Consider different retailers in Singapore & discuss which of these two market structures best explains their market behaviour. [15]

This economics question has been adapted and answered in several posts already on JC Economics Essays. This economics essay response by WY is another attempt at responding to this A level / H2 economics question. Special thanks to WY for his contribution, and to SS for his editing and vetting of this response. 

This paper examines the conduct of monopolistic competitive and oligopolistic market structures, to determine which model best depicts the clothing and supermarket industries in Singapore. Retailers are defined as firms which do not manufacture the goods which they sell, but rather only sell goods produced by manufacturers, a criteria met by clothing retailers and supermarkets. In this essay, clothing retailers are taken to be monopolistic competitive because there are many of them in the market, selling slightly differentiated clothes, with low barriers to entry leading to low market power; on the other hand, supermarkets can be taken to be oligopolistic in nature because there are a few large firms in the Singapore market, which tend to be rivals to each other, and with relatively high barriers to entry. Yet, deeper analysis shows that some large, mostly foreign, clothing retailers in Singapore arguably may fall into the oligopolistic category. In general, these two types of retail industries can be examined in terms of their price and non-price behaviour, as monopolistic competitive firms and oligopolies tend to have different market behaviours.

First and foremost, we explain some theory before examining the issue in detail. With regards to price competition, firms are assumed to produce where Marginal Cost (MC) = Marginal Revenue (MR), the profit-maximising or loss-minimising level. Most firms from various market structure will profit-maximise, and this is true of firms in perfect competition, monopolistic competition, oligopoly and monopoly as well.

What Economics Diagram Should Be Drawn Here?

According to the diagram, a monopolistic competitive firm produces at the profit maximising point where MC=MR, at price P and output level Q. In the short run, a monopolistic competitive firm could earn supernormal profit, as long as the average cost (AC) curve is below P. However, in the long run, because of the relatively low barriers to entry and exit of the market, the supernormal profits of the short run would be competed away due to many competitors entering the market. Therefore, in the long run, a monopolistic competitive market earns normal profit.

Oligopolies can be collusive or non-collusive, where collusive means that they act in a concerted manner and co-operate with each other, while non-collusive means that each oligopoly will operate on its own accord, taking care to strategically consider their rival’s likely behaviour. Non-collusive oligopolies would be the main focus of this essay as collusive oligopolies would often form cartels and behave like a monopoly.

What Economics Diagram Should Be Drawn Here?

Similar to a monopolistic competitive firm, non-collusive oligopolies produce at the profit-maximising point, MC=MR as well, at price P and output level Q. Taking into account their rival’s behaviours, non-collusive oligopolies would not raise their prices as their rivals would simply benefit from such actions. On the other hand, they would not lower their prices for a price war would result, as their rivals would have little choice but to follow suit. According to the kinked demand curve model, due to strategic behaviour and mutual interdependence, there would be a situation of sticky prices at price P, where oligopolies do not have any incentives to raise nor lower their prices. The only way in which a price war is sustainable is if the MC curve fell for a firm, due to innovation and dynamic efficiency. In that way, an oligopoly could lower its prices and trigger a price war with the other firms, and if its rivals are unable to match its lower marginal costs, it would win in the long run. Therefore, due to high barriers to entry and market power of the firms, oligopolies earn supernormal profits in the long run.

Since both monopolistic competitive and non-collusive oligopolies produce at the profit maximising point where MC=MR, they do not differ in their conduct for price competition. Hence it is imperative that we focus on the different non-price competition strategies each model employs, in order to compare the market behaviours of firms in the supermarket and clothing industry. Non-price competition is a strategy where a firm tries to distinguish its product or service form others, on the basis of attributes such as design and workmanship. Non-price competition typically involves promotional expenditure such as advertising, sales staff, sales promotion, coupons, free gifts, marketing, new product development and brand management costs. Although any company can use a non-price competition strategy, it is most common amongst monopolistic competition and oligopolies. Product differences can be based on real or imaginary differences. Real differences mean that the product is actually different in terms of its design, composition of materials and substance. Imaginary difference on the other hand, implies that the product is perceived to be different due to persuasive advertising, branding, and marketing differences, which cause a psychological difference in the minds of consumers. Advertising can be either informative or persuasive in nature. Informative advertising informs consumers about the characteristics of the product, while persuasive advertising aims to create brand awareness and loyalty by creating a certain image of the product of the type of consumers the product is targeted at, thus differentiating the product. Oligopolistic firms usually implement persuasive advertising, and tend to engage in costly forms of advertising such as celebrity endorsements, placing large and prominent advertisement on billboards, newspapers, popular magazines and websites, as well as advertising frequency on television. This is because they have very large output to spread out such high advertising costs, and thus are able to reap economies of scale, unlike monopolistic competitive firms, which have considerably lower levels of output. A case in point for oligopolies would be supermarket chains such as Giant and NTUC which place large advertisement on newspapers.

However, on the contrary, despite monopolistic competitive firms earning normal profits in the long run, there still exist some forms of non-price competition. The types of non-price competition employed by these firms tend to be relatively unostentatious as compared to those of oligopolies. To illustrate, let us consider the non-price competition used by monopolistic competitive firms in the clothing industry. Examples of these firms include Zara, Topshop, Charles & Keith, Giordano and Marks & Spencer to name a few. Such firms market themselves by providing unique plastic bags with their company logo printed on it to consumers who have purchased their products. Loyalty and membership cards are also employed, which allows for the accumulation of points whenever the consumer purchases a product from the same brand, and these points can be used for discounts or the redemption of items. The hiring of blogshop models and the use of advertorials and features are also included in their arsenal of non-price competition strategies. In the case of monopolistic competitive firms in the supermarket industry, supermarkets such as ValueDollar employ bundling as one of their non-price competition strategies. In these shops, labels which depicting lower prices being charged if multiple identical items are bought, are placed on almost all sales items, thereby encouraging consumers to purchase more.

Even though oligopolies also employ the types of non-price competition strategies used by monopolistic competitive firms, they also subscribe to other grander and more costly non-price competition strategies. Examples of oligopolies in the clothing industry include Gucci, Louis Vuitton, Prada, Marc Jacobs, and other foreign branded retailers in Singapore. These oligopolies are producers of luxury apparel, and often advertise prominently on local newspapers – especially placing advertisements on the front page or advertisements that span full pages, which are expensive to fund. Celebrity endorsements are also used by these oligopolies to market and appeal to the upper class. Louis Vuitton for instance, employs celebrities such as Madonna, Scarlett Johansson and Angelina Jolie. Sheng Siong, an oligopoly supermarket chain in Singapore, has collaborated with Medicorp – a local television broadcaster – to host “The Sheng Siong Show”. This show showcases the various products available on sale in their supermarkets, along with lucky draws and various contests which patrons of their stores were invited to join.

In conclusion, none of these two market structures can best explain the market behaviours of the diverse retailers present in Singapore. This is because the real world is very complicated and theory’s ceteris paribus does not hold, therefore it is challenging to categorise these firms only using two theoretical models. However, in Singapore’s context, since most of its industries are dominated by oligopolies – large multinational corporations, for instance – it can be concluded that the oligopolistic market structure best explains the market behaviours of the myriad retailers present in Singapore.

JC Economics Essays – This is an adapted response to a H2 / A level economics essay. This economics essay was contributed by SS and WY. WY is a good economics student who has made great strides in economics, by working hard at his A level economics. Special thanks also to SS for the extensive editing of this economics essay. This economics paper was not written under examination conditions, but what can you still learn from it? What are this paper's strengths, and what are its weaknesses? Always think of how you can learn from the economics essays here on this site. 

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