Essay On Monopoly And Oligopoly Markets: Features, Evaluation, Efficiency, Profits.

1. Discuss the key features of oligopoly and monopoly such as number of sellers, type of product, entry conditions.

2. Explain short run and long run profits and losses in oligopoly and monopoly.

3. Describe how oligopoly can be evaluated.

4. Comment on productive and allocative efficiency of oligopoly and monopoly (hint: compare it with perfectly competitive market structure).

Similarities between Monopoly and Oligopoly Markets

Market structures are a crucial component of every market economy. In the Australian economy, there are various market structures among them perfect competition, monopolies, oligopolies and even monopolistic competition. However, the most predominant market structures in the country are monopolies and oligopolies. A monopoly market structure is one in which there is only one seller, offering a unique product. For this reason, there is no form of competition in this market structure. On the other hand, an Oligopoly refers to a market structure in which there are few large sellers who dominate the entire market. In this structure, the large sellers collude to create barriers that prevent other small firms from entering the market. Regardless of their structures, monopolies and oligopolies have various similarities as well as differences with regards to characteristics such as the number of sellers, type of products offered, and barriers to entry among others.

It is imperative to note that the two market structures have numerous similarities. As such, various features overlap between the monopoly market structure and oligopolistic markets. Mainly, these characteristics include elements such as barriers to entry, significant market share, and imperfect information, among others.

Market Share. In both markets, firms have a large market share of the overall industry. In the case of monopolies, the company owns the entire market share. In the same way, the biggest firms in an oligopolistic market have a large market share.  Cumulatively, they often own approximately 80 percent of the overall market share (“Oligopoly,” 2012). 

Market power. It is worth noting that in both market structures, the firms possess a high market power and can influence their prices.  Notably, a monopoly is able to raise its prices because there is no competition from other firms. Likewise, oligopolies collude among themselves and set high prices in the market. Besides, most products offered by oligopolies are differentiated and hence face no direct competition from other companies. Indeed, the two market structures use their market power to their advantage.

Conditions and barriers to entry. Imperatively, both markets are characterized by high barriers to entry into the market. More precisely, it is difficult for small and new firms to enter the market due to the presence of natural and artificial barriers in the market. Characteristically, the barriers in a monopoly arise from the fact that most monopolies have exclusive control over vital raw materials required in the production of a given commodity, thus making it difficult for other firms to access the resources. In addition, the barriers arise due to the existence of licenses and patent rights that build legal barriers to the entry of new firms (“Monopolies,” n.d.). Some monopolies are also protected from competition by the government. Likewise, the barriers in oligopolistic markets arise from the fact that the process of production requires economies of scale. Consequently, this discourages small firms from entering the market. Furthermore, the barriers may arise from the large capital and financial requirements for starting up the business. Oligopolies also collude and cooperate to create barriers that prevent the entry of new entrants into the market.

Market Share and Market Power

The size of the firm. In most instances, monopolistic and oligopolistic firms are large. Mainly, this is because their type of operation necessitates the economies of scale for the business to be profitable. Through economies of scale, businesses can reduce their marginal costs and enhance their profitability both in the long run and in the short term.

Imperfect information. There is incomplete information between the sellers and buyers in both markets. More specifically, consumers do not possess perfect information regarding the quality of the products offered by the firm. They also do not have perfect knowledge of the prices offered by the firm and the prices of other competing companies. For this reason, the consumer is unable to make comparisons between the price and quality of the product offered by one firm and those offered by other businesses in the market. Unfortunately, companies use this imperfect information scenario to exploit the consumers by setting higher prices or producing poor quality services and products.

Despite the various similarities between monopoly and oligopoly market structures, there are also numerous features that differentiate the two structures. Predominantly, the highest disparity between the two markets arises from elements such as the degree of competition, availability of substitutes, pricing and output decisions, the number of firms, the number of products, and production decisions.            

The Number of firms. From its definition, a monopoly market structure has only one firm or seller. On the other hand, an oligopoly is made up of few large companies (“Oligopoly,” n.d.). Thus, the two markets differ on the number of firms.

The degree of competition. The two markets also differ on the aspect of the degree of competition. While there is no form of competition in a monopolistic market, there is some competition in an oligopolistic market (Amadeo, 2017). Mostly, the few large firms in oligopolies compete against each other to attain greater market share and power. Often, they compete on non-price factors such as warranties, advertisements, and gift vouchers.

Number of products produced. It is worth noting that a monopoly firm always produces only one product or service (“Stigler, n.d.). Contrariwise, an oligopoly firm may produce more than one product or service to its consumers.

Nature of the commodity and the availability of substitutes. By and large, a monopoly produces a good or service that is unique and has no close substitutes. In contrast, the commodity produced by an oligopoly may either be homogeneous or slightly differentiated from those offered by rival firms. In this regard, its products may have close substitutes or perfect substitutes.

Price leadership strategies. An oligopolistic market is characterized by the adoption of price leadership strategies among firms. Essentially, one firm sets its price and the other firms in the market also adopt the price set by the dominant firm (“Oligopoly, n.d.). In contrast, there are no components of price leadership in monopolies since there is only one firm in the market. Thus, the monopoly sets its prices at the point that maximizes its profits.

Conditions and Barriers to Entry

The presence of collusion and cooperation schemes. Given the nature of oligopoly markets, the large firms collude and cooperate to set prices and output levels. Mainly, collusion is preferred to price competition, since the latter often results in price cutting strategies that erode the firms’ profits (“Oligopoly,” n.d.). Additionally, oligopolies cooperate in order to create artificial barriers that prevent the entry of new firms into the market. In turn, this keeps the level of competition in the market at minimal levels (Wu, 2013). Contrariwise, there exists no form of collusion and cooperation in monopolies since there is only one firm which acts independently.

Typically, a monopolist sets its prices at a point that maximizes its profits. For this reason, its prices are always greater than the marginal cost incurred in producing the product. It maximizes its profits at the point where marginal revenue equals marginal cost at point E*. It continues to produce at this level provided there is no threat of competition of another firm into the market. At this point, its optimal output is below potential output Q and price is above the point that would prevail in competition markets. The region PmabP represents its profits both in the long run and in the short run.

In the short run, an oligopoly maximizes its profit at the point where MC curve crosses the MR curve. However, unlike a monopolist MR curve, the oligopoly MR curve is kinked. Thus, the MC curve intersects the MR curve at the vertical section of the kinked curve. In the diagram above, its short run profit is denoted by the triangle pqrs. However, the oligopoly may also suffer losses in the event that it sets it prices below its marginal costs. As such, if the price charged by the oligopoly is lower than the cost incurred in producing the product, then losses will arise for the firm. In the figure below, the firm suffers a loss equivalent to the region efgh. At this point, the ATC is greater than the price charged for the commodity.

Over the long term, oligopolistic firms often break even. For this reason, they do not make supernormal profits or incur losses. Notably, the firm sets the price of its goods and services at the point where price equals the average total cost of producing the commodity.

It is noteworthy that oligopolies play a vital role in the Australian economy. Today, the oligopoly is the most predominant market structure in the economy. These firms contribute a significant amount to the country’s economic growth (Graham, 2016). Basically, they can be evaluated in terms of their efficiency and contribution to the general development and growth of the Australian economy. They create employment opportunities for a large number of workers in the country. Currently, oligopolies such as Woolworths and Coles are the largest employers in Australia.

Typically, both monopolies and oligopolies are allocative and productively inefficient. More specifically, monopolies restrict their output in order to maintain high prices. Thus, they produce output below the production capacity that would exist under competition markets and are thus productively inefficient. In addition, the production of non-optimal quantities results in the development of deadweight loss in the society (Stigler, 2016). Consequently, this makes monopolies allocative inefficient. In the same view, oligopolies exhibit productive and allocative inefficiencies. Mainly, this is because oligopolies always set their profit maximizing price above the marginal cost while the output is below the optimal level.

Size of the Firm and Imperfect Information

Australia’s building and construction industry is one of the most important industries in the country. Its contribution to the nation’s economic growth is vast. Currently, this sector is one of the largest industries in the country (ABS, 2012). It operates in both private and public dimensions and offers services across various sectors such as non-residential building, engineering construction, and residential building. Additionally, the industry is one of the biggest employers in Australia (ABS, 2012). According to the Australian Bureau of Statistics (2010), the industry provides over one million jobs to the country labor force directly. It also provides numerous job opportunities indirectly. Additionally, it contributes to the development of infrastructure and building sector that is imperative to the proper functioning of the other sectors of the economy. For this reason, the building and construction industry in Australia is a significant sector necessary for the development of the nation’s economy.

The building and construction industry in Australia is made up many firms. As at 2015, the country had about 330, 000 construction firms across the country (ABS, 2015). For this reason, the high number of sellers is large enough to create competitive conditions. There is also free entry and exit into the market for both the consumers and firms. Despite a large number of sellers, each firm offers a differentiated product. As such, their products are heterogeneous. Thus, firms are able to set their own prices since they have sufficient market power over the product they offer to its customers. Given that the products are slightly differentiated, they have close substitutes. For this reason, one may argue that the construction industry in Australia has a predominantly monopolistic competition market structure.

Unfortunately, regardless of the strong and vibrant nature of its construction industry, Australia is still facing a significant housing affordability problem (Feldman, 2002). This problem has become a persistent menace to the Australian society. Today, the economy is faced with a chronic shortage of affordable housing (Parliament of Australia, 2012). Mainly, this issue is brought about by the fact that the country’s population is increasing rapidly, thereby raising the demand for houses amidst an inelastic supply (Parliament of Australia, 2012). Consequently, the excess demand over the available supply of houses exerts pressure in the housing market, thereby pushing up the price of houses in the country (Irvine, 2016). In turn, this has led to the rise of house prices over and above the market equilibrium, making it expensive and unaffordable for the middle and low-income households.

According to the National Affordable Housing Summit Group, affordable housing refers to housing that is rationally adequate with regard to its location and standard and can be accessed by the poor households within the economy (Layton et al., n.d.). That is to say; houses should not be expensive to the extent that they take up a significant proportion of the income of poor households. Importantly, households should pay about 30 percent of their income as rent on the higher side. Otherwise, an amount greater than this is regarded as a cost burden to low-income families since it would take up money meant to purchase food, clothing and basic medical care.

Differences between Monopoly and Oligopoly Markets

The austerity of the housing problem in the country has prompted the Australian government to instigate various measures to reduce and eradicate the housing problem. Today, it has put in place various programs that aim at curbing the housing problem in the country by providing solutions that aim at providing means for the people of Australia to access decent homes. The programs initiated so far as follows.

Shared Home Ownership Schemes. In this scheme, the government, through the Department of Housing provides assistance to families to own their homes through shared ownership. More precisely, the government offers loans to households who can then purchase houses and share its ownership with the state. Initially, the government retains about 30 percent ownership, but individuals have the option of buying it out from the government if they raise the required amount. This way, many families have been able to afford decent housing units.

Public Housing Programs. The Australian government has also set up a public housing program to provide the low-income households with decent housing. Essentially, public housing in the country is overseen and delivered by the federal government through state departments. Through the program, the government has built houses all over the country, thus increasing the overall supply of decent dwelling units. Consequently, this works towards the goal of reducing the housing problem in the country.

First Home Savers Account. All first time home buyers who are saving towards acquiring a new home are eligible to receive government contributions to their savings account. Notably, these government contributions allow households to accumulate the required amount to buy their homes faster than if the contribution was not provided (Meen, 2016). By doing so, the government allows more families to afford decent dwelling units in the country.

Subsidies. The government also provides subsidies to households to enable them to buy houses in the country. Principally, these subsidies are in the form of grants to individuals to enable them to afford decent housing in the country. Additionally, it also provides periodical cash allowances to low-income families to support them with rent costs and mortgage deposits (“effects of a Subsidy,” n.d.). In turn, this has greatly improved access to decent and affordable housing

Apart from the policies instigated by the Australian government, there are other initiatives and programs that may help improve the housing situation in the country. Firstly, the government should initiate programs that will further enhance the purchasing capacity of the Australian household. Mainly, this can be done through the introduction of micro mortgage financing systems and avail microcredit facilities to the poor (Garrick, 2017). By and large, such programs will ensure that middle and low-income families can access credit that will allow them to purchase decent homes (Dauncey, 2016). Even so, it is imperative for these microcredit systems to provide a flexible repayment system that does not create an undue burden on the poor households.

Additionally, the government may extend subsidies to construction firms in the country. Primarily, the provision of building subsidies will allow firms to construct new dwelling units at a relatively cheaper cost. In turn, this will motivate them to increase their productivity, thus increase the supply of houses in the country (George, 2016). Besides, the provision of subsidies will ensure that construction costs are low. Subsequently, the prices charged by the developers for the houses will be relatively low (Grewal, 2016). In turn, this will make decent houses in the country more affordable for the middle and low-income families within Australia.

The Number of Firms

Typically, the availability of microcredit to households will increase their access to funding. In turn, they would be able to access money to purchase housing units in the country. Thus, this solution will increase the demand for housing units in the country. More families will be able to live under decent conditions (Welker, n.d.). On the other hand, supply-side subsidies will bring about an increase in the supply of homes in the country. In turn, this will bring down the price of houses and apartments, making them affordable to the Australian people.

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