¶ … classification of an industry into a particular economic market system is really necessary to understand it clearly. Without it we can not analyze the market the way it should be done. This paper discusses about the market, its types as well as it discusses about its impacts on the decision of a company involved in the market in achieving its goals. After that there is a discussion about UK super market industry and it has been analyzed that the oligopoly nature of UK super market industry is why not under the investigation of the commission of competition act and antitrust laws.
The economic market system is normally defined as a system that is self adjustable and works on its own. It needs no controlling body for current operations. Because of ongoing human activities and changing needs the economic system itself adjusts the supply according to demand and production according to consumption. This self adjustment process is flexible, automatic, and reacts to different factors and situations (Williamson, 1981).
Competition does not always increase total welfare, however, because it can create a coordination problem. There can be multiple equilibria because the two firm's innovation levels are (in most circumstances) strategic substitutes. This is due to a market share effect; the more a rival innovates the larger would be his market share and the smaller would be the share of the firm, thus reducing the incentive of the firm to innovate.
MARKET
Market is defined very differently by different scholars. It can be defined as a place where buyers and sellers meet to do a transaction or exchange of any goods or services. It can be any one from the systems, institutions, procedures, social relations and infrastructure whereby parties engage in exchange. This exchange can be in Barter form (where goods are exchanged with goods) or it is some monetary exchange (where goods are exchanged through some currency notes). Most markets expect the buyers to offer the good and services (including labor) in exchange for money from buyers (Fehr, and Gachter, 2000).
Depending on the number of buyers and different other features markets can be classified into four different categories, namely:
Perfect Competition
Monopolistic competition
Oligopoly
Monopoly
Perfect Competition:
Perfect competition can be defined as the market in which there is large number of companies selling identical products to a large population of buyers and there are no barriers to entry into the market (Lancaster, 1990). In such a market the older firms do not posses any advantage over new firms (except the experience which is not an economic actor) and buyers and sellers are very well informed about the market prices as they were established through market equilibrium. In a perfect competition the most unique thing is the identical product and there is no or very less differentiation in products of different firms.
In a perfect competition the goal of the companies is to maximize the economic profit that is total revenue minus total cost.
In perfect competition, the optimal production of the firm can be decided through marginal analysis. The profit maximization point is where the marginal revenue equals the marginal cost.
Affect of Perfect Competition on the Decisions of the Firm:
Since in perfect competition the differentiation is very low, so there is a very less room for earning any more than ordinary profit. In the short run the company needs to make two critical decisions. Firstly, they have to check whether they have to continue their production or close the production house. If their economic profit is equal to or greater than expected profit, they will continue else they have to shut down. Secondly, if they are continuing then they should know which optimal quantity to produce is. The optimal quantity is the one at which they are earning the maximum economic profit (Rubinstein, 1982).
In the long run the company has to decide whether to expand or decrease the size of their production floor. If they think there is a room to earn more economic profit to reach the optimal point then they should think about expanding the plant size. On the other hand if the quantity should be decreased to reach the optimum quantity then the plant size should be decreased. The second long-term decision the company has to made is to whether stay in the industry or not. As the definition shows in the perfect competition the entry as well as exit from the industry is very easy as one can get the full investment back if the sale of the plant take place.
Monopolistic Competition:
While taking the number of producers,...
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