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Assumptions of Market Theory and The Role of Competition - Assignment Example

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This assignment describes the market theory and its base on some assumptions. This paper outlines the role of competition, oligopoly and unique challenges of management in an oligopolistic market…
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Assumptions of Market Theory and The Role of Competition
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Download file to see previous pages  Without competition, producers can gouge consumers. With competition, consumers will choose the best option. They will choose the company that pollutes the least, or charges the least, or pays their workers the best. Workers will similarly choose the company with the best wages and benefits. When you have competition, you generally have cheaper products, better wages, better quality, and less externality and abuse of public goods. This means that, by definition, an oligopolistic market structure is a market failure
Why is competition good? Adam Smith, in his seminal Wealth of Nations, argued that markets reach a so-called “harmony of interests” only when they are fully competitive (Francis). A “harmony of interest” is a situation where an individuals self-interest and the pursuit thereof also benefits society. It is also called Pareto optimal. But competition has a strict definition and so is never perfectly achieved. The market must be composed of a great many buyers and sellers, almost as many as there are dollars flowing through the market, with only infinitesimal islands interrupting the free-market sea. These buyers and sellers must produce and consume, respectively, only a tiny portion of the goods available. This way, no one buyer or seller can control supply and demand. Further, all the goods flowing through the market must be functionally the same. And there has to be no or extremely low barriers to exit and entry on the part of both consumers and producers. An oligopolistic market is one where a collection of large firms own a lot of the market (Lecture Slides 7-9). Different markets and different economic theories mandate different amounts of coordination between the firms and different amounts of market share shared between the firms, but the general idea is the same. A bunch of companies work together, but not quite the same as a cartel. They can agree to lower prices or to not compete in terms of a product offering so as to segment the market. However, they are still competing, actually and nominally, so their coordination is more ad hoc. ...Download file to see next pages Read More
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