Discuss, with relevant examples, whether oligopoly is the most appropriate market structure that can explain the behaviour of firms in Singapore. [25]

Discuss, with relevant contextual examples, whether oligopoly is the most appropriate market structure that can explain the behaviour of firms in Singapore. [25]

Introduction - market structure, oligopolies and monopolistic competitive firms

Firms’ behaviours can be explained by the market structures they exist in, where the conditions and situations are the number of buyers and sellers in the market, the type of goods they produce be they homogeneous or differentiated, the barriers to entry that make it easy or difficult for individual firms to enter or exit the industry, and the strategic interactions between different rival firms. These conditions and situations would determine the behaviour of various types of firms in different industries in Singapore. 

In Singapore, it can be argued that the huge, large firms that dominate the economy are largely big manufacturing and service industries, and global Multi-National Corporations/ Multi National Companies (MNCs) that export products overseas. The small size of Singapore’s markets allows just a few firms to dominate and hence it would seem that prima facie oligopoly is the most appropriate structure that can explain the behaviour of firms in Singapore. 

This Economics paper therefore argues that many firms in Singapore are large companies, often exhibiting high barriers to entry and often large economies of scale, and are strategically interdependent on their rivals’ actions, and thus the oligopoly market structure is arguably the most appropriate model for explaining their behaviour. 

However, on the other hand, it can also be argued that monopolistic competition can also describe and explain the behaviour of smaller firms in Singapore, given that there are many smaller firms in Singapore.

Oligopoly can be applied to Singapore’s context

First, there are significant barriers to entry for most large firms in Singapore, which are possibly driven by economies of scale (EOS). As the pure forms of market structures, such as perfect competition and monopoly, do not adequately explain the behaviour of firms in real life, let alone Singapore firms, it has to be argued instead that oligopoly’s features go a long way to describe the behaviour of firms. For example, in the telecommunications industry, starting up requires a lot of capital, and thus this creates a major barrier to entry for most entrants because of the huge fixed, and often sunk, costs required, and thus it is no surprise that Singtel, M1, and Starhub are oligopolistic in nature. 

[Economics tutor's note: For advanced A level students or H3 students or undergraduate students who want to learn more Economics, see Oliver Williamson for more Economics materials on asset specificity. On a related note, for transaction costs: Ronald Coase might be interesting to read about too, on this topic.] 

Other barriers to entry may not be based on EOS, which is a natural kind of barrier; other barriers may be man-made artificial barriers such as laws and regulations, such as those regulating SMRT and SBS – hence, the high barriers to entry that are characteristic of oligopolies are present in many large Singapore firms.

Secondly, oligopolistic markets are also characterised by non-price competition, using aggressive branding to differentiate their goods, with firms being mutually interdependent, which results in their need to monitor their rivals’ actions and devise counter-responses. Strategic interaction, which means responding to rivals’ actions by devising counter-responses, is a particular characteristic of oligopoly not found in other market structures. 

There are many good examples to illustrate this feature. Take the example of the market for Singapore breakfast toast and coffee; the market in Singapore has major firms selling toast, coffee, and tea, alongside a variety of Singaporean foods. These products are differentiated because the meals are tweaked to match unique styles and there are a few other cafes selling similar yet differentiated goods. The market is largely a mix of firms competing with barriers to entry in terms of the cost of branding. There is price leadership in this particular market, with prices of drinks set similarly, and with smaller cafes usually taking their cues for pricing from the bigger chain cafes mentioned.

In major markets such as banking, supermarkets, and telecommunications, non-price competition is easy to spot from differentiated services offered; often a new service or promotion becomes widespread after it is first started by a dominant player in the market, demonstrating once again that the firms are strategically interdependent. Oligopolies have strategic, game-theoretic interactions because they face rivals and not competitors. Because of Singapore’s small market size, most of these markets are dominated by just a few major players, and as such they have to take into account their rivals’ actions. 

In banking, for example, there are the giant firms DBS and UOB, while the Singapore telecommunications industry also features a few giants, Singtel, Starhub, and M1. Whenever DBS comes up with a new form of priviledged banking, UOB must come up with some similar programme too. Singtel, Starhub, and M1 often have advertising campaigns and fund major events such as Formula One (F1), and offer exciting promotions to attract customers to their cable channels.

Monopolistic competition can be applied to Singapore’s context

On the other hand, monopolistic competition can also explain many of the other types of firms in the Singapore economy. Many small firms in Singapore operate in a monopolistic competitive market, characterised by many buyers and sellers, rather differentiated products, and generally low barriers to entry. For instance, hawker fare in hawker centers, restaurants offering Chinese food, and neighbourhood convenience stores (the famous "mama shops") are good examples; namely the point is that firms that are small, with limited market power, and which provide slightly differentiated goods and services are monopolistic competitive. Each has limited pricing power because there are many of them sharing the same market, and barriers to entry are low, thus ensuring these firms earn normal economic profit in the long run, because the presence of supernormal profit would entice others into the market and compete away the profits due to the low barriers to entry. Hence, the monopolistic competition model thus goes a long way in explaining the many different small shops in Singapore’s economy.

Conclusions

While there are many market structures, such as perfect competition, monopolistic competition, oligopoly, and monopoly, primarily monopolistic competition and oligopoly are relevant, given Singapore’s context. Perfect competition and monopoly in their pure forms often cannot be seen in the real world due to their ideal nature. In conclusion, the oligopoly model is one of the most appropriate models that could explain the behaviour of large firms in Singapore, as huge firms dominate major sectors in Singapore's small and open economy. Yet, clearly the smaller firms in Singapore can be explained using the monopolistic competitive market structure. Perhaps it takes more than one market structure to adequately characterise firms’ behaviour in any economy, and not just Singapore’s. However, given that Singapore is a small economy, and most major firms located in Singapore are large, so as to reap massive EOS, even with the presence of many firms engaged in monopolistic competition, oligopoly still seems to be the model most appropriate in describing the behaviours of firms in Singapore. 

JC Economics Essays: Tutor's Comments - This Economics essay on market structure, about oligopoly and monopolistic competition, is rather well argued, interesting, and relevant. The Economics materials presented are based on real life examples from the relevant context, and the English language is fluent and clear. The student presents material that is clear, easy to read, and in a logical, coherent fashion that would impress tutors. The conclusion is evaluative and a judgement is properly made. Overall, it is definitely possible to succeed in writing good Economics essays if students learn how to write such essays under examination conditions, and exhibit these good attributes. However, of course it has to be said that the proper Economics diagrams and the relevant explanations of both oligopolies and monopolistic competitive firms are required for the best grades. Also, at some junctures, this Economics essay seems a bit repetitive, redundant, tautological, and perhaps even convoluted, but overall this issue seems more of a language or writing issue rather than problems with Economics knowledge and content. Do reflect on it and think through the comments; thanks for reading!

Since large firms enjoy EOS, they are therefore more efficient and should be welcomed by society. Do you agree? [25]

Since large firms enjoy EOS, they are therefore more efficient and should be welcomed by society. Do you agree? [25]

Economies of scale (EOS) refers to the cost savings derived from large scale production of the firm. EOS can be generated internally or externally. If the average costs decrease due to the increase in the scale of production of the firm itself, we say that the firm experiences internal EOS. EOS allows efficiency to be achieved. To be economically efficient a firm has to achieve productive and allocative efficiency. Productive efficiency refers to the least cost method of production. Allocative efficiency on the other hand, occurs when the right amount of the right kind of goods are being produced. This occurs when the marginal social benefit is equal to the marginal social cost, society welfare is thus maximized. On top of that, Pareto efficiency also has to be achieved. Pareto efficiency is when it is no longer possible to change the allocation of resources such that it makes at least one individual better off without making any other individual worse off.

Large firms are firms usually classified as oligopolistic or monopolistic firms. An oligopolistic market occurs where the industry is dominated by a few large firms which control a large proportion of the industry’s output. These firms have a large share of market power. Similarly, in a monopolistic market, there is market dominance because a single firm controls the whole supply of a product which has no close substitutes. As a result of the large market share, profits gained from production will allow these large firms to achieve efficiency through EOS. As long as these EOS can be filtered down to consumers in terms of lower prices and higher output, I agree that because large firms enjoy EOS, they are therefore more efficient and should be welcomed by society.

A firm enjoys internal economies of scale if its average cost of production falls as its scale of production increases. This is represented by a movement along the downward sloping portion of the Long Run Average Cost (LRAC) curve. Average cost refers to cost per unit of output. This is illustrated in the figure below.

Insert Economics diagram - thinking question: what will this economics diagram look like?

A large firm can enjoy internal economies of scale through marketing economies. This occurs when a firm gets bigger and it buys inputs such as raw materials in bulk. Suppliers of these inputs, in their eagerness to secure the firm’s orders, will often offer a discount on its purchase. This lowers the firm’s unit cost of production. A firm can also enjoy marketing economies when it enjoys the ability to spread its advertising costs. Since a bigger firm produces more output, its total advertising cost is spread over a large output, thus unit cost is reduced. Such large firms can also enjoy EOS through financial economies whereby larger firms may be able to obtain financial loans at lower interest rates due to more credit worthiness. It can also raise funds in the capital market by issuing shares to member of the public. Moreover when a firm expands, it is also able to hire professionals to specialize in different areas of work. Different departments can be set up, each led by an expert in the field. With these expertises, a firm’s output can be increased, thus lowering its unit cost of production. This may not be worthwhile or economical for a smaller firm. This is known as managerial economies of scale. As such EOS allows for large firms to be more efficient as they get to reduce costs of production, achieve a minimum efficient scale (MES) and be more productively efficient. This will eventually result in costs savings passed on to consumers in the form of lower prices for the goods and services provided.

However, in the case of a natural monopoly, society has no choice but to welcome it into the market. A natural monopoly occurs when a tremendous amount of capital is required to produce a product or service. This leads to very large economies of scale and the firm’s MES occurs at a very high level of output, such that there will only be one firm in the market. This huge capital requirement means that total fixed costs make up a very large part of the total cost. Such examples of a natural monopoly would include producers for utilities such as gas, water and telecommunications. In the case of Singapore, the telecommunication lines are monopolized by Singtel. Although a natural monopoly is allocatively inefficient in P=MC pricing, where the cost of the good is equal to the marginal cost of producing a good, it is definitely more efficient than trying to duplicate the number of firm through liberalization. This is because the new entrant will eventually collapse to form a monopoly again because the duplicity of firms would cause the new entrant to incur large losses. As such, society would still accept such natural monopolists in the industry. This can be depicted by the existence of Singtel.

However, society should not welcome such large firms because there are disadvantages of EOS when it is being reaped beyond MES. These are internal diseconomies of scale (disEOS). Internal diseconomies of scale are the cost disadvantages a firm experiences as it increases its scale of production. When a firm becomes too large, its average cost of production rises as its scale of production increases. This is represented by a movement along the upward sloping portion of the LRAC curve. Internal disEOS are largely managerial inefficiencies. This can arise from the increase in complexity in management and greater difficulty in co-ordination in a large organization. A firm grows so large that it becomes more cumbersome to manage. It becomes more bureaucratic and decision-can also making process slows down. Work efficiency can be reduced by excessive paper work which results in low productivity and higher unit cost. Management problems of co-ordination may also appear as the organisation of the firm becomes too big. It becomes increasingly more difficult for top management to co-ordinate and monitor all operations, thus inefficiency may creep in. This increases unit cost.

Insert diagram - how will this economics diagram look like? Remember now that it is about disEOS rather than EOS.

Society should also not welcome such large firms because these firms tend to be monopolies. Monopolists experiences static inefficiency, or a lack of dynamic efficiency. Static efficiency is attained when there are both productive and allocative efficiency. The monopolist is productive efficient as long as it maximises profits. However, a profit maximising monopolist produces output up to the level where P>MC. Since consumers value the last unit of the good more than it costs to produce, the good is underproduced and increasing the output can increase the welfare of the consumers. The underproduction of the good has led to the loss in welfare for the society. This can be illustrated in the diagram below.

Insert economics diagram. Apply usual thinking!

As such, under similar cost conditions, the output produced by a single monopolist is lower and the price charged higher than the perfectly competitive industry. The perfectly competitive industry will produce where demand equals to supply, at output Qpc, and charge a price Ppc. However, the monopolist would produce at Qm, and charge a price equal to Pm.

Moreover, society should not accept large firms because there will be an unequal income distribution. This is because the monopolist can earn supernormal profits even in the long run due to barriers to entry. If a monopolist makes supernormal profits, these profits will go to shareholders who may be mainly upper income earners, This may worsen the income distribution in the economy. The existence of supernormal profit suggests that producers receive greater income than is needed to induce them to undertake their operations. The lack of competition enables them to receive higher profits than is economically justified. Thus income is more unequal than it needs to be.

In conclusion, large firms who enjoy EOS are accepted in the economy but too much of it will be non-beneficial for the industry. Hence, to ensure that society benefits equally, government intervention is needed where policies such as AC-pricing and taxation of profits are carried out.

JC ECONOMICS ESSAYS: Tutor's Comments: A very good attempt! Covers the majority of the points needed to tackle this exam question. This model Economics essay was written under "A" level Economics examination conditions. Economics tutor's suggested grade: 20/25. How would you improve this essay, and how would you approach the task of crafting a well argued, nuanced, balanced, and evaluative Economics answer? Perhaps the evaluation in the conclusion could be better, more argumentative, and more justified with relevant examples. Thanks for reading and cheers. Stay here for more Economics essays and materials.