Economics and Market

Topics: Economics, Perfect competition, Monopoly Pages: 3 (909 words) Published: March 18, 2014
Assess the view that making an oligopolistic market more contestable is the best way to improve the efficiency of that market. The theory of perfectly contestable markets was presented as a generalization of the theory of perfectly competitive markets and was presented as providing guidelines for the conduct of regulation, namely to allow freedom of entry and exit and to ensure equal access of competitors. An oligopolistic market is a particular market that is controlled by a small number of firms. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market, however in an oligopoly, there are at least two firms controlling the market. A contestable market is one where incumbent firms face real and potential competition. A market with only one firm can still be contestable if there are serious threats of entry into that market. By increasing a market’s contestability, the overall efficiency should improve because it would make incumbent firms more productively, dynamically, allocatively and x-efficient. This essay will therefore argue that contestability is the best way to make a market more competitive as it improves all four aspects of efficiency. In order to improve a market’s contestability, barriers to entry must be lowered. The Royal Mail used to be a legal monopoly but now firms are allowed to enter the market for sending letters. This has increased contestability. Patents and other legislative barriers could be lowered in order to increase contestability. Firms are therefore able to produce products that they would previously not have been allowed to make. However there is also a danger that by reducing patents, firms and entrepreneurs will have no incentive to invent or innovate. Reducing tariffs, such as the European Union’s decision to reduce tariffs on imported goods from the within the EU from January 2014, will cause firms’ costs to diminish thus making it more likely that they will sell their goods....
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