Final answer:
The introduction of new technology in a perfectly competitive market that reduces production costs can lead to increased market competition and potentially lower prices.
Step-by-step explanation:
When new technologies emerge in a perfectly competitive market, they can lead to various potential outcomes. If these technologies significantly reduce the costs of production, it can affect the market dynamics substantially.
One likely outcome is an increase in market competition, as firms that adopt the technology can lower their prices, thereby gaining a competitive advantage. This competition may drive profits down to a normal rate once the technology becomes widespread.
Additionally, such technological advancements can result in a controversy between increased opportunities for small firms and the dominance of larger firms. Smaller firms may use the technology to expand their reach and compete on a larger scale, suggesting a future with many small competitors.
Conversely, the technology may also create winner-take-all markets, where a single large firm can dominate the market share, like Microsoft in software or Amazon in online bookselling.
Improved technologies may likewise facilitate easier management of operations around the globe, potentially favoring larger firms. Innovation, therefore, is seen as crucial for firms to maintain a competitive edge and could even lead to above-normal profits as competitors struggle to catch up.
It may also create a division of potential outcomes where small firms can expand and compete globally, or lead to winner-take-all markets dominated by large firms.
Innovation is vital for companies to gain a temporary competitive advantage and potentially earn above-normal profits.