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Competition Law Economics | Structures

 

Market structures

Overview

Markets may take many forms. Most markets are neither perfectly competitive, nor monopolistic, but the comparison serves to demonstrate why competitive markets are considered desirable.

 

Competitive markets

Markets may take many forms. At the extremes, a perfectly competitive market is generally said to feature:

  • Large number of suppliers and buyers
  • Small market share held by each
  • Homogeneous product
  • Low barriers to entry
  • Perfect information between all firms (on supply and demand side)

In such a market no single seller or buyer can influence the price of the product; the market forces of supply and demand establish the price. Such a market will generally maximise efficiency as firms have incentives to allocate resources to products consumers want and to do so in as efficient (cost-effective) manner as possible to maximise profits.

 

Monopoly

Conversely, in a monopoly, characterised by a single seller and high barriers to entry, these incentives do not exist; consumers lack the choice to shop elsewhere so a monopolist can simply pass on costs of inefficient production to consumers. Monopolists also have limited incentives to innovate (dynamic efficiency) in order to retain custom.

 

Discussion in case law

In relation to market structures, Justice Emmett, in his trial judgment in Metcash stated:

[161] In a perfectly competitive market, there will be many sellers, each lacking the ability to influence price through its own actions.  Each seller will, in such circumstances, lack market power.  Participants in such a market must sell their products at marginal cost, being the cost associated with producing additional units of a good or service.  On the other hand, in a classic monopoly market, there is only one seller, usually with significant discretion over price.  A firm that has no significant competitive constraints on its pricing discretion will be regarded as having monopoly power or significant or substantial market power.

[162] Between the extremes of a perfectly competitive market and a classic monopoly market, there are various kinds of imperfectly competitive markets.  In an oligopolistic market, there are a few sellers of identical or similar products.  Participants in such markets are generally aware of their influence over price, are cognisant of their interdependence and can often earn rates of return that exceed normal levels.  Some markets can be described as being monopolistically competitive, in that they contain many sellers of similar products.  Because monopolistically competitive firms sell similar products, they have some degree of market power and can charge prices exceeding marginal costs.

[163] In a workably competitive market, some or even all participants may have some market power, in the sense that they all have some discretion over price, but no participant will have a substantial degree of market power.  In such a workably competitive market, at any given time, prices might deviate from underlying costs and the deployed technologies might deviate from the most efficient ones currently available.  Economic forces drive such a market towards efficient prices, outputs and costs, but not instantly.