Why don firms earn profits in perfect competition or monopolistic competition?
Because there are no entry barriers. Firms earn profits only because potential entrants cannot compete them away. In perfect competition or monopolistic competition, we assume that competitors have access to the same technology and therefore have the same costs. • A McDonald’s “Value Meal” is priced less than the sum of the prices of the components. Why does McDonald’s charge two different prices for these items? This is an example of bundling. Different customers have different values for the various items in a meal. If they had to buy them separately, they likely would buy the sandwich and fries, but not the drink (or drink and not fries, etc). This bundle encourages more people to buy more “extra” items. • Amazon.com purchased a company whose software keeps track of connections between books that past consumers have searched for and purchased in order to suggest titles to current customers. How does this create value? How does this allow Amazon to capture the value? This created val
