In a CRIEFF Discussion Paper titled "From Walrasian Oligopolies to
Natural Monopoly - An Evolutionary Model of Market Structure", the
authors argue that: "Under decreasing returns and some fixed cost, the
market grows to 'full capacity' at Walrasian equilibrium (oligopolies);
on the other hand, if returns are increasing, the unique long run
outcome involves a profit-maximising monopolist."
While intellectually tempting, contestability theory has little to do
with the rough and tumble world of business. Contestable markets simply
do not exist. Entering a market is never cheap, nor easy. Huge sunk
costs are required to counter the network effects of more veteran
products as well as the competitors' brand recognition and ability and
inclination to collude to set prices.
Victory is not guaranteed, losses loom constantly, investors are
forever edgy, customers are fickle, bankers itchy, capital markets
gloomy, suppliers beholden to the competition. Barriers to entry are
almost always formidable and often insurmountable.
In the real world, tacit and implicit understandings regarding prices
and competitive behavior prevail among competitors within oligopolies.
Establishing a reputation for collusive predatory pricing deters
potential entrants.
Pages:
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60