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Market Regulation & Optimal Governance – Couwenberg en HelmantelBusiness vertically = From natural resources to consumer products.
A market can be separated based on price elasticity of the traded good.
Elasticity = Measure for the rate of interchangeability between product and its
substitutes.
Crosswise elasticity: proportional change in a firm’s demand divided by the percentage inflation
of its relative pricing is infinite and homogeneous and will be substituted by other products or
service upon price increase.
If the good becomes more heterogeneous it will become less negative and the elasticity is zero.
The structure of a market is defined based on:
- Homogeneity of product
- Number of parties active
(can interact with each other)
Regulation on market structure aimed for: increasing either the total number of suppliers or the
interchangeability of their goods.
suggestion competition is a good thing and should be stimulated, the price mechanism will then
be coordinate all decentralized decisions by firms and their customers on how many goods to
produce, wat what cost. In such cases market can be characterized by:
- Pure/absolute competition = many suppliers of identical product
- Market perfection = complete absence of transactions costs/ frictions
- Free/unrestricted pricing = no intervention by government whatsoever
o Only the market price will be relevant
o Trading process is completely transparent
o Any information is available and no other form of transaction costs or frictions
o Price mechanism is allowed to operate freely and government will not
intervene
Monopolistic competition
In such a market, there will be many parties supplying the product but their goods are all
heterogeneous in some respect. Therefore, the price will no longer be the only relevant
feature but also distinctive qualities of may become equally important
Even though production shall not occur at its optimal level (but below) and will be less efficient
than possible, the general welfare in an economy may be maximized given the additional
qualities supplied
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