So we set up the conditions for a competitive market and the conditions for a competitive market where these four. A large number of relatively small buyers and sellers, homogeneous products, free entry and exit, and perfect information. And we admitted that these four conditions are so restrictive as to basically limit the number of industries that we think actually fit right into that. Before we go any further, I want to put a little Public Service Announcement in for my fellow economists here. Because you might say, Larry, are these assumptions really realistic? What people like myself do, micro economists, is essentially, we look at these and say these assumptions are really, really restrictive. And that's why there's not a than that more than just a handful of industries that would actually meet all four of these relatively tough conditions. But now I want to give a little PSA or my public service announcement for my fellow economists and talk a bit about how realistic these assumptions are. What micro economists do at a research one university like the University of Illinois is they do research. They write papers about about about whatever it is they're experts at. All the faculty across campus are experts in whatever field they're in, cell biology or electrical engineering or computer science. Or here in the College of Business, things like economics, supply chain accountancy, stuff like that. They write papers in this area and the people who really look like me, that is a micro economist. They write papers that oftentimes just say, we can see with these four conditions. We have a rock solid well-known understanding of what the equilibrium would be in an industry that met all those characteristics. And we also have a really rock solid knowledge of what would happen if you went along and tweaked that industry. Remember that story we have about the about the cereal bowl with the ball bearing at the bottom? That's the equilibrium for an industry that meets these four conditions. Bump the bowl with some external shock and the ball will roll around but we can know where it's going to go back. Because we have really good understanding of how this industry works. Now it turns out what economists do then is since we know a lot about how this industry works. The research that people do is to go in and say I'm going to change one of these models. For example, suppose instead of having a large number of relatively small buyers and sellers, we have just one seller. We can change that assumption and then everything else could be the same. The product, free entry and exit, perfect info and see what happens when you change one of those assumptions and see how things change. Suppose instead we have that example I told earlier that there's one relatively large buyer in the market. How does the outcome change? So there are people who will write papers sometimes, make a whole career out of that. Think about the second issue, homogeneous products. We believe for the competitive model that sold these products but what happens if products are not homogeneous? Suppose we have differentiated product industry? If you go into the drugstore, there's like 38 different types of toothpaste you can buy. Some are green some are white, some have got little flecks in them. Some have all sorts of different taste to them, different flavors. That's what we call a differentiated product industry. One of the classic examples out there are economists who have made their career out of thinking about the Ready-to-Eat cereal industry. RTE it's called, that means buying cereal like Cornflakes or Captain Crunch or whatever. Now the interesting thing about the cereal market is where do you buy your cereal? And the answer is you buy your cereal at the grocery store, but it's actually more detailed than that. Where in the grocery store do you buy your cereal? And the answer is the cereal aisle, now we get into the game. So the Ready-to-Eat cereal is a really funny market because the entire market is just one little aisle in a grocery store and that aisle is finite in size. And finite in size means that if I'm Kellogg's, the more different flavored oats and bran and little chocolate donuts and everything else. I can make in terms of cereal boxes, I push out there. There's less room on that shelf for somebody else to enter into the industry. What happens is because the entire battle space for the industry is this finite 38 linear feet of a grocery aisle, you can get really very funny, interesting results out of that. About what's the chance of entry? How many different cereal brands do you have to have to make a viable entry space a foothold on that aisle? There are people who spend their entire career at economics just writing about the battlefield that is the cereal aisle. How about the third thing, free entry or exit? We talked about that, some industries, you can't really enter unless you get a the right to from the city. For example, a liquor license. Sometimes in the past in some European countries, they have had exit rules. That said that if you are going to lay somebody off, you have to give them a 180 day notice. It's like a half a year, you have to give them a half a year notice. That's a very, very difficult thing because that means you as a firm, you can't really exit very well. If all of a sudden, you decide I got to get out of this industry, but wait, I have to at least operate for another 180 days. Because I have to give my workers 180 day advance notice. Now that's going to make a very different outcome than an industry where people could come and go freely into this industry. Finally, perfect information, you can have an industry that fits all of these first three conditions perfectly. But if the fourth one doesn't work, the market could fall apart. So you have situations where people have to expend effort to search. Economists like to write about this. If you go to the mall in Washington, DC, the Smithsonian is on this giant mall in Washington DC. One of the most popular places is called the Air and Space Museum. What happens is that if you take a look outside of the Air and Space Museum, there's about 40 little kiosks of people selling junk souvenirs. A little fake bronze replica of the Washington Monument, a little fake bronze replica of the Lincoln Memorial. These sorts of things that you can walk up and buy take home for your take home for your kids. If you take a look at those things, there's lots of them, they're all relatively small. They meet number one, they all have homogeneous products. They're all buying the same cheap knockoff little fake bronze statuette of the Washington Monument. There's free and exit and entry, people can wield their car up there or they can say I'm not going to do it here. I'm going to go across the street by the art museum or I'm going to go over to the Vietnam War Memorial or something like that. But the last thing, perfect information, we don't really have perfect information. If you were to look at these things, economists who looked at the said, you basically have two-tiered prices in those systems. What happens is that some sellers who have strategically perfect spots like right at the corner intersection of two sidewalks. They're on the very first one on the corner, those guys will typically have a strategy where they charge a really high price. Other ones will be charging a low price, pretty much almost at cost. What happens is there's basically the people running stands know there's two types of people out there. There are searchers and there are non searchers. Searchers are people who might walk up and look at your price and then go down to the next booth and look at their price and go down to the next booth, look at their price. And they'll say I'm going to buy from this guy. It turns out, the presence of searchers drives one of the equilibrium price to be rock solid bottom price. Everybody's price is that because they know if they're not pricing at that, nobody's going to buy from them. Alternatively, there are some people who feed only on non searchers and they charge way too much. So whereas that little plastic thing maybe eight bucks at one of the stands where searchers can drive the price down to cost. Somebody might be selling it for 30 bucks, $29.95, same thing. They may only sell three a day, but they're getting three people who randomly walk up and say I'm late for my flight, give me that thing there. And they say, that'll be 30 bucks. They go 30 bucks? Okay, I gotta get out there and get that cab and get to the airport. They may only sell two or three a day, but they get enough mark up on those two or three a day. That they make as much money as the person who might sell 100 a day, but they're only making $0.30 on each one. So this it's a very weird market, all the other conditions for competition are met except nobody's got good information. Now if they walked outside the Smithsonian and like gasoline stations on the interstate. Gasoline stations on the interstate have giant signs sticking up to so that you can see them a half a mile away. It's got their gas price in huge letters out there. If they had those above all those kiosks, if there was a little thing above there that told exactly what the money was. Then that information would be very good and that market will collapse to one competitive price. But the absence of that information means you have segmented markets. You have markets that searchers will go to and you have markets that non searchers stumble upon. Unfortunately, for the most part, it's what we was oftentimes called an economics tourist trap issue. Thanks.
