SOURCES OF MARKET IMPERFECTIONS

Why.do certain industries display near-perfect competition while others are dominated by a handful of large firms? Most cases of imperfect competition ‘can be traced to two principal causes. First, industries tend to have fewer sellers when there are significant economies of large-scale production and decreasing costs.

Under these conditions, large ‘firms can simply produce more cheaply and then undersell small firms, which cannot survive. ‘ Second, markets tend toward imperfect competition when there, are “barriers to entry” that make difficult for new competitors to enter an industry. In some cases, the barriers ma}’ arise from government laws or regulations which limit the number of ‘ competitors. In other cases, there may be economic factors that make it expensive for a new competitor to break into a market. We will examine both sources of imperfect competition.

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