be very close to the marginal cost. The consumer definitely reaps the surplus from this competition.  I can think of no better example of a homogenous good than water, it's impossible to differentiate one brand from another.

It's one of my favorite things about Turkey.