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Market Structure And Innovation Policies

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Question:

Discuss about the Market Structure and Innovation Policies.
 
 

Answer:

Introduction

The topic chosen for this discussion is the monopoly market structure. The article selected to held delve deep into this topic is entitled “uber replaces one monopoly with another” The article sought to explain how Uber was compelled to avail its reasons for dumping the drivers (Jean-Paul, David and   Fanny 2016). The ride-haling service operate primarily via smartphones and remains a global economic success tale. Before, the firm was monopoly but this has shifted to a profit-making “unicorn” and has been valued lately at 62.5 billion dollars (Jean-Paul, David and   Fanny  2016).

The researcher discusses four types of market structures, perfect competition, oligopoly, monopoly and monopolistic competition markets. A monopolistic competition market structure is a situation characterized by a relative number of sellers trading in homogenous but differentiated commodities (Lin and Wu 2017). The traded products have close substitutes, and hence the firm attracts a stiffer competition. Oligopoly market structure is one where there are few number of competing interdependent firms. Monopoly refers to a market structure in which they are few sellers and many buyers. It results when there is the sole producer of a commodity with no close substitutes.

In a monopoly market structure, the firms have market power with little competition. The firm are price makers and hence restrict output while charging the prices above the Marginal Cost; that is, P>MC as shown in the diagram. Firms, therefore, produce at MC=MR but charges at AR (demand curve). On the other hand, in Perfect competition market, the firm’s demand curve is horizontal. Hence, firms are price takers at produce and sell where P=MR=MC=AR. The only condition is that firms maximize their revenue by producing more goods (7000 as shown in the market) where the slope of the MC curve is positive.

With respect to Monopolistic competition, there is a similarity to that of a monopoly as they produce at MC=MR and hence charges at P>MC. Oligopolistic market have a kinked demand curve which leads to price rigidities. The prices cannot be changed as firms compete stiffly, charging a higher prices leads to a reduction in quantity and hence consumer shift to substitutes from the rival firms and lowering leads to an increase in quantity in the short run and a decrease in the long term hence rigidity in prices but competes in terms of warranties, gifts, quality, advertising, discounts and after-sales services to increase sale.

Allocative efficiency is based on determining how resources are utilized in production of the combination of commodities that are basic to the society. On the other hand, productivity efficiency is focused on minimization of the costs incurred on production of goods and services required by the consumers. Therefore, economic efficiency entails producing the right (allocative) amount in the right manner (productive efficiency).

Under perfect competition, productive efficiency is achieved in the long run where the equilibrium price= minimum average total cost (min ATC) and hence the firm utilizes the lease-cost technology to thrive. Allocative efficiency on the other hand occurs where price= marginal cost (P=MC) as the price measures the benefits derived by the society from marginal units of a particular goods while the marginal cost measures the sacrifice or the cost to society of the forgone goods so as to produce a particular good (Li et al. 2017).

 

Uber, monopoly produces where MC=MR and the price charged is along the demand curve (AR) Curve. In Uber’s monopoly market structure, the firms have market power with little competition. Uber is, thus, a price maker and, hence, restrict output while charging the prices above the Marginal Cost; that is, P>MC as shown in the diagram. Firms, therefore, produce at MC=MR but charges at AR (demand curve).

Uber as a monopoly firm cannot achieve productive efficiency because it produces at an output much less than that of min ATC. The X-inefficiency is due to lack of competitive pressure to make Uber operate at the minimum possible costs. In addition, the Uber does not achieve Allocative efficiency because the price (the value consumers attach to Uber’s services) charged is above the Marginal Cost (opportunity cost) hence, the condition of P=MC is violated by Uber (Horan 2017).

The firms have two options based on increasing or decreasing prices that are ultimately rigid. An increase in prices leads to a loss of customers to rival as the upper part of demand curve is more elastic than that below the kink. If the firm decrease the prices, sales rises, but it is a short run as businesses in the industry follow suit to cut prices (Horan 2017). In case the follower mostly reduces the price, the leader suffers due to decreased sales hence the companies avoid cutting prices and sell their commodities at the prevailing market prices.

Conclusion

The paper has discussed 3 market structures; monopoly, monopolistic competition and oligopoly. Each market structure has distinct features based on the number of firms and buyers, price and output determination, goods sold. The paper has uncovered that economic inefficiency in monopoly market and economic efficiency in perfect competition (Evens 2017).

 

References

Evens, T., 2017. Market Structure and Innovation Policies in Belgium. In Innovation Policies in the European News Media Industry (pp. 25-36). Springer International Publishing.

Horan, H., 2017. Will The Growth of Uber Increase Economic Welfare?.

Jean-Paul, G.,  David, C. and   Fanny,. T., 2016. Uber Replaces One Monopoly With Another. The Sydeny Morning Herald, pp. 1-3.

Li, Y., Nie, D., Zhao, X. and Li, Y., 2017. Market structure and performance: An empirical study of the Chinese solar cell industry. Renewable and Sustainable Energy Reviews, 70, pp.78-82.

Lin, Z. and Wu, Z., 2017. A Model of Platform Competition in Sharing Economy.

Lucchi, N., Ots, M. and Ohlsson, J., 2017. Market Structure and Innovation Policies in Sweden. In Innovation Policies in the European News Media Industry (pp. 191-203). Springer International Publishing.

Schneider, H., 2017. The Market Process and Uber. In Uber (pp. 29-54). Springer International Publishing.

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