United States (US) has millions of vehicles in the country which are registered. The competition in this sector is very tough. It has nearly all the major vehicles producer in the country. This has given rise to price war and customers are getting lots of option. Some of the producers which are there are Ford Motors, General Motors, Chrysler, BMW, Honda and Hyundai. This puts a lot of pressure of different companies. This takes the US market towards perfect competition. It also satisfies the assumption of perfect competition as companies here earn only nominal profits. There are many producers of cars like Ford Motors, General Motors, Chrysler, BMW, Honda, Hyundai and many others.
This leaves the company with very little to alter the price. Thus the prices are very similar and there is not much difference. This makes them more of a “price taker”. (Miller, 2008 pg 27)“The products produced are more or less similar” (Miller, 2008, pg 32). Every manufacturer has cars in all segments. Like in the luxury class, economy class and so on. Their cars are also very similar with very little difference to choose from.
Thus, customers have a choice to make. The information with the customer regarding the prices of car is there. In case there is difference then the customer has a choice to pick other. As there is complete information it creates healthy feeling among the consumers. There is also complete information regarding the way the cars are manufactured and the technology used. When a company supposes Ford comes with a new technology others follow suit. Thus information and technology is free to pass. There is freedom of companies to enter and exit the market.
There are certain norms of the United States (US) government which the company has to adhere to and it is similar as every country has so but there is no legal barrier. This helps the company to decide its future course as there is freedom for both. Here also car manufactures try selling their car which will fetch them maximum profits. “This is when the marginal revenue = marginal cost” (Miller, 2008, pg 37). Since, there is so much competition this situation is also there.
This is also seen in the diagram below. It can be seen that price is determined where supply matches demand for the market. Figure 1: Optimization of profit $ MC $ S ATC P AVC D Thus the US car market has lots of companies moving the market towards perfect competitionThe demand for US cars has slowed down due to decrease in demand. This has been due to the fact that consumers are saving more fearing the recession. This is also caused due to “more players in the market as customers have more choices and this has affected the sale of each company” (Miller, 2008, pg 32).
“The market size has not grown” (Miller, 2008, pg 43) as the increase in the number of players thus affecting the demand. This can also be understood better when we look at the following graphFigure 2: Demand and Supply of cars in US market