a Is the market for search engines google bing etc a perfect

a) Is the market for search engines (google, bing, etc.), a perfectly competitive market? Justify your answer using three characteristics of perfect competition. b) Even if firms in perfectly competitive markets can earn a positive economic profit in the short run, they can only earn zero economic profit in the long run. Why is that?

Solution

1. A) Market for search engines can\'t be considered as perfectly competitive market because there are not too many sellers i.e. not too many search engines that provides answers to many queries. Only a few search engines such as Google, yahoo dominates the market. Also, all the search engines don\'t provide homogeneous services (in perfect competition, all firms produce homogeneous product) i.e. services differentiate from one search engine to another. Another characteristic that differentiate search engine market from being perfect competition is barriers to entry. Perfect competition has no barriers to entry, but search engine market has high barriers to entry i.e. its not easy to enter the market and build own search engine like Google or, Yahoo.

Therefore, search engine market is not a perfectly competitive market because -

• product differentiation

• not too many firms(search engine) are there

• barriers to entry

B) If in short run, firm in perfect competition earns supernormal profit, it will attract other firms into the market. This will increase the industry supply and as a result industry supply curve will shift to the right. It will continue to happen until long run equilibrium is reached. In long run equilibrium, market price = MC = ATC, i.e. each firm earns only zero economic profit and therefore no other firm is attracted to the market. However, zero economic profit is earned because, in long run equilibrium, firms produce at minimum point on ATC and Therefore, Total revenue = total cost and no firm has the incentive to enter or exit the market.