Economics in construction

1. Perfect competition maybe described as a theoretical form of market wherein no buyer or supplier has the capacity (or what is termed the ‘market power’) to control the market price. Regular definitions of perfect competition in economics describe it as a situation in which there is absolutely ‘efficient outcome’. The hypothetical situation of ‘perfect competition’ is primarily conjured to build the fundamentals of the supply and demand theory.

Totally contrary to the ideas of a perfectly competitive market is the idea of a monopoly, which maybe defined as a continual market situation within which there is only one supplier of a particular service or an item. All monopolies are necessarily devoid of any economic competition and the utter deficiency of ‘substitute goods’. Often a monopoly is sanctioned by the state. Such a monopoly is called a ‘legal monopoly’ or a ‘government granted monopoly’ and is authorized by the government so as to encourage firms to take up a particularly ‘risky’ or ambitious project. Instead of allowing a certain firm to take up a venture in this manner the state might also keep the project all to itself. Such a situation will then be referred to as a ‘government monopoly’. (King, 126)

Unlike in a monopoly in a perfectly competitive market there are a number of minor suppliers and buyers who operate at equal capacities in the market. Given their equal status neither of them manages to attain enough significance to influence the market in their favor. The firms in such a set-up are therefore price-takers rather than price-setters, as in the case of monopolies. Also, while a monopoly provides a particular, unique item or service to the market in a perfectly competitive market no firm enjoys any sort of individuality. Instead, each of their products is quite like the others such that there is no room for ‘product differentiation’.

A monopoly remains the sole provider of a certain product or service by simply barring other similar firms to enter the market by some means or the other. Often such means include government authorization, like in the case of ‘legal monopolies’ discussed above. In case of perfect competition however no such entry barrier can be introduced. As a result any given firm can enter the market if it wishes to. Similarly, unlike in a monopoly in a perfect competition set-up all firms have access to the same kind of resources all of which are completely ‘mobile’. In a monopoly of course a particular firm controls (and occasionally even withholds) essential resources and production expertise.

Given the large number of close substitutes available for the products/services sold by firms in a perfectly competitive set-up it is only obvious that no single firm or even a group of firms have any say about the ‘market-price’. The price of the products or services of firms in an arrangement such as this is duly decided instead by the market, which in turn depends on the behavior of the buyer.

A monopoly however doesn’t remain obligated to the market in this manner. Instead, it effectively determines the market price simply by increasing or decreasing the quantity of its produce. Such independence is enjoyed by a monopoly simply because it faces no form of price pressure from opponents. However, there is a limit to which this liberty maybe pushed. Monopolies that raise their price far beyond permissible limits invite competition and may soon have to face rivals providing the same services/products either legally or even illegally. (Fletcher, 188)

2. The residential construction industry might pretend to be a single, solid, well defined industry but it in fact is far from being that. As anyone who has ever had a house made knows building a great house involves a number of things; great plumbing, great carpentry, great painting etc. etc. etc. Given the large demands of building a residential outfit the residential construction industry does not represent one single market, like it appears to be but rather a variety of sectors.

However, not all of them need to come into play in every residential construction project. Often a particular house does not need all the facilities the industry is capable of providing it with. For instance if an environmentalist who feels strongly about the use of wood in his house decides to build a house tomorrow he is hardly likely to employ a carpenter, irrespective of how easily he can land one. Similarly a family who decides to paint their interiors themselves will not need painters, at least to the extent they are usually needed by new house owners. Also, in many cases residential construction involves repairing old structures. This obviously takes less effort and expertise than those required for building a house from scratch.

As is obvious therefore there are a number of ifs and buts in the industry. We will take a look at some of these a little closely.

Normally, specialist contractors who have long standing reputation in the field carry out residential constructions. These individuals take complete responsibility of building an entire building from scratch and cover everything from plumbing to painting. Once they achieve the contract however they duly sub-contract additional independent workers who assist and accompany their own crew.

Contractors are often described as the king of the jungle in their own area. They are managers, salesmen, supervisors and directors all rolled into one. As a result of their unique capacity to bring in professionals of their own field under their wings these individuals soon turn out to be perfect monopolies by themselves. Often many of these professionals operate all by themselves in a given area, without any form of opposition or competition. Given their advantageous position they duly flex every possible monopoly muscle they possibly can and obviously determine the market price of the services they provide.

Similarly special service providers in the industry, such as say wood engravers or carvers who are both sophisticated and rare in terms of their skill usually monopolize the market and set the market price by themselves. Unlike them plumbers or electricians, who are found in plenty and whose skills hardly vary can never really behave in a monopolistic manner. Instead, their circuit closely replicates what can be called a ‘perfectly competitive’. Much like them painters and carpenters can hardly afford to be choosy or ultra expensive since they are easy to substitute.

A good illustration of this point is provided by the use of lumber in the industry in the past decade or so. The U.S. residential construction industry is, by all accounts the biggest consumer of softwood lumber. However, the amount of softwood lumber available to the industry fell dramatically following the restrictions that came to be placed on state and federal forests in the past few years. As a result of this unfortunate fall in supply a large chunk of the industry soon shifted to other alternatives available in the market.

Amongst the 2,500 builders we surveyed for this particular study about 12.8% reported to have increased their use of alternative structural materials in the past decade alone. 99% of the respondents also confessed to having started to use at least one out of the long list of alternative structural materials that we provided them with. Till 1995 only 91% of the builders interviewed used substitute materials. (Kar, 145)

While the decreased supply of lumber has obviously proved unfortunate for the lumber industry the construction industry itself has survived virtually unscathed. This is primarily due to the wide availability of materials such as reinforced concrete, plastic fiber, steel etc. which maybe easily used as a replacement for lumber.

This example clearly proves the market for construction material itself therefore it maybe said to be a ‘perfectly competitive’ market. With easily available substitutes, easy entry into the market and hardly any product differentiation it fits almost every characteristic of the ‘perfect competition’ market to the tee.

Unlike lumber and its alternatives however other important facets of construction are not as easily obtained. The expertise required to design a house for instance is far harder to replace than the construction material it is to be built with. Due to the utter importance of their job and how extraordinarily dependant on knowledge and skill it is, the architect and the whole engineering industry maybe described as a bit of a monopoly. It is of course difficult to enter their market, there are hardly any ‘substitutes’ available (since the level of skill and expertise of each engineer varies from the other) and the engineers themselves tend to determine the market price of their know-how. (Lamb, 243-245)

Thus we see how the residential construction industry of U.S.A. is actually a mélange of a wide variety of competitive markets and not a single market by itself. It is the proper functioning of each of these individual parts that ultimately allows the construction business to function properly.

References:

Fletcher, R; Economy: Beliefs and Knowledge; Believing and Knowing. (Mangalore: Howard & Price. 2006) pp 188

Kar, P; History of Indian Consumer Market Applications (Kolkata: Dasgupta & Chatterjee 2005) pp 145

King, H; Fiscal Fitness Today (Dunedin: HBT & Brooks Ltd. 2005) pp 126

Lamb, Davis; Cult to Culture: The Development of Civilization on the Strategic Strata. (Wellington: National Book Trust. 2004) pp 243-245