What prevents a perfectly competitive firm to lower the product price and capture the entire market?
What prevents a perfectly competitive firm to lower the product price and capture the entire market?
Two points describe why a firm in a perfectly competitive market cannot lower the product price:
(i) A firm would not want to reduce the price when it is able to sell all its output at a higher price.
(ii) Under perfect competition, there is a large number of buyers and sellers of a product. Each firm produces only a small fraction of the total market supply. It has limited production capacity. Now, if an individual firm lowers the price, all buyers in the market will rush to this firm for supplies of the product. But, by definition, the firm is so small that it cannot produce enough for all the buyers in the market. Hence, the possibility of capturing the entire market by lowering the price is ruled out.
Two points describe why a firm in a perfectly competitive market cannot lower the product price:
(i) A firm would not want to reduce the price when it is able to sell all its output at a higher price.
(ii) Under perfect competition, there is a large number of buyers and sellers of a product. Each firm produces only a small fraction of the total market supply. It has limited production capacity. Now, if an individual firm lowers the price, all buyers in the market will rush to this firm for supplies of the product. But, by definition, the firm is so small that it cannot produce enough for all the buyers in the market. Hence, the possibility of capturing the entire market by lowering the price is ruled out.
