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Why are some markets more competitive than others?

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Introduction

Why are some markets more competitive than others? A market is the reconciliation of quantity decisions of buyers and sellers through price adjustment. There are four main types of market structure: perfect competition, monopoly, monopolistic competition and oligopolistic competition. The competitiveness of a market depends upon how many suppliers are seeking the demand of consumers and the ease with which new businesses can enter and exit a particular market in the long run. Competitive markets are characterised by various forms of price and non-price competition between sellers who are bidding to increase or protect their market share. Factors which affect how competitive markets are depends upon the characteristics of the market structures. It is evident that perfect competition is the most competitive market. It is an ideal situation in which everyone is a price-taker. The market contains many buyers and sellers all with perfect information about the market, whose individual decisions have no impact on price or quantity as a whole hence the horizontal demand curve. *(See diagram 1) There are also no barriers to entry or exit in the long run, which encourages the large number of firms in the industry. Firms in perfect competition aim to maximise profits, thus produce where marginal cost is equal to marginal revenue, *(see diagram 2) ...read more.

Middle

The aim of these is to make entry to markets more difficult for new firms. These barriers guard the power of the firms already in the industry and help them to maintain supernormal profits in the long term. There are three main categories: structural barriers-due to differences in costs, strategic barriers- where the firm has the deliberate intention of blocking new entry, and statutory barriers- by government. The main types of barriers to entry that need to be considered are cost barriers and pricing barriers. Cost barriers such as economies of scale are factors that cause long run average costs to fall as output rises. If an existing firm exploits its economies of scale, it could lower its prices and therefore have a cost advantage over new entrants making it less worthwhile for the new firm to enter the market. This is significant in monopolistic and oligopolistic markets as are marketing barriers such as brand loyalty. A large firm with branded products e.g. coca cola are a reputable firm, which their customers trust and therefore they have an advantage over smaller less known firms. Barriers to entry have the effect of making markets less contestable, which therefore reduces competition and helps explain why markets with free entry to markets such as monopolists are more competitive then oligopolist markets, which have barriers to entry such as high initial starting costs. ...read more.

Conclusion

Regulation and public provision are also crucial factors in how competitive markets are since they are needed because the "growth in firm size will have implications for the public interest." Mergers are a tool for increasing power/control within a market thus legislation is needed to prevent abuses of power at the expense of the public. The government's power over competition can be seen in the influential position of the Secretary of State who has the power to overrule both the DFGT (Director-General of Fair Trading) and the MMC (Monopolies and Merger Commission). This would suggest that government policy has a significant impact on the extent of competition. In conclusion, the above analysis shows that the level of competition amongst firms depends upon the market structure and the characteristics associated with that structure. Above all however, the important factors appear to be the existence of barriers to entry and exit for new firms to penetrate the incumbent firms in the industry and the strong influence that government influence has, as it has the ultimate power in making a market more or less competition through means such as taxation and subsidies. Costs too have a great influence on the competitiveness of markets, as it is demand and costs that interact to determine the likely structure of each industry. . Economics Essay Sona Patel 1 ...read more.

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