CFA Practice Question

CFA Practice Question

Which one of the following industries most closely resembles the purely competitive model?
A. computer manufacturing
B. vegetable farming
C. retail clothing
Explanation: Since the output in vegetable markets is generally homogenous, there are many producers, each producer supplies a small amount to the total supply of the market and there are small entry barriers the market is relatively competitive.

User Contributed Comments 24

User Comment
sireklove The answer given seems valid but you could make a stong case that agriculture is dominated by large corporations that benefit from government subsidies making entry difficult for new businesses. Whether the output is homogenous is debatable (and I wasn't aware that was critical to to competition). Plus, there are considerable transportation and storage costs given the perishable nature of the product which shapes competitive interactions.
ahan I think it is a pretty open question. I would say "retail clothing" is the purely competitive model as well. I hope this type of questions won't be on the real exam.
ylepape what about farming subsidies and all the existing barriers to trade ?
Ali1 i'm with the retail clothing too. The amount of food that's rotting in EU warehouses as a result of farming subsides sort of negates competition, especially when the market price is less than the farmers' production costs. we're in the long run and we've yet to see the producers numbers diminish and breakeven be accomplished.
sammual Well, think about millions of farmers versus Wal-Mar, K-Mart, etc.
frcfa Go and tell about low entry barriers to vegetable farmers in Latin America or Northern Africa when trying to export their farm products in the US or the EU.
Spain81 Retail clothing is by no means a competitive industry. Think of all your t-shirts that say Made in China, Indonesia... how many say Made in UK USA, Germany? Food industry on the other hand is very competitive. Yes EU Subsidies hurt competition but the question does not ask for a "perfect" competition industry but merely the best of the available options.
BADGUY i chose C too bcos i guess the products are generally homogenous,the products 'move' and so there are many entrants into the business,as such,entry barriers are small and the market is competitive.
...i was wrong!
DAS11 Someone please explain how farming is a low barrier to entry market?
wollogo In the theoretical world where economics lives there are no governement subsidies or other distortions. Vegetable farming is the best answer because the products are the most homogenous, (a carrot is a carrot), there are also a large number of suppliers and customers. I would say retail clothing would have higher barriers to entry and that the products are less homogenous with lots of variety. Think about the difference between label/designer clothing versus stuff you would buy at a flea market.
ontrack My take: Except for vegetables,all other industries produce goods that can be differentiated. SO since perfect competition means homogeneous goods, vegetable farming seemed logical to me and i chose ans B!
julescruis Applying Porter's five forces analysis to these industries and you would also pick answer C. Because of barriers to entry due to capital intensity, I think retailing, especially "clothes" will always be more competitive than the other choices.
Birdy101 organic veggies, gene manipulated veggies, would be the same as designer and H&M ... so would also go for cloths as a jeans is a jeans where ever you buy it
StanleyMo anything with no need "branding" is consider purely competitive model.
sharpos i went for farming for one reason.

each individual farmer is a price taker and the pricing is conducted in the ag markets
look at the price of soy beans, sugar, oj etc.

the farmer has to accept these prices.
so the competitive market.

retail each company finds a niche and sets a price accordingly.
escempep I think the key issue here is to consider the differentiation between products in the industry.In agriculture field all the products are the same.
iambroke I bought 5 potatoes from 5 different vendors in a market (25 total). I went back to the first vendor and asked him to pick out the 5 that I bought from him. Of course he couldnt => Perfectly competitive. (of course vegetable market is a price taker)
NickPash Faming industry is subsidized industry, how it could be competetive when it is subsidized. I choose Retail C as well. Number of retail companies are large enough to be competetive where farms are too small to survive without subsidy.
6YASHWIN retail clothing makes lots of advertisments.this is for a monopolistic market
Merke I think the retail clothing market is more competitive than the vegetable farming. Line between B and C is not clear.
rubin1 I agree with merke completely.......very difficult to make distinction
MaresaJaden I picked C as well, but Sharpos makes a very valid point.
marrilynne2 Is retail clothing not monopolistic as there are some few brands
CalebMast I didn't think of retail clothing (@marrilynne2) as monopolistic, but I see your point. I think of the many ways of accessing clothing and aftermarket, but aftermarket, by definition, is not a primary market, thus not how the market is defined. The few brands makes sense. It's sort of the like the automobile industry, though, with a few primary entities having different products. The "DBA," etc. may not change, but there are a lot of different types of clothing available. I think of TJ Maxx vs. Banana Republic, but that simply shows price differentiation and really, a Veblen (status) good effect for the higher priced clothes, unless one thinks like (I've come to sympathize more with this sentiment over the years) my aunt that higher end clothes, like Abercrombie, etc. last longer compared with Old Navy and Old Navy lasting longer than Wal-Mart brand clothing, etc.
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