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MARKETS AND MARKET STRUCTURES - Coggle Diagram
MARKETS AND MARKET STRUCTURES
contestable markets
no barriers to entry or exit
Behavioural
deliberately created to keep out potential competitors
Structural
innocently or inevitable created
Structural
Sunk costs
costs that are not recoverable if a firm ceases to trade (advertising and the depreciation of assets)
High start-up costs
costs of premises or equipment
Economies of scale
If it is large, it will act as a barrier to entry because any new firm entering the market is likely to produce less and therefore have much higher average costs
Legal barriers
may give firms particular privileges (patents) or firms may have exclusive rights to production
Natural cost advantages
some produces possess advantages because they own factors which are superior to others and which are unique (no close substitutes) i.e. a petrol station on a busy main road compared to being on a sleepy town road
Behavioural
Natural cost advantages
some produces possess advantages because they own factors which are superior to others and which are unique (no close substitutes) i.e. a petrol station on a busy main road compared to being on a sleepy town road
Marketing barriers
existing firms in the industry may be able to erect very high barriers due to high spending on advertising and marketing (create powerful brand image)
Limit pricing
firms in an industry may be able to erect prices than they would change if they maximised their short-run profit (to keep out new entrants)
Anti-competitive precises
firms may deliberately restrict competition through restrictive practices (a manufacturer may refuse to sell goods to a retailer that stocks the products of competitors)
Contestable markets are:
there are no markets in which zero barriers to entry or exit exists, so in practice the question is a matter of degree rather than purely of its existence
the theory is about the threat of competitors rather than the amount of competition actually present
means new firms can easily enter an industry in which firms are exploiting their dominant positions and earning abnormal profit (the incumbent's prices would be undercut and the result profits will fall)
In a perfectly contestable market firms are expected to be productively efficient (they are also efficient as average revenue is the same as price)
The theory implies that a market could continue as a monopoly or oligopoly but still behave efficiently (they are under threat of hit and run competition attracted by the allure of a quick profit)