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Features of Market Structure

Questions:

1. Suppose there are two monopolies. One monopoly supplies water and the other monopoly provide landline phone connections. Which company is likely to have greater market power and why? Explain using the concept of elasticity.

2. Identify and justify the market structure of KFC, MacDonald’s and Hungry Jack. Explain using diagrams.

3. Critically discuss the level of competition faced by Charles Darwin University in Darwin vs the campus in Sydney. Explain using diagrams.

4. Suppose fire emergency services are only provided by the government in Australia and there is no market for fire emergency services. Now assume that fire emergency services are not provided by the government anymore and are privatised. Show the demand and supply diagram of fire emergency after privatisation. Explain the price elasticity of demand for fire emergency services. Show with the aid of a diagram and explain your answer.

5. Identify the main models of competition learnt in this unit. Give a brief description of each model in no more than 100 words. Discuss the most realistic models of competition in Australia with examples.

6. How will student enrolments be impacted at CDU if the pass mark at CDU was increased from 50% to 60% for all tertiary students? Explain using demand and supply diagram.

7. Explain the slope of marginal cost curve. How is marginal cost linked to opportunity cost? Why is concept of marginal cost important in economics? What is the marginal cost of adding an additional household on to the NBN network?

8. How best do you explain the success of supermarkets using the concepts learnt in this unit?

The purpose of this report is to analyze on the different market structure of various companies. Market structure refers to the organizational features of a particular market. It focuses on those characteristics that influence the competition nature and pricing. The vital features of the market structure includes- the number of entities, the share of market of largest entities, the cost nature, product differentiation, customers turnover and the purchasers structure in the industry. The competition that each entity faces in the market has been segregated into various models. However, these models of competition have been explained in this study. In addition, slope of marginal cost and linkage of marginal cost to opportunity cost is also highlighted in this report.

A monopoly is the type of market structure that is characterized by one seller selling unique commodity in the competitive market (Kirzner 2015). However, no competition exists in this type of market and the retailer is the sole manufacturer of commodities with no substitutes. In this case, there are two types of monopolies- one that supplies water and another that provides landline phone connections. These two types of monopolies are also referred to as natural monopoly. Natural monopoly exists in that market situation where single firm supplies particular commodities at lower cost that might be attained by other rivalries. This competition is uneconomical as multiple manufacturers are unable to utilize scale economics and this outcome in higher prices.

Different Types of Market Structures

Water is considered as necessity good for the householders as it has no alternatives. If the water firm in this monopoly market increases water bills cost, the consumers would keep purchasing the service. Therefore, tap water is considered as inelastic good as demand for the service remains the same despite rise or drop in price of water bills. On the contrary, landline phones are considered as substitute product. Therefore, increase in price of landline phone by the monopolist leads to decline in demand for the product. Hence, it is deemed as elastic product as it has other alternatives. Thus, it can be noted that water company has higher market power than landline phones company.

KFC, Mac Donald and Hungry Jack fall under the monopolistic market structure. In monopolistically competitive market, large number of producers sells commodities that are slightly differentiated from each other and thus are not close substitutes in respect of quality and brand.  Moreover, in monopolistic market structure, each firm faces no barriers in the entering and exiting the industry (Rios et al. 2013). These companies cannot limit their total production because there are huge number of competitors in the industries of the fast food chain. As a result, collusion does not exist in the market. Although these companies manufacture their own commodities, they compete in terms of product price.   These firms are considered as monopolistic as they sets their price based on production cost and have no perfect substitute for their meals. However, these entities focus on rivalries and target markets in setting their product prices.  These companies face few hurdles in terms of economies of scale.  Owing to this, they increase their production scale and this leads to decline in cost of goods per output unit. In addition, advancement of technology also helps the firms in producing foods faster and sell at less cost. This is illustrated with the help of the diagram below:

Figure 1: Market structure of KFC, Mc Donald and Hungary Jack

Source: (Authors creation)

Both the Charles Darwin University in Darwin and the campus existing in Sydney faces huge level of competition. In an attempt to attract large number of students from these two places, this university competes vigorously with other universities within the country or from other countries.  As their focus is to endeavor into international marketplace, they face high levels of competition. Moreover, as this university has been exposed to competition pressures, it compels the university to improve their educations methods and systems. This university implemented new technology in Sydney campus in which the students can have access to it and this helps them to face huge competition. tis university can be considered as entities in monopolistically competitive market that provides similar service that is education but is not similar. In fact, the education considered as product differs in terms of location, services extent, image and its quality. This can be explained with the help of the diagram given below:

Monopolies

Figure 2: University offering enrollment at which MC=MR

Source: (Created by Author)

Another vital consequence of this model is the significance of the advertising expenditures of this university. The MR of the dollar of advertising becomes equivalent to the price elasticity of demand. Charles Darwin University adopts various forms of advertising methods that includes construction of new building and campuses simply increase marginal revenue (Reisman 2013).  With the differentiation of offering higher education in this two campuses, this institution demand curve becomes downward sloping. For maximizing profit, this institution offers enrollment at that level where MR=MC shown in the figure above.

Emergency services of Australia such as fire emergency are vital for people’s health and protection of the society and are used to be funded by the Australia government. Now the government does not provide fire emergency services and hence is privatized. As a result, it improved the efficiency and increases competition in the market. On the contrary, privatization creates natural monopoly that seeks in setting higher prices that exploits people. After being privatized, the fire emergency firm increases their cost of service in order to attain higher profitability. This is illustrated by using demand and supply analysis:

Figure 3: Demand and supply of fire emergency services

Source: (As created by author)

The above figure reflects that as the demand for the fire emergency services in Australia increases, the company charges higher price after being privatized. Therefore, this improves the financial performance of the firm as they benefit in attaining higher profit. Moreover, the supply of the services also increases after privatization, so the price declines to the equilibrium point.  In addition, if the supply increases and demand does not increase for the emergency services, then it cost of this service will decline from the equilibrium price.

Different entities or industry within the nation faces competition that is generally segregated into various models depending on the degree of competition faced by these entities. It includes- pure competition, monopoly, oligopoly and monopolistic competition. These models of competition are illustrated below:

Pure competition- This market scenario involves huge number of purchasers and sellers of similar products, but none of them influences the product price. Few conditions that characterizes pure competition are:

  • Though there are huge number of consumers and producers, they donot have control over their commodity price
  • As both the purchasers and retailers deals with homogeneous products, consumers do not prefer merchandise of one retailer over the other as there is no quality or brand value disparity.
  • As the firms are free in entering and exiting the pure competitive market, the manufacturer strategizes in keeping prices competitive for gaining competitive advantage.

Monopolistic competition-Since pure competition do not always prevail in the market, producers operate under different competition model that is monopolistic competition. The basic difference between monopolistic and pure competitor is that the former employs product differentiation for establishing comparison between its own commodity and other rivalries commodity.

Monopolistic Competition

Oligopolistic competition- In this competition model, there are few retailers dominate in the industry and have the capability in influencing the commodity prices (Nagurney & Yu 2012). As there are few entities in the competitive market, other companies follow the action taken by one firm. In certain circumstances, firms interdependent behavior outcomes in formal agreement in setting prices which is called as collusion. Therefore, if one entity lowers the product price, other entities follows the same.

Monopoly competition- In this case, competition does not exist in the market because there is one retailer that produces specific product that does not have any close substitute.   

Monopoly and oligopoly competition models prevail in various sectors of the Australian economy. Oligopoly as well as natural monopoly models of competition prevails in service, telecommunication, electricity and gas sectors (Marshall 2012). The telecommunication sector of Australia has been more competitive in current period with high improvement in retail level. It has been stated by (Taussig 2013) that worldwide change in technology of telecommunication industry increases the productivity of nation. Subsequently, Telstra dominates the market with at least two third of the industry listed capitalization in the market. Therefore, Telstra’s market power continues in sector though recent entrants constructing partial networks.  On the contrary, oligopoly competition prevails in Australia’s airline domestic industry owing to volatility linked to the changes of players.

If the pass mark at CDU increases from 50% to 60% for all the tertiary students then enrollment of students in the university decreases. One of the vital factors that affect the performance of the university is the academic performance of the students. From the recent study, it has been reflected that near about 42% of tertiary students enrolled in other university did not complete their education as they fail in their courses (Hausman et al. 2016). Therefore, it can be predicted that the less proportion of students will enroll in this university due to increase in pass mark percentage. It has been noted from the completion data of CDU student released by Australian government that the dropout rate of CDU has been worsening with near about one third of the students wrapping up their education after few years of enrollment. As a result, the ranking of CDU lowered owing to decrease in completion rates of students in the university. As a result, the demand for this degree courses provided by this university decreases because of growing rate of dropping out of students (Hart 2013). Moreover, the supply of education in CDU also lowers due to lower rate of enrollment of students. This has been illustrated by the diagram given below:

Oligopolies

Figure 4: Enrollment of students affecting demand and supply of education offered by CDU

Source: (As created by author)

  1. a) The marginal cost (MC) of production refers to the total cost change that comes from manufacturing one extra unit of item. Marginal cost is generally analyzed for determining the point at which the companies achieve economies of scale (Kanemoto 2013). The slope of MC curve highlights law of diminishing marginal returns to scale. The U- shaped MC curve as the first portion reflects increasing marginal returns to scale due to fall in MC to minimum point and then diminishing returns to scale owing to rise in MC.

Figure 5: Slope of MC curve

Source: (Authors creation)

Opportunity cost relates to alternative cost of the activities that is computed in terms of next alternative value that is foregone. Opportunity cost as well as marginal cost is vital in those industries where the commodities are being manufactured. Although marginal cost and opportunity cost are not directly linked to each other, they plays a crucial role in business in deciding rise in total production in highly profitable way (Hart 2013). However, the MC also relates with the opportunity cost that is connected with manufacturing extra unit of commodity. Moreover, MC and opportunity cost analyzes the impact of manufacturing added element of product on the business cost.

  1. b) Marginal cost is vital in economics as it facilitates the managers of the firms in deciding whether the production cost stays in line with the total profit gained from the overall production. The business cost varies according to the total production. The managers of the entities should comprehend MC so that they have the ability in producing commodities at optimum level while mitigating cost of production.
  2. c) The government of Australia sets up NBN (National Broadband Network) in the year 2009 for increasing the connection and broadband speed to each households as well as business of the nation (Mankiw 2014). During that period, NBN is the biggest investment in the public sector as it has been used for replacing existing network in the telecommunication sector. However, it also delivered economic benefits to the nation by enhancing competition for the small business. In addition, it generated new business markets and offered huge job opportunity for Australians. As NBN is a huge business in Australia, marginal cost becomes negligible of adding an additional household in the network.

The financial performance and success of supermarkets depends on the competition models, marginal cost, economies of scale, market structures and various other factors. The demand for the products of supermarkets depends on services of product distribution at substantive and methodological level. The supermarkets demonstrate constant MC in respect of total output while decreasing MC in respect of substantial economies of scale. In addition, supermarkets adopt new technology owing to rise in level of competition in the industry.

Conclusion

From the above report, it has been concluded that level of competition varies according to the different market structure. However, producers plans their pricing strategy based on the target market and competition level.  Even privatization also increases the competition level of the firms that leads to rise in price of services and products. Moreover, marginal cost, economies of scale and competition models is important for success of every organizations.

References

Baldwin, W & Scott, J (ed.) 2013, Market structure and technological change, Vol. 18, Taylor & Francis.

Frank, R.H, Bernanke, B.S. & LUI, HK, 2015, Principles of economics, 8th edn., McGraw-Hill Asia.

Hart, N, 2013, Alfred Marshall and Modern Economics: Equilibrium Theory and Evolutionary Economics, Springer.

Hausman, D, McPherson, M  & Satz, D, 2016, Economic analysis, moral philosophy, and public policy, 9thedn., Cambridge University Press.

Kanemoto, Y., 2013, ‘Second-best cost–benefit analysis in monopolistic competition models of urban agglomeration’, Journal of urban economics, vol. 76, pp.83-92.

Kirzner, I.M., 2015, Competition and entrepreneurship, University of Chicago press.

Mankiw, N.G, 2014, Essentials of economics, Cengage learning.

Marshall, A, 2012, Principles of economics: unabridged eighth edition, Cosimo, Inc..

Nagurney, A. & Yu, M., 2012, ‘Sustainable fashion supply chain management under oligopolistic competition and brand differentiation’, International Journal of Production Economics, vol.135(2), pp.532-540.

Reisman, D, 2013, The Economics of Alfred Marshall (Routledge Revivals), Routledge.

Rios, M.C, McConnell, C.R, & Brue, S.L., 2013, Economics: Principles, problems, and policies, McGraw-Hill.

Taussig, F.W (ed.) 2013, Principles of economics, Vol. 2, Cosimo, Inc.

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