Civil Engineering Reference
In-Depth Information
In making this comparison between the world of perfect theory and actual
practice, it is important to remember that the construction industry, as a whole,
consists of many different markets - some are defined by a specific service or
product; others by the size and complexity of contracts awarded in the market, or
by the geographical location of the market. Consequently, we should not aim to
pigeonhole all firms into one model of market behaviour. However, the following
analysis represents a quick tour through some generalised principles that apply to
significant parts of the construction industry. It may help your comprehension if you
have some specific construction firms in mind as you proceed.
Monopolistic Competition
In reality, most markets are far from perfect. For example, in any construction
market contractors, subcontractors and material producers will try to obtain
some monopoly advantages by distinguishing their firm's product from that of
their competitors. They may do this by somehow implying - or, indeed, achieving
- better quality and/or reliability. In these types of market, firms can earn above
normal profits - but only for a short while, because other firms in the market will
respond by producing similar products. This keeps the market very competitive, and
constrains long-term profits.
This model of behaviour is known as
monopolistic competition
as each firm
can easily achieve a degree of local monopoly but is ultimately restricted by the
presence of many competing firms. As we have suggested, this type of competition
is well exemplified by firms in the construction industry: firms tend to be highly
fragmented across the country but are somehow constrained by the potential
competition of similar firms in neighbouring towns.
Oligopoly
In the strictest sense of the word,
oligopoly
is where a few sellers compete for
the entire market. Blue Circle, for example, accounts for approximately half of
the supply of cement to building firms in the UK and two other firms, Rugby and
Castle, make most of the remaining cement. In this kind of market each firm has
enough power to avoid being a price-taker - but they are still subject to a sufficient
amount of competition to know the market is not entirely under their control. In
other words, firms in oligopolistic markets will price their produce or service
according to how they think competitors will react. This leaves them faced with the
dilemma of not knowing whether to compete or co-operate. In short, the world of
oligopoly is one of uncertainty.
To paraphrase Lipsey and Crystal (1995: 264), firms in an oligopolistic industry
will make more profits if they agree to co-operate as a group; however, if one firm
deviates from the agreement and/or becomes aggressively competitive, it stands to
make more profit for itself.
When firms agree to co-operate to raise profits it is called
collusion
. Anecdotal
evidence from managers and postgraduate students working in the industry
suggests that collusion is common practice across the whole breadth of construction
