Economics for Business: Comparing Market Structures
Ans- Below is the comparison between Perfect Competition, Monopoly, Monopolistic Competition and Oligopoly market structures under the following headings- [A, Robinson. T, and Tucker I. ]
|Perfect Competition||Monopoly||Monopolistic Competition||Oligopoly|
|Number of firms in the market||Large number of seller firms in the market, hence has no control over the market or the prices||One or two seller firms who has full control over the market and prices||Large number of firms, but less than perfect competition. ||Small number of firms, but all large firms. Market is dominated by these firms and they also decide the market prices.|
|Similarity of the products sold||Homogeneous product, i.e. products sold by all the sellers are similar to each other except a few features, packaging or body of the product||Homogeneous product||Differentiated products, i.e. products are close substitutes for each other, and seller firms compete with each other on non-price factors||Homogeneous products in case of a perfect oligopoly and heterogeneous products in case of imperfect oligopoly|
|Barriers to entry||No restrictions on the entry of firms into the industry||Huge barriers on the entry of firms into the industry||Very low or negligible barriers to entry of firms in the industry, i.e. as most of the firm are large in size, it is difficult for a new firm to enter and make its place in the market||High barriers to entry of firms in the industry, i.e. only few firms are allowed that too with government permission|
Ans- Game theory is a concept where two or more strategic decision makers, who have a conflict of interests amongst them, take decisions or predict results on the basis of other person’s probable decision.
Oligopoly market structure experiences it the most because here market prices, supply and demand are all dependent on other, although each firm is an independent decision maker. [Paul Krugman, Robin Wells (2004)]
In real life, game theory is applicable when you make a move to ask a girl/guy out. The outcome depends on the other person’s answer to say yes or no but you analyze his/her likely behavior to make your decision of asking out or not.
Ans- Smartphones market is an example of oligopoly market as majority of the market share is controlled by Iphone and Samsung. [Vanishka Ghosh- Economics discussion (2014)]
Firms in an oligopoly market doesn’t have a fixed demand curve as their demand is dependent its competitor’s price and supply. Also, price is not determined by the demand and supply forces, rather it is determined by the large controlling firms, hence the prices tend to be rigid for a long time.
In the given Fig.1, the area above the kink is highly price elastic and the area below the kink is price inelastic. Because of this change of elasticities, the demand curve takes a kinked shape.
Ans- Price discrimination is the strategy used by the seller in a monopoly market. As the firm is the only seller and has full control over the price, it charges different prices from different customers for the same product based on what is deemed to be the best price for that customer.
Following are the ways how a monopolist practice it- [Tejvan Pettinger (March 6, 2017)]
- Loyalty pricing, i.e. charging different prices to loyal customers
- Quantity based pricing, e.g. electicity charges based on consumption
- Time based pricing, e.g. price of flight tickets
a. Woolworth supermarket chain in your city (Melbourne/Sydney) – Oligopoly, because it is one giant company and it is not impossible but is very difficult to enter the industry and compete with it. Price is also substantially controlled by the super-market.
b. A Coles supermarket in a small town in country Victoria or NSW- Monopoly, because of no competition and familiarity amongst small towners, it can single handedly control the market and prices. In case of coexistence with an equally strong competitor like Woolsworth, maybe in a big city, it becomes an oligopoly.
c. A small café in Melbourne/Sydney CBD – Monopolistic, because it is an industry where competitors compete on the variety of products and services offered and not on price basis. Price Differentiation is also possible.
d. Yarra Tram in Melbourne or Sydney Trains in Sydney – Monopoly, because it is the only service provider and entry is restriced by the government provided lease by the Government of Victoria
e. Australia New Zealand Bank – Perfect Oligopoly, because majority market shares are held by top 3-4 banks including the Australia New zealand bank and the rates are mutually decided & fixed by all of them. It is immensely difficuly for a new bank to enter and compete with them.
f. Academies Australasia Polytechnic- Monopolistic, because there are a lot of seller firms and all of them compete on the quality and type of services provided rather than the price.
g. A small store among many other similar stores that sell souvenirs such wallets, caps, tee-shirts, key chains souvenirs that are almost identical in your city’s Sunday market – Perfect competition, because of free entry and exit of any number of firms, and all of them selling similar products. Also, price is determined by the demand and supply forces. Hence, sellers are the price-takers and not price-makers.
h. Iphone and Samsung in the mobile phone industry – Imperfect Oligopoly, because majority of the shares are held by them and they compete on the basis of differentiated products. [Krugman Wells (2009)]
The first figure (Diagram A) depicts the demand curve of a firm in an oligopoly market whereas the secong figure (Diagram B) is a demand curve of a firm in a monopolistic market. This is because the price elasticity of a monopolistic market is more than that of an oligopoly.
In a monopolistic market, firms can take independent decisions to increase or decrease the price without losing or gaining majority of the customers. This is because the basis of competition in an oligopoly is not price but product differentiation. Hence, the demand curve is more elastic. [Elmer G. Wiens (2008)]
Whereas, in an oligopoly market, the prices are determined by the large market players and prices tend to be inflexible upto a certain point for a considerablem amount of time. The firms are not independent price-makers and a change in price can make a substantial change in profits and market share of the firms. Hence, the demand curve is more inelastic. [Paul Krugman, Robin Wells (2004)]