Market Structures: Competition and Monopoly: Question 7
Syllabus 3.7
Riverside Market is a Saturday fruit market in the town of Elmswood. Any trader can rent a stall for a small weekly fee and start selling fruit there, and can just as easily stop renting a stall and leave if trade does not work out. More than twenty stallholders currently sell apples and pears at Riverside Market, and shoppers can walk freely from stall to stall comparing prices before deciding where to buy.
CrossFerry Ltd is the only company permitted to operate the passenger ferry crossing between Elmswood and the island of Selkirk, after winning an exclusive 25-year operating concession from the local council. No other company is allowed to bid for this crossing while the concession lasts.
(a) Identify two characteristics of Riverside Market, other than the number of stallholders, that make it a competitive market. [2]
(b) Explain how CrossFerry Ltd's operating concession acts as a barrier to entry, preventing the Elmswood–Selkirk ferry crossing from being a competitive market. [2]
(c) Explain one way in which the freedom of stallholders to enter and leave Riverside Market is likely to benefit shoppers there, compared with the position of passengers on the Elmswood–Selkirk ferry crossing. [2]
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Worked solution
Part (a): Further characteristics of a competitive market
Beyond having more than twenty stallholders, Riverside Market shows two further hallmarks of a competitive market:
- Freedom of entry and exit. Any trader can rent a stall and start selling, or stop renting and leave, without needing anyone’s permission.
- Well-informed shoppers, because shoppers can walk from stall to stall comparing prices before buying, no single stallholder can easily overcharge without shoppers noticing and buying elsewhere.
Part (b): The concession as a barrier to entry
CrossFerry Ltd’s exclusive 25-year operating concession is a legal barrier to entry. It does not simply describe a situation where no rival happens to exist, it actively forbids any other company from bidding to operate the Elmswood–Selkirk crossing for the whole 25-year period. Even a firm keen to compete, and able to afford the ferries, is legally shut out of the market, which is why this crossing cannot become a competitive market while the concession lasts.
Part (c): Benefit of freedom of entry and exit for shoppers
At Riverside Market, if existing stallholders tried to charge shoppers too much for apples or pears, the ease of renting a stall means a new trader could quickly enter and undercut them, winning shoppers away. This constant possibility of new entry disciplines prices and keeps stallholders responsive to what shoppers are willing to pay.
Passengers on the Elmswood–Selkirk crossing have no equivalent protection. Because CrossFerry Ltd’s concession blocks any rival from entering for 25 years, there is no threat of a new ferry operator undercutting its fares, so CrossFerry Ltd faces far less pressure than Riverside Market’s stallholders to keep its prices reasonable.
Final answers
- (a) Freedom of entry and exit for traders, and well-informed shoppers able to compare prices between stalls.
- (b) The exclusive 25-year concession legally forbids any rival company from operating the crossing.
- (c) Riverside Market’s freedom of entry and exit disciplines prices through the threat of new entry; CrossFerry Ltd faces no such threat, so passengers benefit far less from this protection.