The Contestability of a Market
A contestable market is a market where an inefficient firm or firms,
which is earning excess profits, is likely to be driven out by more
efficient or less profitable rival.
A market can be contestable even if a single firm, which appears to
enjoy a monopoly with market power, dominants it and the new entrant
exists only as potential competition. The threat posed by the new
entrants in the market is taken to be a key reason for the firm's
behaviour in the market.
There are many factors that can affect the contestability of the
market. The number of firms in the market can change the
contestability of the market. If there are many firms in a market the
market is known to be contestable. As for the water industry the
number of firms in the market are very few and most of these firms
take most of the market share.
The ease of entry of the firm in the market can also affect the
contestability of the market. This is linked direct to the barriers of
entry. The market structure for the water industry is a oligopoly.
This means that the barriers to enter this market are very high.
Barriers to entry are barriers that prevent a firm from entering that
particular market. For this particular the barriers to entry are start
up costs, patents and advertising etc. If the barriers to entry for a
firm are low then this will mean that it will make firms easily to
enter the market making a contestable market, but for the water
industry the barrier to entry are high making it a highly
incontestable market. If a new firm does enter the market the current
firms may try to push out the firm due to the fear of competition.
They may do this by lowering their prices making it difficult for the
new entrant to operate. This may lead to the new entrant in the market
to leave as it has high costs as it come into the market.
Second: The break of monopolies or “trustbusting” began in the late 19th century with President Roosevelt. However, it was the Sherman Act passed by Congress in 1890 that really began dismantled large monopolies. The Sherman Act “was based on the constitutional power of Congress to regulate interstate commerce” (Sherman Anti-Trust Act (1890). This act helped dismantle many of the monopolies that had been formed by companies’ trusts such as Northern Securities Company, Standard Oil and the American Tobacco Company. These companies had shareholders put their shares into one trust so the company could control “jointly managed” businesses and keep their prices low. This gave little competition to the major monopolies as other smaller companies could not stay in business and have such low prices. With the help of the courts monopolies continue to be kept at bay and competition continues to be encouraged within industries today.
*Every semester I teach college Sociology classes I always have my students play a game of Monopoly. They don't play normal Monopoly though but one with special rules designed to teach them about how social class and wealth impact success and failure in life.*
Oligopolies do not compete on prices. Price wars tend to lead to lower profits, leaving a little change to market shares. However, Oligopolies firms tend to charge reasonably premium prices but they compete through advertising and other promotional means. Existing companies are safe from new companies entering the market because barriers to entry to the market are high. For example, if products are heavily promoted and producers have a number of existing successful brands, it will be very costly and difficult for new firms to establish their own new brand in an oligopoly market.
One of the factors contributing to the barriers to entry is the high capital requirements that are needed in order to compete in the market. Large investments are required in acquiring facilities and maintaining them, along with purchasing the expensive equipment relative to manufacturing welding products. Purchasing the equipment is not enough, but new companies are also required to develop the advanced technologies before effectively competing in which is really time consuming. With these asset specificities, potential entrants are discouraged from committing to obtaining these specialized assets that have no other means of use or profitability if the venture fails. When existing firms acquire these specialized assets, they are more inclined to resist efforts by other competitors from stealing market share, therefore enhancing the competitive disadvantage for new entrants.
Monopoly is when a business or a single company owns nearly all its market for a given type of product and services. There is no competition in monopoly and the price of a specific product is set by the monopoly itself. Therefore, a monopoly's price is the market price and demand are market demand; the firm and the industry are the same. It can charge higher prices at any output consequently, consumers will not be able to substitute the good or service with a more affordable alternative. Monopoly’s soul goal is to make profit at any price and quantity. Still to this day, monopolies do exist but at a smaller scale.
There are many industries. Economist group them into four market models: 1) pure competition which involves a very large number of firms producing a standardized producer. New firms may enter very easily. 2) Pure monopoly is a market structure in which one firm is the sole seller a product or service like a local electric company. Entry of additional firms is blocked so that one firm is the industry. 3)Monopolistic competition is characterized by a relatively large number of sellers producing differentiated product. 4)Oligopoly involves only a few sellers; this “fewness” means that each firm is affected by the decisions of rival and must take these decisions into account in determining its own price and output. Pure competition assumes that firms and resources are mobile among different kinds of industries.
1) To me, market competition is the act of various different providers of goods and services trying to accomplish their goals. These goals can be to increase market share, profits, revenue etc…. I would say that street food hot dogs I recently bought in New York are a good example of perfect competition. The food is all priced relatively cheap, since they are price takers, the food is almost the same, buyers know what the price should be and the available substitutes, and there are very low barriers to entry/exit.
The ease with which firms can enter into a new market or industry is a critical variable in the strategic management process. In some industries the barriers to entry are minimal. In oth...
In the short run, oligopolies are. able to earn abnormal profits, but in the long run as well they are. able to sustain abnormal profits due to the barriers to entry and exit. Then the s The barriers act as a strong deterrent to firms that want to come in. the industry and " eat into" the abnormal profits and then exit the market.
As with all markets and their respective economies, having equilibrium is one of the key factors of a successful system. Although most markets do not reach equilibrium, they attempt at getting close. There are numerous methods devised to reach equilibrium, whether they involve human intervention directly or a cumulative decision by all factors involved. These factors may be a seller's willingness to lower overall revenue, or a buyer's willingness to withhold some demand for a certain product. Of course, the basics of supply and demand retrospectively control the equilibrium in the market.
A perfectly competitive market is based on a model of perfect competition. For a market to fall under this model it must have a number of firms, homogeneous products, and easy exit and entry levels into the market (McTaggart, 1992).
Monopolies have a tendency to be bad for the economy. Granted, there are some that are a necessity of life such as natural and legal monopolies. However, the article I have chosen to review is “America’s Monopolies are Holding Back the Economy (Lynn, 2017)” and the name speaks for itself.
A monopoly is “a single firm in control of both industry output and price” (Review of Market Structure, n.d.). It has a high entry and exit barrier and a perceived heterogeneous product. The firm is the sole provider of the product, substitutes for the product are limited, and high barriers are used to dissuade competitors and leads to a single firm being able to ...
An oligopolistic market has a small number of sellers dominating market share and therefore barriers to entry are high. These sellers are highly competitive and do not act independently of each other. Access to information is limited so sellers can only speculate of their competitor’s actions. Sellers will take advantage of competitor’s price changes in order to increase market share.
Question: “A single-price monopoly will always charge a price that is on the elastic range of the demand for the monopoly’s output.” Discuss using relevant diagrams or algebra.”