Market Competition and Economic Performance - Essay Example

Market Competition and Economic Performance Name: Tutor: Institution: Date: Market Competition and Economic Performance Introduction Most economists argue in support of competitive market over monopoly. According to Hildebrand (2009) in a competitive market competition tends to lead to cost efficiency, relatively lower prices and increased innovation1. For markets that are competitive, creates a higher level when it concerns consumer welfare in both short and long-run, when compared to markets that are not competitive. On the other hand, monopolies are identified to be bad for consumer welfare. To compare benefits achieved from either competitive markets or monopolies, it is important that we compare the outcomes for consumers for both markets2. The advantage of competitive markets over command-and –control systems is well identified. However, it seems to be difficult to provide experimental evidence in regard to the effect of increased changes in the strength of recompense for collective economic performance (Moschandreas, 2000)3 . Moschandreas believes it is partially because market competition is only one among many issue pressuring key cooperative performance indicators, for instance increased output and employment. On the contrary, there exist experiential connection between strong competition in markets for goods and services and better productivity and employment outcomes. In this research, we establish competition affecting aggregate economic performance. There exist differences in competitive pressures, which provide some rough indications of the possible gains in performance that arise from reform to intensify the product market competition. Some studies suggest the differences in regard to competitive pressures remains one of the important aspect in explaining the variation in economic performance across most countries. Furthermore, most of the economists believe that product market reforms that enhance competition create positive effects on the employment performance. In identifying the scope of intervention and monopoly, there are two extreme economic models expressed by economists in regard to market aspects Perfect competition and monopoly. In perfect competition consumers welfare is optimized and it is not improved even upon an omniscient regulator. On the contrary, monopoly market is not fully utilized and can in theory be enhanced upon by use of regulatory involvement. Similarly, neither the models offering good report of the competitive progression in any business a market, it is used to illustrate the potential benefits of competition law intervention. Productivity and Innovation Increased competition leads to both one-time and ongoing gains in multifactor productivity. For example the combination of productivity with labor and capital, one of the efficiency improvements , which is also defined as the static gains arise from better resource allocation and from less floppy in the use of inputs in response to greater pressures to perform. While there is a common consensus that stronger completion creates static efficiency gains, there exists an argument in regard to the link between competition and dynamic gains. Firms that trade under imperfect competition may seek to lower output in some identified activities essentially creating scarcity rents, thus forcing resources to move to other activities where they are not employed as productivity. On the contrary, despite imperfect competition is identified to be widespread, the welfare costs that are associated with this form of static resource misallocation are not by themselves likely to be larger4. Often, productivity is observed to improve noticeably following regulatory reforms witnessed in the previous sheltered industries. This indicate that the imperfect competition found in regulated sector tend to be accompanied by excess use of labor among other forms of slack. Most of these inefficiencies relates to the weak governance structures. This is evident, considering that there are no other apparent reasons to why owners of monopoly business have to be more prone to on accepting lower efforts from their managers or workforce than owners of fully competitive businesses (Laury, 1999)5. Perfect Competition Perfect competition is an economic model, and it is expressed in regard to competitive markets. In this perfect competition paradigm there exist many buyers and sellers of products. However, the quantity of products bought by any buyer or sold by any seller is relatively small when compared to the total quantity traded that changes in these quantities a situation that leaves market price unchanged (Hildebrand, 2009)6. Products that are traded in this kind of market are identical, with all buyers and sellers having perfect information. The market structure allows for both free entry into and exit out of the market. This has a number of implications, with the most important being that the market price of the product is above the marginal cost of production for seller, that seller can make more profits by selling one more unit of production. Considering that the price obtained for the product has to exceed the cost incurred in producing it, a positive margin is made on the sale. In addition, economist argues that if marginal costs were greater than market price, profits can increase by applying a reduction in output. This is done considering that the product is homogeneous and no seller can affect the market price, the market prices remain the same for all sellers. This therefore implies that each seller has to expand out to marginal cost which is equivalent to the marketplace price. In equilibrium, suppliers reach a point at which marginal cost is equal to the market price. The other important implication of this model is defined in the fact that no firm in this kind of market makes positive economic profits. In a case were the price earned was high enough for firms already in the market make positive economic profits (Goodwin and Ackerman, 2009)7. The element of free entry into the market applies, and this means that the entry would continue until incumbent firms no longer make economic profits. On the other hand, the free exit means that supplies would not remain in the market if they were making losses. Ultimately, in a perfect competition firms make no economic profits, this will imply that additional to being equal to marginal cost the market price must be equal to the average cost of the firms. The figure below illustrates a Perfect Competition in an Industry. Figure 1: Perfect Competition Industry Source: Cline, 2005 In the diagram given above the straight downward sloping line depicts the industry demand curve (Laury, 1999)8. This explains how much of the product consumers demand a different prices. As the demand falls, consumers will wish to buy more of the product, hence, the demand curve slopes downward. In the diagram Pc denotes the perfect competitive price in this particular example and Qc indicates the perfect competitive level of output. At point Pc marginal cost is equal to price that is the marginal cost curve cuts he demand curve, while the average cost is also equal to price and hence, the total profit achieved is zero (Cline, 2005)9. Product efficiency occurs when a given set of products are being produced at the lowest possible cost. Often, this occurs in industries characterized by perfect competition, since, firms that fail to trade by producing at the lowest possible will incur losses and ultimately make an exit. In a perfect competition, the economic profits for efficient firms are zero. Hence, inefficient business must make losses. This element leads firms in a perfect competitive market to gain an improving productivity and efficiency in all activities, which is aimed at achieving maximum attainable profits in the market an element that gives firms an incentive to reduce costs as low as their market rivals will make an exist as a result of continued losses10. A Monopoly Paradigm The opposite extreme to perfect competition is monopoly. The presence of many sellers is replaced by the fact that a monopoly only supports one seller (Perloff, (2008)11. Often, economist believe that a market in support of a monopolist price above the level that would occur in presence of perfect competition. 12Under the perfect competition we have already identified in figure 1, that price represents marginal cost, unwavering by the connection of demand arc and the marginal arc. This is denoted by Pc in figure 1. However, under monopoly, the product price is at level Pm in figure 2, which lies above Pc below. Figure 2: A Monopoly Source: Cline, 2005 In a monopoly, the demand and marginal cost curves in Figure 2 are the same as those indicated in Figure 1(perfect competition). On the contrary, additional curve is added. 13This explains the marginal revenue curve, which identifies the extra amount in term of revenue that the monopolist earn when selling one more unit of product. For instance, in Figure 2, when the monopolist makes a decision to sell y+1 units rather than just y, the seller receives additional revenue from selling the additional unit, however, since the demand curve is sloping downward, the seller have to charge a lower price not only to the extra unit but also all other units sold (Goodwin, and Ackerman, 2009)14. Hence, the marginal revenue curve in a monopoly will always lie below the demand curve. This is so considering that the monopolist makes less than the price at which they sell their products. Conclusion The practice of market power to the detriment of consumers can potentially take many forms, thus drawing up a complete list of abuses which would be fraught with difficulties. A finding of abuse ought to be based not on the shape of profitable performance but rather on the outcome of the actions (Cline, 2005)15. Therefore, it is fairly possible for activities to make up cruelty in one business but not other business venture, or when passed out by one firm and not the other firm. Dissimilar channel for a defective completion to damage business performance is revealed through weakening inducement aimed at improving production efficiency (Moschandreas, 2000)16. It may be difficult for owners of monopolistic businesses to enforce maximum efforts even at time they indent to, and it is the presence of little competition in this form of market set up, for instance lack of other firms to serve as the standard of reference and therefore, the risk of business failure may be partial. The effects of monopoly are amplified when product market rents are shared with workers in form of supra-normal wages. The study found out that wages differ by industries even after taking individuals’ and employers’ characteristics into account suggesting that such rent sharing is reported to be widespread especially as the wage preemie are correlated with measures of competition intensity. Bibliography Cline, A. D. (2005). A Consumer Behavior Approach to Modeling Monopolistic Competition. ournal of Economic Psychology , 26 (6): 797–826. Goodwin, N. N., & Ackerman, F. &. (2009). Microeconomics in Context 2d. London: Sharpe. Laury, S. K. (1999). Multi-market equilibrium, trade, and the law of one price. Southern Economic Journal , 65(3): 611-622. Moschandreas, M. (2000). Business economics. London: Cengage Learning EMEA. Hildebrand, D. (2009). The role of economic analysis in the EC competition rules. New York: Kluwer Law International. Perloff, J. (2008). Microeconomics Theory & Applications with Calculus. London: Pearson. Pindyck, R. &. (2001). Microeconomics 5th ed. London: Prentice-Hall. Wignaraja, G. (2002). Competitiveness Strategy in Developing Countries: A Manual for Policy Analysis. London: Routledge,. Read More