3. The following facts characterize the furniture
industry in the United States:39
a. The industry has been very fragmented, so that
few companies have the financial backing to
make heavy investments in new technology and
equipment.
b. In 1998, only three U.S. furniture manufacturers
had annual sales exceeding $1 billion. These
firms accounted for only 20 percent of the market
share, with the remainder split among 1,000
other manufacturers.
c. Capital spending at one manufacturer,
Furniture Brands, was only 2.2 percent of
sales compared with 6.6 percent at Ford
Motor Company. Outdated, labor-intensive
production techniques were still being used
by many firms.
d. Furniture manufacturing involves a huge number
of options to satisfy consumer preferences,
but this extensive set of choices slows production
and raises costs.
e. Small competitors can enter the industry because
large manufacturers have not built up
any overwhelming advantage in efficiency.
f. The American Furniture Manufacturers
Association has prepared a public relations
campaign to “encourage consumers to part
with more of their disposable income on
furniture.”
g. In fall 2003, a group of 28 U.S. furniture manufacturers
asked the U.S. government to impose
antidumping trade duties on Chinese-made bedroom
furniture, alleging unfair pricing.
h. The globalization of the furniture industry
since the 1980s has resulted from technological
innovations, governmental implementation
of economic development strategies
and regulatory regimes that favor global investment
and trade, and the emergence of
furniture manufacturers and retailers with
a capacity to develop global production and
distribution networks. The development of
global production networks using Chinese
subcontractors has accelerated globalization
in recent years.
Discuss how these facts are consistent with the
model of perfect competition.
The facts presented about the furniture industry in the United States suggest that it is not consistent with the model of perfect competition. Here's why:
1. Fragmented Industry: The furniture industry in the United States is described as fragmented, meaning there are many small manufacturers instead of a few dominant firms. In a perfectly competitive industry, there would be a large number of buyers and sellers, none of which have the power to influence prices. However, in this case, the fragmented nature of the industry means that few companies have the financial backing to invest in new technology and equipment. This lack of financial strength reduces competition and can result in lower efficiency and innovation.
2. Limited Market Share: Only three U.S. furniture manufacturers had annual sales exceeding $1 billion, accounting for only 20 percent of the market share. In a perfectly competitive market, no single firm would have a significant impact on the market share. However, in this case, the majority of the market share is controlled by smaller manufacturers, indicating that there is not an equal distribution of market power.
3. Outdated Production Techniques: The fact that many furniture manufacturers still use outdated, labor-intensive production techniques suggests a lack of technological advancements and innovation in the industry. In a perfectly competitive market, firms would continuously strive to improve their production techniques to reduce costs and increase efficiency.
4. Slow Production and Higher Costs: The extensive set of choices available to satisfy consumer preferences in the furniture industry slows down production and raises costs. In a perfectly competitive market, firms would aim for maximum efficiency and cost minimization. The presence of a huge number of options and longer production times indicates a departure from the model of perfect competition.
5. Tariff Imposition: The fact that U.S. furniture manufacturers asked the government to impose antidumping trade duties on Chinese-made furniture indicates a desire to protect domestic producers from foreign competition. In a perfectly competitive market, there would be no barriers to trade and firms would not seek protection from foreign competition.
6. Globalization and Production Networks: Globalization in the furniture industry has been facilitated by technological innovations, economic development strategies, and the emergence of manufacturers with global production and distribution networks. In a perfectly competitive market, there would be no concentration of production networks or advantages in efficiency that favor some firms over others.
Overall, the facts presented indicate that the furniture industry in the United States does not align with the model of perfect competition due to factors such as fragmented markets, limited market share, outdated production techniques, slower production times, tariff protection, and the globalization of production networks.
The facts presented about the furniture industry in the United States are not consistent with the model of perfect competition. Perfect competition is characterized by several key assumptions, such as a large number of buyers and sellers, homogenous products, perfect information, and no barriers to entry or exit.
Let's examine how each fact differs from the assumptions of perfect competition:
a. Fragmented industry: In perfect competition, there are numerous small firms, none of which have significant market power. However, the furniture industry in the United States is described as being highly fragmented, with few companies having the financial capacity for heavy investments. This suggests the presence of larger firms with more market power, which is inconsistent with perfect competition.
b. Concentration of market share: In perfect competition, no single firm has a substantial share of the market. However, the fact states that in 1998, only three U.S. furniture manufacturers had annual sales exceeding $1 billion, accounting for only 20 percent of the market share. The remaining market share was split among 1,000 other manufacturers, indicating a lack of equal market presence among the firms.
c. Low capital spending and outdated techniques: Perfect competition assumes that firms have access to the necessary resources and technologies to compete effectively. However, the fact indicates that furniture manufacturers have low capital spending and continue to use outdated, labor-intensive production techniques. This suggests a lack of technological advancement and inefficiency, which are not characteristics of perfect competition.
d. Extensive set of choices: Perfect competition assumes that products are homogenous, meaning they are identical or very similar. However, the fact states that furniture manufacturing involves a huge number of options to satisfy consumer preferences, which slows down production and raises costs. This suggests product differentiation, which is not consistent with perfect competition.
e. No overwhelming advantage in efficiency: Perfect competition assumes that no firm has a significant advantage in terms of efficiency or cost. However, the fact states that small competitors can enter the industry because larger manufacturers have not built up any overwhelming advantage in efficiency. This suggests that some firms may have advantages over others, which deviates from the perfect competition model.
f. Public relations campaign: Perfect competition assumes that firms cannot influence or manipulate consumer behavior through advertising or marketing campaigns. However, the fact mentions a public relations campaign by the American Furniture Manufacturers Association to encourage consumers to spend more on furniture. This indicates that firms engage in marketing efforts to influence consumer preferences, which is inconsistent with the perfect competition model.
g. Request for antidumping trade duties: Perfect competition assumes that there are no trade barriers or government interventions that favor or protect certain firms. However, the fact highlights that U.S. furniture manufacturers asked the government to impose antidumping trade duties on Chinese-made furniture, alleging unfair pricing. This suggests that firms seek protectionist measures, which contradict the assumptions of perfect competition.
h. Globalization and global production networks: Perfect competition assumes that the market is confined to a specific geographical area. However, the fact mentions the globalization of the furniture industry, with the emergence of manufacturers and retailers capable of developing global production and distribution networks. This indicates the presence of international trade and market expansion, which is not consistent with the assumptions of perfect competition.
In conclusion, the facts presented about the furniture industry in the United States demonstrate deviations from the model of perfect competition. The presence of larger firms with market power, product differentiation, technological inefficiency, government interventions, and globalization all indicate that the industry does not conform to the assumptions of perfect competition.