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Competition Theory A. Outline the role of competition in a free market. B. Outline/Explain the model of perfect competition (p.c.) Include competition spectrum

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Introduction

COMPETITION THEORY A. Outline the role of competition in a free market. B. Outline/Explain the model of perfect competition (p.c.) > Include competition spectrum C. How/why does e-commerce and the Internet resemble the theory of perfect competition. D. Explain the theory of perfect competition in both the short and long run. > Use diagrams > Abnormal profit - normal profits E. Evaluate how useful the p.c. model is A. Outline the role of competition in the free market Market forces ensure that the right goods and services are produced in a free market. This would occur because producers would want to make profits by providing the right goods and services. A free market is a market, which is free from government intervention, which usually creates lassiez-faire in environment; public well-being would increase from competition organizing production to suit the public. This is the basis of the free market. Competition would mean producers would try to outsell each other and this leads to lower prices in the market therefore benefiting the consumer. Competition in the free market plays a vital role as it reduces the level of unwanted goods being produced. Therefore allowing the allocation of resources to become more efficient. The free market can lead to both being created, monopolies and perfectly competitive markets. If there were a lack of competition it would mean producers would make larger profits, as there would only be a limited supply of certain goods and services. This would attract more firms to exploit this type of industry thus drive down prices are more firms compete to gain a larger proportion of market share. This means that firms then become price takers as consumer set the appropriate price for goods and services. Consequently leading to lower profits for businesses in the industry. However in order for the free market to work it has to requirement that have to be fulfilled at any time otherwise we may witness the collapse of the free market, they are: 1. ...read more.

Middle

For that reason it represents the basic requirement that the entire market needs to be transparent for competition to be at its most effective and consumers must have all available information before they make their choice of product. The E-commerce market can be considered to closely resemble the mode of perfect competition because it is one of the few markets that have a restricted level of barriers of entry. The only outlay for a company wanting to setup as an E-commerce company is the cost of acquiring the actual Internet address needed for the business practice. E-commerce can be considered an almost perfectly competitive market because there are many small companies that are involved in the market. The large numbers of small dot.com companies ensures that no company is able to gain the significant amount of market share that would be needed to create monopolistic power for a single firm in the market. Expansion in dot.com companies now result in a substantial range for the consumer to choose from. This shows that the level of competition within the market is always increasing and therefore the market is slowly fulfilling the requirements needed to be perfectly competitive. Therefore consumers have the level of choice that is needed to ensure that companies are price takers rather than price makers and allows the consumer to have consumer sovereignty over the market. E-commerce also resembles the prevention of monopolistic power being formed, as the number of dor.com firms increase monopolistic power become increasingly harder to achieve with so many small firms being active. E-commerce is available all over the world and therefore we cannot have geographical monopolies, as the market is a global one. This also prevents globalization, as the barriers of entry and exit are no existent. There are many reasons why the introduction of E-commerce makes our economy more competitive. The fact that it ensures that companies now have to operate within the new market and therefore have to ensure that they appeal to consumers in the new available market resulting in the operation of far more competitive E-commerce markets as opposed to the retail markets. ...read more.

Conclusion

This can be justified because each end of the spectrum (Perfect Competition and Pure Monopoly) cannot be achieved in reality as no one firm can dominate any market and no market is perfectly competitive. Therefore the model needs revising such that it becomes far more realistic as it is now impossible with the emergence of a global marketplace and the Internet for either extreme to be achieved. Thus the model is now useless and needs to be updated in account of the developments of globalization where brands can operate at minimal cost across the world and sit in the middle of the model. Another reason why the model of perfect competition can be considered useless in the real world is because it can cause government intervention. This is potentially a bad thing because if the competition commission decides that a market is under monopoly power and force the government to intervene it is possible that the situation could only be made worse. Government Intervention perceives to try and correct the situation within the market, however could end up creating new companies in the marketplace that fail in their objectives and end up increasing the monopoly power of that one company. Overall I believe the perfect competition model is only useful to a certain extent as it gives a brief overview of the different types of possible market structures. However most of these models never exist in reality and if they do they are extremely rare, so there is no need to express these extremes. Nevertheless in an economic point of view these situation are just models and express a theory which could possibly exist, therefore it is just an assumption that has to be taken into account when looking at competition in markets. The fact that markets have changed and a trend of increasing perfect knowledge exist is eradicated as economics is only the study of the efficient allocation of scares resources, therefore an economist has to take into account all types of market structures. ?? ?? ?? ?? Anand Thanky Economics - Unit 5 Business Economics and Income Distribution Mr Cooksey ...read more.

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