Explain what is meant by 'the principal-agent problem' and analyse why it is likely to be found in some market structures and not others.

Mark scheme

Marking points from the official mark scheme (May/June 2019). The mark or mark type is shown in brackets.

1. The owner of the business (principal) is not necessarily taking the decisions about its operation. This is done by managers (the agent). There may be difference between the aims and objectives of the two. Unlikely to occur in perfect competition, firms are too small; or monopolistic competition. Occurs in larger firms, usually with shareholders in oligopoly and monopoly.
2. Contestable market is one with zero entry and exit costs. No barriers to entry and no barriers to exit, such as contractual agreements. For a market to be perfectly contestable, industry technology would be readily available to potential entrants. This makes the market potentially competitive and aims other than profit maximising might exist. Discussion of alternative aims; behavioural, managerial, satisficing, limit pricing.