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How Much Competition Makes A Market Competitive?

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An interesting question here. How many participants do we need in a market in order to make it competitive? We do know that those models of perfect competition are wrong, the criteria almost never apply. We do know that some markets aren’t competitive and we should treat them as such. But where’s the dividing line? When is it that we should – for all the truth that it’s not an exact representation – use that free market structure as our analysis and when should we use oligopolistic competition?

Hmm, well. The Social Market Foundation says that many UK markets are not competitive enough:

For a supposedly free market economy, Britain is surprisingly tolerant of oligopolies. Our latest calculations, published today, show that six of the eight big consumer markets — groceries, broadband, mobile telephony, electricity, gas and personal current accounts — are “concentrated”, meaning the big suppliers are dominant enough to prevent real competition. Only the markets for mortgages and cars can be described as fully competitive.

Hmm, well, no, that’s probably not the way to do the measuring.

It’s a useful guide perhaps. But two people going at it hammer and tongs can and will be a competitive market, a dozen in a cartel will not.

For example, from across the pond:

Walmart is still the world’s largest retailer, but a recent company memo highlights its struggles to overcome competitors like Amazon, Instacart, and Target. The document also hints at challenges the company’s new subscription service Walmart+ is facing in retaining new members.

The 100-page document from February, which was viewed by Recode, was created for advertising agencies that Walmart invited to compete to handle the planning and buying of ad placements for the retail giant. The memo makes several blunt assessments about the uphill battle Walmart faces to hold onto its once-dominant retail market position, including in the US grocery industry, where the company has long been No. 1 in sales.

We would say that Walmart has market power, probably we’d say the American groceries market is concentrated. And yet there’s still, clearly, competition and the effects of it here.

Steve Keen has been known to make the claim that all markets are oligopolistic. We don’t have an infinite number of producers of anything, that’s the strict requirement for those perfect free market models therefore everything should be modelled as being a cartel of the capitalist bastards. I simplify but not much. Reality seems to be that having only a few, maybe just the three or four, who are actually competing is enough to give us something at that competitive end of the spectrum. Or, as we might put it, that free market competition model covers more of reality than many would like to admit.

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  1. That HHI calculation looks a right botch. Why use estimates of market share, instead of estimates of the profit rate, and then do the squaring and summing?

    Anyway, the interoperability and availability of substitutes? Telecomms – a phone number is a phone number is a phone number. It doesn’t matter whether there is a single network that everyone (or at least everyone who matters) is on, or whether there are a shedload of much smaller networks, as long as you can communicate across networks. Same for retail banking.

    The interoperability requirement suggests that the profitability is generally low per customer. (And maybe the churn rate is quite high). Four to six firms might rake in large amounts of cash, but the margins would quite tight.

    And a tin of tomatoes is a tin of tomatoes, spuds are spuds (but not necessarily Spuds).

    Cars would appear to be a specific failing of the HHI calc – lots of types of cars, lots of brands, lots of models and variations within them, but post-2008, fewer individual manufacturers, and even fewer underlying platforms.

    Yeah, it’s bollocks.

    (BTW, your Timmy around the Web get-up on TW is borked – hasn’t been updating for at least a week.)

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