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

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Introduction

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.

Middle

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.

Conclusion

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.

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