The products are also identical and there is complete freedom of entry to the market. Moreover the information about the products and prices from various firms are also available to the customers at no cost. Hence, in a perfect competition, the price is purely set by the market and the firms adhere to the price (Salvatore, 2006). In the case of CPI, if it decides to raise the prices of the toothpaste unilaterally, the demand for the firm’s toothpaste will be completely reduced and the firm will lose its market share. Customers will prefer to buy the products which are priced at the market rate. This will eventually lead to the shutdown of the product totally.
In this case, the market price of the toothpaste is increased to $ 54 per case. As discussed earlier, it is evident that the profit is maximized when the marginal cost (MC) equals the marginal revenue (MR). The marginal cost function remains unchanged as MC = 0.006 Q, as the costs are unaffected due to raise in prices. Also, the marginal revenue will equal price, as the sale of an additional case results in a revenue equal to the price per case.
In a perfect competition, the market price rises only when the demand rises from the current level. In such a case, the supply also has to rise to meet the demand. The point where the supply meets the demand is set as the market price. Hence it is very clear that the demand in the market has risen (Sloman and Sutcliffe, 2004). This will lead to the profit maximizing level of the firms to increase, as the firms now have the opportunity to exploit a higher demand than usual with increased prices.
It is important to note that the products of all the firms are homogenous and are not differentiated in a perfect market. Moreover the customers already have all the information about the products available in the market. Hence it is very difficult to create an impact by advertising the product.