Assumption
In this ideal world, there are so many producers that none can influence the price of the products that they sell. All such products are assumed to be identical; all information about them is freely shared with everyone; new firms can enter or exit the markets in which these products are sold at will, with everyone having equal access to capital to enable this, and there are no barriers to entry of any sort. The “invisible hand” ensures efficiency, and there are no monopolies, no exploitation, no laws protecting intellectual property rights and no market power.
Reality
Almost none of these assumptions resembles the economy we live in. A handful of corporations dominate most industries; energy companies, banks, supermarket chains
Acshully, the assumption is that “if the world were like this then how would it work?”.
Not that the world is like this, but if it were. We then follow on to ask, well, how close is our world to this model?
Take supermarkets for example. Back 25 years Tesco’s net margin – profit after all costs – was about 6% of sales. Today it’s 3%. What has happened? The irruption of Aldi and Lidl into the British groceries market. Going from – counts very here but this is close – 5 to 7 national retailers increases competition and reduces profit margins. For several of the national groceries retailers profits are below the cost of capital – that is, no economic profit even if there’s an accounting one.
Of course we’re not in a world of perfect competition. But it’s still a damn handy model to explain that world out down the Mile End Road, isn’t it?
The Sage of Ely is 13 and 3/4
“Of course we’re not in a world of perfect competition”
You’re never going to get that because at the point where you hit supermarket margins, it’s hard to find an opportunity.
But competition gets it down if there’s a big fat profit.
Beyond that the question is whether you have an inefficient state monopoly’s costs, or profit costs. The UK coach market is now rather competitive with National Express, Megabus and Flixbus. Everyone’s fighting over the passenger. Meanwhile railways are expensive, crap and burning through about £12bn of taxpayers money. There’s an expansion of coach routes going on, which I suspect is that all these companies have tapped out things like trips to London so are trying to find new business. Like National Express now go Birmingham to Bournemouth via Swindon and Gloucester. Flix are doing various places to Luton Airport.
People on TwiXter are insisting the UK supermarket sector is an oligopoly. How many competitors are needed to go beyond ὀλίγος?
“ A handful of corporations dominate most industries; energy companies, banks, supermarket chains”
And the reason for that is largely down to the interference of the State protecting large corporations from competition.
And further irony is that commie dick Murphy wants the state to dominate all.
Corporations act for the benefit of their stakeholders. Commie states act for the benefit of the few in charge, to the horrendous destruction of the rest. I.e., he’s not against a handful dominating, it’s just the who, and with some desire for mass destruction of the masses.
Also, that’s just what is efficient for those industries. There are businesses that function at scale.
If you’re processing mortgage transactions (as I once did) it doesn’t really matter that much if you’re doing it for 300,000 mortgages or a million mortgages. Yeah, you need a few more boxes, but the IT department is about the same. The cost per mortgage, per transaction falls.
Aldi have people who go to a wine producer in Bordeaux and offer to buy everything he produces for a few years. That means they get a fat discount and the same wines are across Europe. They do clever things like get in shipped in tankers and bottled when it arrives in the UK to save costs. Little wine shops can’t set all that up.
Why don’t we have massive hairdressing and plastering companies? Because no-one has figured out how to scale that up so that it’s more efficient than a 5 person business.
“If you’re processing mortgage transactions (as I once did) it doesn’t really matter that much if you’re doing it for 300,000 mortgages or a million mortgages. Yeah, you need a few more boxes, but the IT department is about the same. The cost per mortgage, per transaction falls.”
Strange then that the big boys charge the same as the little guys………Its not half as cheap to get a mortgage set up with the Nationwide as it is at the Leeds.