Monopolistic Competition and Oligopoly Markets
The marketplace where many firms offer their consumers differentiated goods and services but the products do not have any perfect close substitutes is considered as the monopolistic market . In this market the capabilities of free entry and exit for all the firms are very low. The production decisions of any one firm do not affect the competitors of that firm directly and this is why all the firms possess relatively low degree of the market power in the marketplace. All of the firms exist in this market are price makers and in the long run demand for the goods and services of the firms get relatively elastic. This implies the fact that demand of the products is very sensitive with respect to the change in prices. In the short run, the objective of all the firms is to make positive economic profit but in the long run it reaches to zero. On the other hand, oligopoly is that marketplace in which a small number of firms capture the large majority of the total market share . In oligopoly market, two or more firms have get the right to dominate the whole market and production as well as price decisions of any one firm directly affects the decisions of other firms.
In the given project, the various aspects of monopolistic competition and oligopoly markets will be discussed. The discussion will be on how the two market structure is different from each other and the way of capturing market power for both the market structures in the Australian economy. In Australia, both of these markets exist and they operate their activities differently. These two markets compete with each other with respect to pricing decisions and hence the production decisions are made through the analysis of market demand and market supply. Here the ultimate issue is related to the dynamic process of the structural changes occurring in the Australian economy facing by the business people of Australia.
Article: Monopolistic Competition and Oligopoly
According to the author of this article, both the monopolistic competition and oligopoly exist in the economy of Australia as the traditional classifications of the market structures. These are the static processes of the economy that is responsible for all the economic activities .These market structures are most significant for describing the business behaviour of the businessmen under the set of static assumptions for the economy of Australia.
The theories related to the pricing decisions with respect to the spectrum of market conditions according to the author is the range exist from perfect competition to monopoly and other imperfect market structures. In Australian economy, the imperfect market structure is nearer to the perfect competition for the goods and services in the service sector and labour market as well and the oligopoly is more rapidly taking the place of pure monopoly. The basic difference between these market forms is the size of the firms that directly affects the pricing decisions of them. In the Australian retail industry, in which the market is divided into several small segments, monopolistic competition is found. The segments of the market do not suffer from the diseconomies of scale as they operate in the monopolistic competition. But in contrast to this, in the manufacturing and insurance as well as in the banking sector, oligopoly is more apt and the economies of scale in this case require the market to supply by only a few numbers of large firms.
For the retail industry of Australia, thousands of different companies with different brands exist. Each of them is defined independently by their quality of the products and the raw materials used by the firms. There are around 14,000 retail firms exist in the retail industry and among them Telstra, Coles are most substantial retail firms in Australia and they share a significant amount of total market share in the Australian retail industry . The prices here are determined by the willingness of the consumers that depends upon the choice and preferences for the particular products. As the number of firms are quite limited and the brand name matters for the consumers, so any high price for the products would change the preference for that products from buyers. The retail sector accounts for 4.1% GDP and 10.7% employment for the overall Australian economy.
Figure: Retail industry share of monopolistic competition in Australia.
The diagram given above shows the market shares of the companies in the retail industry of Australia. Here Telstra has become the leading retail firm in the industry as it captures 46.3% of the total market share. This situation leads the retail industry towards the monopolistic competition and most of the market power has gone to the Telstra. This also implies the fact that prices of the products provided by this company can easily attract the consumers. High price would lower the demand for the goods and services.
The most momentous theory of monopolistic competition has given by Edward Hastings Chamberlin. According to him and another English economist Joan Robinson, the businesses operated under the market structure of monopolistic competition that offer different goods and services to their customers and possess an element of uniqueness for those products and all the firms competing in the market for the same types of customers. The firms here make the decisions independently about the prices and output based on the cost of the production. The four major types of products are sold by the sellers are differentiated with respect to the physical product differentiation, marketing differentiation, human capital differentiation and the differentiation happen through the way of distributing the goods and services. The physical product differentiation for the firms in Australian retail industry consists of the size, shape, design, performance and colour of the retail products. Here consumer electronics from electronic retails can be physically differentiated. For the marketing differentiation, the retail firms of Australia differentiate their products by several distinctive packages as well as some promotional techniques. In this case food retails of Australia use their packaging through the marketing differentiation. Human capital differentiation applied by the retail firms create differences with respect through the skills of the employees, the training sessions received by the employees and other distinctive uniforms. Food retail, Clothing retails, all of the retail firms under the Australian retail Industry use the differentiation in human capital for their goods and services. Lastly, differentiation through the distribution includes the distribution with the mail order, internet shopping from different online sites etc. As the competition and rivalry between the traditional stores and the online selling stores of the retail firms continues, the differentiation occurs via distribution. In this imperfectly competitive market segment, all the retail firms are the price makers and they face a downward sloping demand curve for their products as all the firms produce unique goods and services and can charge both higher and lower prices than their rival firms. Many times the firms set their prices lower to attract the customers and sometimes they charge price higher than the industry price level and it becomes constraint for the firm. This is another reason for the negatively sloped demand curve. Here the firms do not always need to advertise their products. The firms sometimes offer similar products and they need to advertise this on a local basis for informing the customers. The most common methods for the firms to advertise their products are the local press, radio, leaflets, special promotions, local cinema hall, posters etc. In all the respects the firms under the Australian retail industry are considered as the profit maximizers. They can enjoy the economies of scale also and it tends to higher the profit of the firms. In the short run all the firms enjoy supernormal profits as only limited number of firms exists in the industry. But in the long run when some other firms with good knowledge and opportunity of the industry get attracted towards the industry they enter into the industry with the object of profit making. The profit maximizing condition for the firms is MC=MR. Here, MC indicates the Marginal Cost and MR represents the Marginal Revenue for the goods and services of the firms.
The above diagram represents the short run equilibrium situation for the firms. In the X-axis, costs and revenues have been shown and in the Y-axis, output level has been given. Here the firms capture the profit given by the area of the rectangle of CPAB. At this level of profit, the price of the goods and services is OP, the output level is OQ and the cost of production is OC. AR is the demand curve of the firms. When the new firms enter into the retail industry, the demand for the goods and services of the existing firms become more elastic. In that case, demand curve will shift towards left that also lowers the price level for the firms and all the super normal profit will be eroded away. Thus in the long run firms will only enjoy the normal profit.
The diagram above represents the long run equilibrium situation of the firms in the retail industry where the firms only earn the normal profit at point A of the amount given by the area of the rectangle of OPAQ. Therefore, firms get most of the benefit when it is operating its business in the short run and they try to stay in the short run by adopting several movements such as innovation and further product differentiation. From the above analysis it can be concluded that retail industry of Australia is more efficient than that of the monopoly market structure but it is less efficient than the perfectly competitive market forms. The reason behind this is that the firms produce more efficiently in monopolistic competition than monopoly as the market power is less than that of the monopoly. But monopolistic competition is less efficient from the perspective of both allocation and productivity than that of the perfect competition as the goods and services produced in the perfect competition are more innovative and prices are determined by the interaction between the market demand and market supply.
In Australian manufacturing sector, the oligopolistic market structure exists and in the manufacturing industry a very small number of firms dictate the whole market. The reason is that there is no free entry and exit for the firms in this industry. The barriers for this free entry and exit is that all the firms do not possess same amount of financial resources that are needed to enter the market and there are also some particular governmental rules and regulations and other patent systems for the firms in the industry. The competition in this market form occurs with respect to the sales of the goods and the services not for the price of the products. The degree of product differentiation is high in this market and the decisions taken by one firm affects the decisions of other firms as every oligopolistic firm watches the decisions of its competitors very closely. The method that exists in this industry is other than the price wars. The manufacturing firms in Australia are Coles, Woolworths, Hoyts, Bridgestone, Carlton United, Kellogg and Dulux etc. All the firms tend to adopt identical prices for the identical goods and services as they avoid price wars. The government body named Hilmer Committee of Australia was established in the year 1993. It acts in the interests for the recommendations of National Competition policies. The demand curve generally looks like a Kinked Demand Curve and it explains the fact that oligopolistic firms adopt common price for achieving the highest price as well as output level.
Two major oligopolistic firms in the manufacturing industry are Coles and Woolworths as they together share approximately 70-80% of the total market share. The remaining portion that is other 30% is occupied by the boutique niche from the IGA group. Pharmaceutical firms in this industry also operate under oligopolistic competitions.
Above diagram shows the pharmaceutical manufacturing sector of Australia under the oligopolistic market structure. Here all the firms share more or less same amount of market share in this industry. As the firms compete with respect to the sales level in this industry that is why the selling output of them is almost identical. There does not exist price wars in the market and all the firms have full knowledge regarding the production decision decisions of one another. In this the producers adopt the Prisoners dilemma type solutions followed by the Game Theory to solve the sales decisions of the goods and services . Sometimes the producers also apply the theory of kinked demand curve as well as the cartel theory.
The diagram given above represents the oligopolistic market equilibrium through profit maximization. Here the price of the products charge by the firms is OP amount and the output level with respect to that is OQ amount. The firms make profit of the amount given by the area of the rectangle abcd. Here the market demand curve is the kinked demand curve and the marginal revenue received by the oligopolistic firms is represented by the MR (marginal revenue) curve of the firms.
It is understood that the banking sector in Australia is dominated by four central institutions. These institutions together are responsible for contributing over 85% of the domestic home loan value. Commonwealth Bank, National Australia Bank, Westpac and the New Zealand banking group together have collective market capital that estimates to around 400 billion dollars. This estimates worth about five times the total assets of the remaining financial institutions in Australia. It has been reported that though the banking market in Australia is highly competitive, the dominance of the prevalent market with a limited number of financial institutions makes the banking sector highly oligopolistic. It has also been reported by the marketing experts that the leading market leaders of this sector exercise full power and control over the market and consequently, they are successfully able to manipulate several smaller firms and their consumers to comply with their demands. In the light of the current discussion, it is to be noted that in 1990, the four pillar policy was adopted. By the virtue of this policy, any future merger or acquisition was restricted in the above cited four leading banking institutions, not only among themselves, but also with other international financial institutions. However, a study has been carried out in this context. It has been reported that this policy was implemented with the objective of delivering protection from the global financial crisis. But, the situation exhibited a growing uncompetitive behavior among these sectors that is detrimental to the financial stability of the country. According to characteristic of oligopoly market form, the banking sector of Australia does not allow the free entry and exit of the forms in the industry. The reason is the various regulatory as well as capital requirements for the firms.
The statistical data given above represents the market share of the existing banks in the banking sector of Australia. Here mutual shareholder ownership across the banks is high enough and it can be concluded that the shareholders of the banks have interests in achieving maximum amount of profit. The very common method that is applied by the Australian banking sector in determining the competitiveness is the Herfindahl-Hirschman Index (HHI). This measured is used by the banks in relation to the banking industry. This measure of HHI helps to understand the competition level in the industry. As the value of the index becomes as it implies that the market becomes less competitive. This HHI showed that the Australian banking industry has become more concentrated from the year 2
the study carried out helps in understanding a number of critical aspects in relation to the monopolistic and oligopolistic market in Australian market. The discussion provides a conceptual insight into the definition of monopoly and oligopoly. It goes on to highlight the theoretical frameworks associated with the understanding. Accordingly, the model of Chamberlain has been implemented to elaborate the discussion of the study scope. At the same time, in relation to the framework discussed, a brief market overview in Australia is carried out. Based on the understanding derived it could be understood that the retail market in Australia is mainly rule by the monopolistic market. The manufacturing, retail and the banking sectors, on the other hand, are mainly dominated by the oligopolistic competition. Based on the study it could be reported that in the monopolistic market situation the segments like the retail sector would profit in the short run, but will not survive in the long run as several new market entrants and increase of competition would give rise to oligopoly. However, in case of the banking scenarios in Australia, it has been reported that only a limited number firms dominate the market. Therefore, they are in control of the ruling market forces. Consequently, all the smaller firms are brought under their control. The application of the four pillar policy in 1990 has limited the four major banks merger or acquisition potential as a protective financial measure. But, in the long run, the economy of Australia would suffer a detrimental impact as it has considerably lowered the competition rate in the market.
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