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Consider Singapore retailers and discuss if oligopoly or monopolistic competition best explains these retailers’ market behaviour. (rephrased adapted question)

- Adapted from an actual A level Economics examination question

Introduction

Does oligopoly or monopolistic competition better explain the market behaviour of Singapore retail firms? First, a few definitions are in order.

What are retailers? First, retailers are firms that do not produce their goods that are sold, but only sell goods which are actually manufactured by manufacturers or producers.

What is an oligopoly? Second, oligopoly is a market structure characterised by many buyers but few sellers, each of the sellers interacting strategically against their rivals, which are the other firms competing in the oligopolistic industry, and there are high barriers to entry, usually caused by high economies of scale. Economies of scale refer to the situation where LRAC (Long Run Average Costs) fall as scale increases, when output increases.

What is monopolistic competition? Third, monopolistic competition is a market structure where there are many buyers and sellers, few barriers to entry, and slightly differentiated products that are quite different from other competitors, but psychologically or physically different. For example, NTUC and Giant hypermarket are examples of oligopoly, because of their market share and situation of rivalry and strategic behaviour, while clothing retail shops such as Charles and Keith are examples of monopolistic competition, because of their many buyers and sellers and slightly differentiated products of fashionable accessories and clothing items.

Pricing and Output, Strategic Behaviour?

Also, price stability, furthermore, could be due to collusion, which means that oligopolies tend to gang up or collude against the public interest by raising prices together, whether through explicit or implicit means.

On the other hand, there is no price stability in monopolistic competition because according to the economic model of monopolistic competition they operate using the profit maximising rule only to make their pricing decisions, where marginal cost equals to marginal revenue (MC=MR), which differs from firm to firm due to their changing marginal costs and marginal revenues.

Non-price Competition - Oligopoly and Monopolistic Competition?

Secondly, oligopolies tend to prefer non-price competition like advertising, freebies and lucky draws, whereas monopolistic competitive firms are more likely to compete based on prices (and output). Due to their large scale, with massive internal EOS, running down along their LRAC, oligopolies are able to use huge, large scale, media-based, newspapers and multimedia advertising, where for example supermarkets like Giant or NTUC often advertise in newspapers. On special occasions, they also have products sold at lower prices or at special discounted, special occasion based prices. These oligopolies also have loyalty programmes, freebies, and even sometimes lucky draws with attractive prizes that make people want to go there, which demonstrates that non-price competition and advertising are important for oligopolies. Non-price competition is of course competitive behaviour unrelated to pricing or output decisions, and is distinct from competing based on MC = MR, the profit maximising rule.

First, monopolistic competitive firms can make independent decisions on pricing and output, whereas oligopolies are mutually interdependent because they are rivals rather than competitors. There is price stickiness in oligopoly, shown by the oligopoly kinked demand curve model, which shows there is no incentive for firms to raise or lower prices as long as their rivals do not do so. This is because raising price leads to losses in revenue along the inelastic part of the demand curve, and lowering price leads to a price war because the other rivals will join in the fray metaphorically.

Also, it should be argued that there is product differentiation for monopolistic competition, because different clothing retail shops have different clothing designs, for instance, Charles and Keith clothing shops specialise in women’s clothing and special types of clothes we love to buy. These monopolistic competitive clothing shops typically engage in price competition which implies that they do and will lower their prices all round if they are able to bring their marginal costs down, for instance by having better and cheaper supply chain management. It finally can be strongly argued that monopolistic competitive firms are more open to price competition in contrast to oligopolies. While monopolistic competitive firms also advertise, they tend to rely on low cost methods such as handing out flyers or using free newspapers rather than broadsheet newspapers and these advertising methods are certainly not their main strategy unlike oligopolies.

JC Economics Essays: Economics Tutor's Comments - This Economics essay is quite interesting and reasonably answers the question set, and certainly could be done reasonably well by many students during the examination timing and under stressful conditions. The student clearly knows his Economics materials, and his Economics tutors have certainly done a lot of good work, and he can also be proud of the Economics content that he has learnt!

However, it does not have a conclusion and seems quite rambling at certain points. It also seems rather dis-organised. In fact, this economics essay could actually have fared so much better if it did have an evaluative conclusion that made a justification on an evaluation made. Also, the essay is a bit short, and lacks well-labelled Economics diagrams (this one is a unique essay because normally I don't include the diagrams drawn in the essays presented, but this one does not actually have any essays drawn, although the student SHOULD, dare I say MUST, have at least one diagram, and in this case two diagrams. Think: what diagrams? See the text.) The student could also have told us what he was going to tell us before telling us what he was going to tell us.

Yet, there are of course good points that we can learn from it. Question is: what are the other good points that you could learn from this essay, other than the criticisms and the comments written here? Thanks for reading and cheers. 

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