Application Exercise 4k: Benefits of lower concentration
In relation to ‘market structure and concentration levels’ it is clear that as the market becomes dominated by fewer and fewer firms its market structure becomes more highly concentrated, tending towards oligopoly or even monopoly. As these concentration levels get higher and higher (at the extreme, towards a monopoly) it is likely to lead to lower levels of technical efficiency and higher prices. This occurs because the dominant firms have less reason to be as innovative or productive as firms in a more competitive market knowing that they can more easily pass on higher costs (that result from inefficiency) to consumers in the form of higher prices. In addition, dominant firms are less likely to be as responsive to the precise demands of consumers (e.g. about the exact type or style of goods that are demanded) which impairs dynamic and allocative efficiency. Further, the higher prices charged by the dominant firms ultimately means that there will be a group of consumers who will not be able or indeed prepared to purchase the good or services compared to the situation that arise in the event of a more perfectly competitive market structure. While there is a possibility for some monopolists or oligopolists to sell at lower prices (due to economies of scale benefits), it is more likely that highly concentrated market structures lead to sub-optimal outcomes for efficiency, prices and therefore living standards of Australians.