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34. Theory of effective competition
Performance criteria functioning of any commodity market can be considered
1. The presence of competition.
2. Variety of consumer choice.
3. Price stability in the long run.
4. Barriers to entry.
competitive market characterizes:
1) in the long run, the price is equal to the average cost;
2) industry output is produced at the lowest cost;
3) price is equal to marginal cost;
4) the number of enterprises is constant;
5) the absence of serious entry barriers.
Conditions of existence competitive market:
1) the implementation of the entry and exit of the enterprise from the market without significant costs, i.e. compensation for all operating costs when leaving the market; there should be no irreversible costs in the industry;
2) the time of penetration and strengthening of the enterprise in the market should be less than the response time of old enterprises;
3) large enterprises operating in the industry must have technology that provides increasing returns to scale; with an increase in output, the costs per unit of output for enterprises operating in the industry will decrease;
4) there must be potential competitors for enterprises already operating in the industry, the threat of entry of potential competitors for enterprises in the industry must be quite real.
The main criterion for effectiveness within the framework of general economic theory serves the public welfare. Public welfare is the sum of buyers' and sellers' gains.
Efficiency gain, due to competition is achieved due to:
1) a pricing policy that depends on the availability of competitive substitutes for goods (ceteris paribus, monopolism in the markets for industrial products is much more dangerous and is accompanied by higher welfare losses than in the markets for consumer goods, i.e., the power in the markets for capital goods is much stronger, than in consumer markets), on the share of spending on goods in the total costs of the buyer and on the elasticity of demand;
2) return on scale of production, the indicator of which reflects the proportion of the increase in the use of the producer's resources and the growth in output and the ratio of output growth and costs.
The main criterion are barriers to entry as the most important factor determining the level of competition in the industry.
Author: Ilyina V.N.
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