Bargaining theory is the economic theory that analyses economic outcomes between individuals possessing market power. Under conditions of perfect competition no individual has any market power; in most situations of practical interest, however, individuals have some influence over the prices at which they buy and sell. Bargaining theory can be applied to the determination of wages, competition between oligopolists, or even the relationship between the government and the electorate. Modern
bargaining theory mainly centres on game theory and focuses on some of the main problems in contemporary economies. Research Bargaining Theory
The contestable markets theory is the theory that prices in oligopolies may be close to the perfectly competitive level due to the threat of entry by maverick firms. For example, in the airline industry although there are a relatively small number of competitors, prices tend to remain low, since as soon as the airlines try to raise their prices entrepreneurs enter the market and undercut existing fares. This leads to the suggestion that governments need not try to encourage perfect competition in markets as long as they ensure that they are contestable. Research Contestable Markets Theory
Normal economic profit is the theoretical minimum profit required to keep an entrepreneur in a particular business. It must be at least as much as he could earn by investing his capital in some other business. If the entrepreneur was to earn abnormally high profits, new firms would enter the industry and the entrepreneur's profits would fall; if the entrepreneur's profit was too low he would leave the industry, allowing others to make better profits. Thus in perfect competition only normal profits can be made. In a monopoly, abnormally high profits can be earned as a result of barriers to entry. Research Normal Economic Profit
An oligopoly is a market in which relatively few sellers supply many buyers, each seller recognising that he can control his prices to a certain extent and that his competitors' actions will influence his profits. This is a departure from the assumption, in perfect competition, that there are a large number of firms in any particular market. If there are only a few firms, each one may be able to influence the market price by controlling the amount they produce, thus earning higher profits.
Oligopoly is a common feature of the real world; studies have shown that in developed countries markets tend to become more oligopolistic. There is some doubt, however, as to whether prices really are higher under oligopoly. Research Oligopoly
In economics, a perfect competition is a market structure in which all agents take the market price as given; they cannot alter it because they lack the market power to do so. This implies that there are a large number of firms producing an identical product; perfect entry to and exit from the industry (new firms are able to set up easily); perfect information; and no transport costs. The consequence of these assumptions is that firms will make no excess profit in the long run, since any excess profit in the short run will attract new firms into the market, and the increased supply will drive down the market price, thus eroding the excess profits. Imperfect competition comprises a set of market structures where some or all of these assumptions do not hold; the principal categories arise from monopoly and oligopoly. Research Perfect Competition
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Matt and Leela Probert
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