This essay seeks to examine the key
differences between oligopolies and monopolistic competitive firms. There are
five main characteristics of market structure which each type of market
structure possesses. They are: number of buyers and sellers, type of product
sold, level of barriers to entry, price setting ability and information level.
The four main types of market structure are also assessed in six areas of
performance, which include productive, allocative and dynamic efficiency,
X-inefficiency, product variety and type of profits.
A monopolistic competitive firm is
a firm that sells a slightly differentiated product, in a market with many
buyers and sellers, with relatively low barriers to entry and exit. Barriers to
entry refers to any man-made or natural barriers which are strong enough to
prevent new rival firms from competing on an equal basis with existing firms,
and prevent these firms from entering or exiting the market. There are two main
types of barriers to entry, namely natural and artificial. Natural barriers to
entry refers to barriers which are intrinsic to the industry itself, such as
economies of scale. Artificial or man-made barriers to entry refer to laws,
legislations, patents, and other obstacles to entering or exiting an industry. Monopolistic
competitive firms are price setters, but have limited price setting ability due
to many competitors in the market selling differentiated but similar products.
Imperfect information exists in a monopolistic competitive market.
An oligopoly refers to a firm that
sells either a homogenous or differentiated product, in a market with many buyers
but relatively few sellers, each mutually interdependent on each other, with
relatively high barriers to entry and exit. Mutual interdependence means that
each of the firms in an oligopolistic market structure will take into account
each other’s pricing and non-pricing behaviour when making their strategies.
This strategic or game theoretic behaviour occurs because firm in such an
industry is not a competitor, but rather a rival to the other firms. Hence,
oligopolies can be collusive or non-collusive, where collusive means that they
act in a concerted manner and cooperate with each other, while non-collusive
means that each oligopoly operates on its own accord, taking care to
strategically consider their rivals likely behaviour. This essay focuses on
non-collusive oligopolies for collusive oligopolies often form cartels and
behave just like a monopoly. Due to the low number of firms in the market as
compared to the monopolistic competitive market, each oligopoly has a
relatively large market share, and thus has relatively high market power. This,
coupled with the relatively high barriers to entry, results in oligopolies being
a price setter with relatively high degree of price setting ability. Imperfect
information also exists in the market.
An example of monopolistic
competitive firms in the supermarket industry would be the common provision
shops selling all sorts of goods. These provision shops are mostly located at
the void decks of Housing Development Board (HDB) flats, which implies that
their barriers to entry are relatively low when compared to those supermarkets
which are located within shopping malls. Hence, there are many of such
provision shops in Singapore, compared to the number of supermarkets. These
shops also have limited price setting ability due to the presence of many other
provision shops in the island selling differentiated but similar products.
On the other hand, supermarkets such
as NTUC, Cold Storage and Sheng Siong are examples of oligopolies in the
supermarket industry. These supermarket chains are often located in places with
crowds or shopping malls, and thus have relatively high barriers to entry due
to the high rent. Hence, since an average supermarket chain has a large floor-space,
there usually only exists a few of these supermarkets in the industry,
resulting in these oligopolies having high market power and thus a high degree
of price setting ability as compared to those of the monopolistic competitive –
provision shop – firms.
Both monopolistic competitive and
oligopolistic firms are productively and allocatively inefficient. However, an
oligopoly is more allocatively inefficient than a monopolistic competitive firm
as it earns supernormal profits as opposed to normal profits in the long run. A
monopolistic competitive firm does not have the willingness nor ability to
engage in costly research and development (R&D) and be dynamically
efficient, while an oligopoly does. X-inefficiency refers to the fact that the
firm does not act energetically to curb costs. Oligopolies are mostly X-inefficient
– especially collusive oligopolies that behaves like a monopoly – as they are
able to absorb the costs through their supernormal profits, unlike monopolistic
competitive firms, which cannot afford to be X-inefficient as they only earn normal
profits. Regarding product variety, monopolistic competitive firms have a
myriad of product variety as the firms sell slightly differentiated products.
As for the oligopolistic market structure, it depends on the specific industry
the firms operate in, which dictates whether a homogenous product – such as
crude oil – or a differentiated product is produced. A case in point for
product variety would be that one could find more variety of instant noodles,
canned drinks and frozen food in a supermarket chain than in any provision
shop.
JC Economics Essays - Economics Tutor's comments: Special and very heartfelt thanks to WYWS for his kind H2 A level economics essay contribution here on this economics essay learning site. This is his first contribution and I look forward to more essay contributions in future.
This H2 economics essay is rather well-written, but has a few issues, which could be better addressed.
One, this economics response could benefit from more "on the one hand, but on the other" constructions. Language is important in an economics response, to communicate the right ideas. More contrast would have been beneficial to this economics essay's structure and sound.
Second, this economics paper could be a lot tighter and get to the point faster in some areas, but having said that, as this essay is currently written, it is still very strong. Yes, the essay could also benefit from economics diagrams - so readers and students are encouraged to think of what economics diagrams to draw and how to properly illustrate them. Having said that, this economics essay is well-crafted, detailed, and strong overall. Thank you all for learning, reading, and thinking about improvements, and cheers!
This H2 economics essay is rather well-written, but has a few issues, which could be better addressed.
One, this economics response could benefit from more "on the one hand, but on the other" constructions. Language is important in an economics response, to communicate the right ideas. More contrast would have been beneficial to this economics essay's structure and sound.
Second, this economics paper could be a lot tighter and get to the point faster in some areas, but having said that, as this essay is currently written, it is still very strong. Yes, the essay could also benefit from economics diagrams - so readers and students are encouraged to think of what economics diagrams to draw and how to properly illustrate them. Having said that, this economics essay is well-crafted, detailed, and strong overall. Thank you all for learning, reading, and thinking about improvements, and cheers!
