Question

Suppose in a purely competitive market that American firms consider labor costs to be mostly variable while Japanese firms consider labor costs to be mostly fixed. What implication would this have for the viability of firms in each country if they compete with one another in the short run? What about the long run?

Answer 1

In a purely competitive market, firms are price takers as respective markets determine the prices. To sustain the marketplace, the participating firms need to keep their costs below the prices to remain profitable or break even.

In the given case, it would be challenging for the Japanese firm to compete with the American firm, as the latter could modify its labor costs (variable) as per market conditions, but the former could not.

However, in the long run, all fixed costs (in addition to variable costs) could be manoeuvered. This would give the Japanese firm a level playing field against the American Firm.