Monopolistic Competition And Oligopoly Markets: Features And Characteristics Essay.

Discuss about the Monopolisically Competition and Oligopoly Market.

In common terminology, “market” indicates specific place where buyers and sellers of various goods meet with each other and involve in physical transaction of the good. Market however has a different significance in economics. Economic definition of market however is not restricted to a single place rather it implies spread of buyers and sellers over the whole area. One definition of market as stated by Cournot, a French economist suggests that market does not refers to a single place where goods are bought and sold. Market is the entire region that where sellers and buyers are involved in free intercourses to one another. In the market, price of the product tends towards equality (Baumol & Blinder, 2015) there are several determinants building the basis of different forms of market. These include nature and number of seller, nature and number of buyers, kind of product sold in the market, condition to enter or exit the market and economies of scale.

Depending on degree of competition, there are four common forms of market- Perfect competition, monopoly, monopolistic competition and oligopoly market. The current research paper makes intense research on two of these popular market forms namely monopolistic competition and oligopoly.

The concept of monopolistic competition indicates condition of a market that has a keen competition among a considerably large number of sellers. The degree competition however is neither pure not perfect. There is rather a large group of small producers enjoying some form of monopoly following product differentiation (Nguyen & Wait, 2015). Monopolistic competition is thus considered as a form of market that is a mixture of perfect competition and some degree of monopoly. Some salient features of monopolistic competition are given below

Number of buyers and sellers

In a monopolistically competitive market, large number of sellers operate in the market. The number of firms however is not as large as that of perfect competition. Each firm therefore has some market power to control combination of price and output. In the market, there are large number of sellers. Each firm follows its own strategy. When a single firm lowers its price, the acquired gain from sales is not much large giving rivals’ little incentives to react.

Free entry and exit

In the monopolistically competitive market, firms are allowed to enter or exit the market freely. Entry occurs when existing firms in the short run enjoys a supernormal profit. The entry of new firms increases supply in the industry. The excess supply then lowers price and erodes profitability gain. Firms incurring loss in the market on the other hand exit the industry creating a supply shortage (Bertoletti & Etro, 2017) Prevailing excess demand then increases price and reduces loss. Entry or exit continues unless all the firms enjoy have only normal profit.

Monopolistic Competition

Product differentiation

Product differentiation is another distinctive feature of monopolistic competition. Product differentiation inclines to a situation in which buyers are able to differentiate products that are close substitute to each other. Since the product of the operating firms are not much different, firm differentiate their product by adding some distinguishing features. Firms producing differentiated products though has monopoly but faces extreme competition.

Elastic demand

Though not infinitely elastic like perfect competition, firm under monopolistic competition faces a relatively higher elasticity of demand (Assenza et al., 2015).  Each firm faces a downward sloping demand flatter market demand curve. Firms need to lower its price to sell more of its product.

A market is said to be an oligopoly market if only few sellers operate in the market. Each firm has the ability to influence its own price and output combination in the market. Give that, number of firms is not much large each firm has control over a large part of the market supply. Strategy of an individual firm influence its rivals very much. In a pure oligopoly market where firms sell homogenous product, market price remains fixed (Moulin, 2014). Even in situation where firms sell differentiated products agreements like monopoly market have less possibility to occur. Some of the distinctive features of oligopoly market are given below.

Monopoly power

In the oligopoly market, there is some extent of monopoly power. The monopoly power arises because small number of firms operate in the market and each controls a large market share.

Strategic interdependence of firms

In the oligopoly market, each firm produces goods that are either homogenous or differentiated slightly. Independent strategy of firms affects their rivals as well. Firms cannot ignore the action or reactions of their rivals in the market (Adlakha, Johari & Weintraub, 2015).

Conflict among existing firms

In an oligopoly market, there are two forms of conflicting attitude among the firm. There is one instance where firms recognize it is disadvantageous to compete and intend to collude achieve maximum profit jointly. This form of oligopoly is known as collusive oligopoly. There is however situation in which firms seek to maximize their individual profit leading to conflict among them (Gugler & Szucs, 2016). There are clashes among firms regarding profit distribution and allocation of market share. This form of oligopoly market is known as non-collusive oligopoly.  

Fewer firms in the market

Under oligopoly, there are fewer firms controlling the entire market. When there are only two firms operating in the market, it is called duopoly. Market with smaller number of firms has extreme concentration.

Oligopoly Market

Nature of the product

Oligopoly market selling a homogenous product is called pure oligopoly. An oligopoly market is said to be differentiated oligopoly when firms sell differentiated products.

Large number of consumers

Number of seller in the market though is relatively smaller but there are large number of buyers in the market.

Indeterminate demand

In the oligopoly market, the market demand curve is indeterminate in nature (Stiglitz & Rosengard, 2015). This is because action taken by one firm may cause a change in market demand.

The coffee industry in Australia has a monopolistically competitive market structure. As of March 2013, coffee shops in Australia numbered 6,488. The coffee shops are employing nearly 83,000 staffs. The estimated market value of the coffee industry is AU $ 5 billion. In the coffee industry, there exists low entry barriers. New players can easily enter the market but they need to differentiate their products highly. Starbuck in Australian market in 2008. The company was able to make successful operation only for eight year succeeding their market entry. Starbucks failed in Australian market. In a monopolistically competitive market, product differentiation plays a critical role (Barrios et al., 2016). Starbucks put several effort for differentiating its coffee. Starbucks collected its beans from all over the world and offered several choices of coffee recipes. The coffee market in Australia however is very much localized. The offerings of Starbucks though stand in world standard; it however failed to make considerable appeal in Australian market.  Starbuck was not enough responsive to meet local tastes and preferences. Starbucks though attempted to differentiate the offered drinks by introducing newer coffee recipes; its sustainability in the market however was questionable.

In a monopolistically competitive market, despite prevalence of large number of sellers, owners of each brand enjoys some control in deciding price. Buyers are willing to a high price only when the product seems to be as good quality. Offering in the Starbucks coffee shops did not seem as premium to Australian customers, despite it charged a premium price over other local seller. Courteous servers that offers a satisfactory level of personalized service is one distinctive advantage of Starbucks over other rival players in the industry (sbs.com.au, 2018). The service standard of Starbucks however has declined in recent years as the company hired less experienced and untrained baristas. This created a sense of discontent among Australian customers.

Starbucks was unable to recognize the fact that differentiation is not a onetime effort. Once the product is easy to imitate, there is further need for innovation to add some variability to the product. Another that that needs to be considered is that people’s tastes change overtime. Firms need to make product differentiation in line with changing tastes and preferences (Knox, 2016). The failure of Starbucks to review product differentiation effectively despite of its operation in a highly competitive and differentiated market environment.

Coffee Industry in Australia

Banking industry in Australia is dominated by four major banks accounting almost 75 percent share in the entire industry. Concentration in the banking industry is mostly resulted from mergers that were taking place back to a century. Followed by the mergers there is an increasing tendency of concentration in the industry (Bakir, 2017). The number of competitors in the industry has declined overtime. As of October 2007, there were more than 150 financial institutions offered 2117 loan products. However, in 2010, the number of financial institution lowered to only 100 with number of offering declined to 1600 products.

Two measures can be used for measuring concentration in Australian banking industry. The first one is simple comprising industry’s share of largest three to five form. Australian banking is currently dominated by four large banks accounting largest share in assets, deposits and home loans. Another measure used to analyze market concentration is Herfindahl – Hirschman index. The measure varies between 0 and 1 (aph.gov.au, 2018). Higher the index, higher is the concentration. The computed index for Australian banking in the year 2011 was 0.16.

There are different form of entry barriers exist in industry. The entry barriers prevail in the form of branch network, low interest deposit, significant control in the financial planning market advantage of product bundling, advertising, perceived size and safety. The presence of economies of scale is another factor contributing to banking industry concentration (Tyers, 2015). The oligopoly market structure and dominance power of largest banks considerably increase profitability of banking.

Conclusion 

The report summarizes two common structural form of market namely monopolistic competition and oligopoly. Monopolistically competitive market is a market structure having combined characteristics of monopoly and perfect competition. Oligopoly on the other hand is a form of concentrated market dominated by few firms. Product differentiation is one of the most crucial aspect of monopolistically competitive market. Other features of monopolistic competition include large number of sellers, free entry or exit and elastic demand. The main characteristics of oligopoly market include interdependence among firms, monopoly power, high entry barriers, conflict among firms and others. Australian coffee industry is an example of monopolistic competition. An example of oligopoly market in Australia is the banking industry.

Reference list 

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