1. A firm in a perfectly competitive market invents a new method of production that lowers its marginal costs. What happens to its output? What happens to the price it charges?
a. The firm has an employee who threatens to tell all other firms in the industry about how to implement this new technique. Will it be possible to bribe the employee not to do this? Explain why or why not.
b. Why should this employee probably choose to tell only some of the other firms rather than all of them?
c. What factors will determine the best number of firms to sell the secret to? (Assume that those who get the information keep the secret instead of selling it to still others.)
1. When a firm in a perfectly competitive market invents a new method of production that lowers its marginal costs, several things happen.
First, there will be an increase in the firm's output. With lower marginal costs, the firm can produce more units of the good or service at a lower cost per unit, which incentivizes them to increase their production.
Second, the firm may decide to lower the price it charges for its product. With lower marginal costs, the firm can choose to pass on the cost savings to consumers by reducing the price. This can lead to increased demand for the firm's product and potentially attract new customers.
a. It may not be possible to bribe the employee not to disclose the new technique to other firms. The reason is that in a perfectly competitive market, there are many firms that compete with each other, and any individual firm's ability to control the market is limited. Even if one firm manages to prevent the disclosure of the technique, it is very likely that someone else will eventually discover it or develop a similar technique. In a perfectly competitive market, information tends to flow freely, and firms have limited power to withhold or control information.
b. The employee who has knowledge of the new technique may choose to tell only some of the other firms rather than all of them for a strategic reason. By selectively choosing which firms to disclose the information to, the employee may be able to negotiate better terms or gain some advantage. For example, they may offer the information to firms that are willing to enter into a partnership or collaboration, or firms that can offer a higher price for exclusive rights to the technique.
c. The factors that will determine the best number of firms to sell the secret to depend on various considerations. These factors may include the size and competitiveness of the market, the potential benefits that can be derived from sharing the secret with certain firms, the bargaining power of each firm, and the willingness of firms to offer favorable terms or incentives in exchange for the information. Ultimately, the employee will have to weigh these factors to determine the best course of action.