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Using transport examples throughout, explain the impact of market structure on economic efficiency and the ability of firms to set prices and make profits

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Introduction

Using transport examples throughout, explain the impact of market structure on economic efficiency and the ability of firms to set prices and make profits Economic efficiency is the use of resources in such a way as to maximise the production of goods and services. The structure of a market, its profitability, prices and output can affect its economic efficiency. There are four main types of efficiency to consider; productive efficiency, allocative efficiency, dynamic efficiency and X-inefficiency. Productive efficiency is at its maximum when the level of production is at the minimum of the Average Cost curve. Productive efficiency is at its maximum when price is equal to marginal cost. Dynamic efficiency is through the generation of abnormal profits (AR>AC), that are invested for future development. X-inefficiency is when a firm is not operating at minimum cost, due to organisational slack. Using the market structure of perfect competition as an example, there are many small firms producing homogenous goods, thus it is fragmented as opposed to concentrated. In the transport industry the local coach travel market represents the model of perfect competition quite well. No one firm can set of affect the price level, and so the firms are referred to as 'price-takers'. If a firm decided to sell their good or service at a price higher than that of others, consumers would simply demand from another supplier due to the homogenous nature of the good or service. ...read more.

Middle

Perfect competition is merely a theory and so does not exist in practice, however within the transport market structure there are examples of highly competitive markets, such as the local coach travel market, which is highly fragmented, provides a homogenous product and service, there are many participants (buyers and sellers), low barriers to entry and exit, there is high knowledge of market conditions and the firms' objectives are to maximise profits. This in turn means that compared to less competitive markets, there is higher output within the market, and the price is lower than other, less competitive markets. These less competitive markets can be seen as 'monopolies' or 'oligopolies'. Monopolies typically have characteristics converse of those of perfect competition. A monopoly arises when one firm is a single seller of a good or service, there are no substitutes for the good, and there are high barriers to entry into the market. This market power and dominance is gained through brand loyalty, high barriers to entry such as sunk costs, economies of scale, regulation or control of resources. Compared to the 'price-takers' of perfect competition, monopolistic firms are 'price-makers' and so can set prices as they wish. For this reason the demand curve in a monopoly is downward sloping compared to horizontal in perfect competition. Monopolistic firms are constantly able to make abnormal profit, whether it is in the short or long term. ...read more.

Conclusion

We assume that there are, high barriers to entry to an oligopolistic market due to large-scale production and strong branding, price rigidity due to the risks of competitive pricing and thus non-price competition to gain market share, firm's LRAC curves are 'L-shaped' rather than 'U-shaped' because the MES extends over a large range of output. The 'kinked-demand' theory suggests that if one firm in an oligopolistic market increases price then other firms will not follow because the level of output decreases far too greatly relatively and they will be able to sell more, due to the asymmetric PED, however if one firm lowers price, others will follow suit and also decrease their prices so as not to lose market share. When firms within an oligopoly compete through non-collusive behaviour, the market behaviour becomes very much like that of perfect competition, with increased productivity and lower prices, meaning increase productive efficiency and allocative efficiency, with also lower X-inefficiency through lower costs and profit maximisation, thus less organisational slack. Overall we can say that as a market structure becomes less efficient, the firms within that market are able to set prices and make profits with more ease. With high efficiency, normal profits and hardly any ability to set prices in competitive markets, and low efficiency, abnormal profits and the ability to manipulate the market selling price in markets that have little or low competition with a high n-firm concentration ratio. ?? ?? ?? ?? ...read more.

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