Traditional economic theory suggests that highly competitive industries are more likely to be economically efficient than those where there is less competition. Intense competition will force firms to charge a price which is equal to their marginal cost of production and hence allocative efficiency will occur. This pressure on price will in turn force firms to minimise the average cost of each unit produced and so productive efficiency will occur.
However the theory of contestable markets suggests that it is not the actual level of competition a firm faces which forces it to be efficient but the level of potential competition. As long as the firm faces the threat of competition it will be both productively and allocatively efficient. In addition this theory suggests that a large firm, with significant market share, might actually produce in a more efficient manner than a perfectly competitive firm since it will be able to avail of economies of scale and therefore produce at a lower average cost.
Alternatively it could be argued that it is those firms which operate in less competitive or contestable markets that are more likely be efficient. The argument suggests that firms in oligopolistic or monopolistic markets are more likely to invest in research and development and therefore these industries are more likely to achieve dynamic efficiency.
lydiajane74 answered the question on July 5, 2018 at 04:52
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