1a) Explain how the different features of monopolistic competition and oligopoly affect price and output determination in these market structures.
Both monopolistic competition (MPC) and oligopoly generally determine price and output based on the profit-maximising condition that marginal cost (MC) equals to marginal revenue (MR). Due to the different features of both monopolistic competition and oligopoly such as the barriers to entry (BTE), which affects the number of sellers as well as market power, nature of product and possibility of enjoying economies of scale (EOS).
MPC firms have weak BTE where firms’ entry into these industries is largely unrestricted by government’s rules and regulations. One example of an MPC firm is the hawker stall. The set-up cost including the rental cost is low and due to the small-scale production of food, there is limited scope for EOS that act as a BTE. This weak BTE gives rise to the large number of hawker stalls being set up. With so many hawker stalls present, each hawker stall has a relative small share of the total food market. Thus, each hawker stall has only a small amount of control over the market price of the food. Actions by one hawker stall with regards to changes in its price or quality of food have little impact on the sales of any other hawker stalls and so are unlikely to elicit response from other hawker stalls. Each hawker stall makes independent decision on the price of food. The products sold in the MPC market are differentiated just like how every hawker stall sells different food. In the long run, with weak BTE, hawker food stalls will enter or leave the food industry such that it earns only normal profits.
On the other hand, an oligopolistic firm has stronger BTE arising from the structural BTE, endogenous sunk costs or strategic entry deterrence. One example of an oligopolist is telecommunications such as SingTel, M1 and Starhub. These three firms have high set-up costs since they have to be engaged in piping the networks and advanced technologies for mobile connections. By having a large-scale production of telecommunication services, they enjoy large EOS such as managerial EOS and marketing EOS. New entrants must enter the market at a large enough scale so that their average cost will be sufficiently low to be able to compete effectively and survive against these three large firms. New entrants must also have a sizeable advertising campaign to compete against the telecommunication services from the three large firms that are well known to many consumers. This high cost serves as a form of BTE. This strong BTE gives rise to the high market concentration ratio with each firm having a large share of the total market. This means oligopolistic firms have high ability to set prices. Firms from the oligopolistic market sells homogeneous or differentiated products. SingTel, M1 and Starhub sell homogeneous goods such that they all sell telecommunication services. They sell differentiated goods as they have different packages and plans for telecommunication services. The high BTE into oligopolistic industries are usually high enough to prevent new entrants from coming into the market, allowing firms to earn sustained supernormal profits at long-run equilibrium. The high market concentration gives rise to strategic behavior by firms. They are mutually interdependent. Each seller takes the actions and reactions of their rivals’ marketing strategy into account when making their own production and marketing decisions. This results in price rigidity. When the competition heats up, firms in the oligopoly may collude to act like monopolies instead of competing. The member firms will then agree openly upon a common uniform price in the market.
Due to the difference in extent of BTE, the market share for MPC firm and oligopolistic firm are different and therefore, the price and output determination will be different. For oligopoly, due to the fact that they have high...
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