• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Explain the disadvantages of competition, and Evaluate the Removal of restrictive practices such as the RPM.

Extracts from this document...


Competition Essay 1.) Explain the disadvantages of competition. 2.) Evaluate the Removal of restrictive practices such as the RPM 1.) The disadvantages of competition are essentially the benefits of a monopoly. In perfect competition allocative efficiency is achieved as it is a price taker to the point that whatever the market demands is met by firms in the market. The disadvantage here is that productive efficiency is not being achieved, because the firms are supplying to the level that normal profits can be made. The firms in the market will only ever achieve normal profits because this is what is achieved at equilibrium level, as a perfectly competitive market is contestable, and so if supernormal profits are being made in the short run more firms will enter the market as money can be made. Whereas if firms are making losses in the short run smaller or less rich firms will be forced out of the market. This is shown in the graph below. Here productive efficiency is not gained because price is dictated and so there is no chance to gain a greater market share through dictating price and forcing other entrants out of the market. ...read more.


no one firm will have a direct monopoly unless they collude and share the profits, if they behave as so there is no competition and therefor should be treated as a monopoly. If they do not collude then a variety of positions can be taken up on their price/supply diagram. If like a monopoly it chooses to set price at where the MC MR intersection hits the demand curve then supernormal profits will be achieved and profit will be maximised. However the firm will be neither productively or allocatively efficient. If it chooses to set price where MC and AR meet then it will gain allocative efficiency and will still have supernormal profits, but will not be maximising profits. The third possible situation will be where AC meets AR; at this point normal profits will be made. An oligopoly has this ability because it has sufficient market share to be able to dictate price and supply, and therefore can, like a monopoly choose. This can be shown on the graph overleaf. The disadvantages of competition are that productive efficiency cannot be obtained through any given market situation whether it be perfect, monopolistic or in an oligopoly. ...read more.


However in an opposite scenario the removal of a RPM may have a different effect. If a good has positive externalities such as university education, if left up to market forces it will be under consumed. Currently students only contribute �1,000 per year, where top universities such as Oxford wish to charge �20,000 per year. Here the Government has a RPM of �1000 and so it is consumed more than it would be than if tuition fees were �20,000 per year. We can see this in the graph below: If the Government did not force the price to be lower then consumption would be reduced. The maintenance of such a mechanism is justified by the benefits to society that occur, that far outweigh any benefit. If the market was left to market forces, this would be to the detriment of society. To conclude the when the retail price mechanism is removed there are changed to the markets price and consumption as it reverts back to the natural equilibrium, whether it be increased, or reduced consumption. However the removal of the RPM may have a whole range of social impacts that cannot be taken into account in a graph, such as a loss of advice and service quality with chemists, or fewer highly educated individuals in the case of universities. Adam Craig 24.09.02 1 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Markets & Managing the Economy section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Markets & Managing the Economy essays

  1. "Discuss and evaluate the proposition that perfect competition is a more efficient market structure ...

    Examples of this are local public utilities such as telephone, gas water and electric power. Also it is sometimes cheaper to produce two related products in a single firm rather than in two separate firms. This are called Economies of scope.

  2. What is a Monopoly?

    For Microsoft the challenge is now maintaining its position of dominance against a variety of threats. As technology develops, the skills and creativity of those who use it also grows. In addition, the weaknesses of the monopolist's product become more apparent making it the target for those seeking to fill the gaps in the market.

  1. what is economics

    an objective of maximising revenue * Companies are aware that where demand is inelastic, an increase in price leads to an increase in total revenue. * The business situation in both graphs is clearly beneficial, as revenue increases * What is not beneficial is for a firm to reduce prises

  2. The Importance of the Canadian Airline Industry.

    In the case of the airline industry, the mutilation was the result of overcapacity and destructive competition. During the 1980's, the Canadian airline industry was transformed through a series of mergers and acquisitions. Canadian Pacific Air acquired Eastern Provincial Airways, Nordair, and Quebecair, and was then bought by Pacific Western Airlines (PWA).

  1. Is Competition policy necessary?

    it appreciates the potential gains as well as costs of monopoly power, and it investigates each case on its own merits. In the UK and EU, unlike the USA, monopolies are allowed as long as the firm does not engage in anti-competitive practices, which for instance, raise prices for customers, restrict supply, discourage innovation or damage competitors.

  2. Is the Government to Blame for Higher Petrol Prices?

    China along with India are demanding ever increasing quantities of Oil because per Capita their demand for Oil is much smaller than that of the OECD countries. With few production increasing capabilities at present in India or China all this extra Demand for Oil is coming without any local increase in Supply of Oil.

  1. Post war times.

    The new benefit proposal contained no means test and the masses generally preferred it that way, Any time someone, especially the government, interfered with a persons rights, the British took strong stances against such treatment. The coverage on the new unemployment would be indefinite coverage, i.e.

  2. What Are The Effects Of Tescos Oligopolistic Market Structure, On Both Consumers And Producers?

    This is stated in The Office of Fair Trading website; 'Supermarkets, entry into the convenience store sector pushes prices down. Customers benefit from strong competition and falling prices in the sector. The Office of Fair Trading also mentioned 'price cuts' as a concern: 'aggressive pricing by supermarkets may be distorting competition.'

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work