In economic theory, a monopolist would determine the price and output that would maximise his profits. Discuss whether firms in the real world would always set prices at profit-maximising levels. [25]

This essay argues that, while according to economic theory, a rational monopolist would set MC = MR to maximise his profits, in the real world, firms sometimes do not want to maximise their profits because they sometimes have alternative aims like revenue maximisation, or are often unable to because of imperfect information and bounded rationality and depend on "rules of thumb" like cost-plus pricing.

On the one hand, a monopolist would rationally seek to maximise profits, using the MC = MR rule, or the profit maximisation rule (also known as the marginalist way or principle). A monopoly is defined as one dominant firm that produces a unique good with no close substitutes, for instance, De Beers in terms of diamonds or Microsoft in terms of the software that it produces. The market structure that a monopolist faces generally has very high barriers to entry, either in terms of natural barriers to entry like large economies of scale, or man-made barriers to entry like powerful legislation and patent rights, price setting power due to the large market share commanded by the monopolist, and often imperfect information exists in the market, just like it does in software and high capital-intensive technologies.

On the other hand, in the real world, firms often do not want to maximise profits. They may want to maximise their growth or revenue instead of profits. 

To maximise their growth and expansion, they could produce where AR = 0, which would maximise output, so as to extend their lead in the market and would thus promote the growth of their firm. 

To maximise revenue, firms could easily produce where MR = 0. This economic theory is particularly interesting. According to the famous economist William Baumol, if the aim of a firm is to maximise its sales instead of profits, one possibility is that it would produce where MR = 0. This is due to the issue of the division between ownership and control of a firm. With the separation of ownership and control in modern corporations, the issue is that managers of a firm, like the Chief Executive Officer or Managing Director, may seek prestige and higher salaries by trying to expand sales even if it were at the expense of profits, which would be shareholders’ interests. According to Baumol and Williamson, managers may seek to maximise their own utility rather than profit-maximise, which would benefit the firm. And according to Bearle and Means, the ownership of companies is spread out over a large number of shareholders with little individual power, while control and decision-making is in the hands of a few managers. 

However, some firms would aim to maximise their revenues but this would still be subject to "satisficing" – which means to reach at least a minimum level of profit, but a level which is lower than pure profit maximisation.

Another reason why firms may not maximise profits is that they are unable to do so, even if they are willing. According to Herbert Simon, decision makers face the situation of imperfect information and have to make decisions under uncertainty in the real world. Even though they may be rational or try to be, they eventually use what is known as “bounded rationality”, and therefore make decisions using the information that is available to them. Using Simon’s theory of bounded rationality necessitating satisficing, Cyert and March argued that real world firms aim for satisficing behaviour and even found empirical data to support their view. 

One alternative way of making pricing and output decisions is to use cost-plus pricing, which is basically to take P = AC + a mark up, which is why this method is called cost-plus pricing. Hall and Hitch would agree, as they argued that company executives often make decisions using “rules of thumb” rather than the marginalist way of MC = MR.

In conclusion, to a large extent firms in the real world do not aim at profit maximisation in the sense that they set MC = MR, and often are unwilling or unable to set MC = MR. They often operate under conditions of imperfect information and make bounded rational decisions, and may often use cost-plus pricing. However, to a large extent, firms that do not care at all about profits would not survive in the long run, and it is not a far stretch of the imagination to say that either by luck or by skill, in the long run, all firms would approximately reach a level of pricing and output that is profit maximising because firms that did not make profits would not have survived in the long run against their more rational and efficient competitors.

Economics Tutor's Comment - This is an excellent effort for the A levels that answers the economics question comprehensively. Also, the use of economic theory is very strong in this economics essay. Do think of which economics diagrams are needed to be drawn and explained in this essay to make it an even stronger paper that supports your case that you are making. Thank you for reading, and cheers.

JC Economics Essays - This useful and relevant economics essays site can help students studying economics do well at the A-Levels (Cambridge, A1/S, A2, H1/H2/H3 levels), and the international AS level economics examinations. IB students can also benefit from the top-quality economics content here. This economics website contributes useful economics content, lesson materials, examination tips and techniques, and model economics essays that students in both Singapore and the UK, as well as also all around the world, can use to excel in economics.

This excellent economics essay was jointly written and contributed by both SS and WT, the first, our editor of JC Economics Essays, and the second, our resident Economics expert who helps students understand the beauty of Economics and its applications in real life. (Some of the economics content for alternative theories of the firm was also learnt from economics modules/lessons at the University of Manchester - Business Economics in 2008.) Thank you for reading and cheers! 

Explain how, according to economic theory, a monopolist would determine the price and output that would maximise his profits. [8]

This essay explains how a rational monopolist would determine the price and output that would maximise his profits. A monopoly is defined as one dominant firm in a market that produces a unique good with no close substitutes, for instance, De Beers in terms of the diamond market or Microsoft in terms of software. The market structure that a monopolist faces generally has high barriers to entry, either in terms of natural or man-made barriers to entry, price setting power where the monopolist would set price and take the resulting output or set output and take the resulting price, and often imperfect information exists in the market. 

A profit maximising firm, not just a monopoly, would set its pricing and output decisions where MC = MR, the profit maximising rule or loss minimising rule. 

[What economics diagram would you draw here? And how would you explain this economics diagram? Economics tutor’s hint – draw a monopoly diagram and be careful to explain how this diagram answers the question posed.]

According to the diagram, the monopolist will set price and output at MC = MR, and the P > AC, thus earning the monopolist supernormal profits. The optimal price would be P* and the optimal output would be Q*, and the shaded area would be the supernormal profits generated from setting MC = MR. 

In conclusion, according to economic theory, rational firms which want to maximise their profits will set MC = MR and a monopolist is no exception. 

Economics Tutor's Comment - This is an excellent explanation for how the monopolist maximises his profits. It was based on an actual question set for the Economics at A levels. Also, the use of economic theory is strong in this economics essay, but the real question is: how could the theory be used even better with real world examples for each point to illustrate the context? Thank you for reading, and cheers. 

JC Economics Essays - This economics essays site is useful, accessible, and relevant for students studying economics, especially students taking the A-Levels (Cambridge, A1/S, A2, H1/H2 levels), and the international AS level economics examinations. And IB students can also benefit from the top-quality economics content in JC Economics Essays. This economics blog provides a range of useful economics content, materials, examination tips and techniques, and model essays that students in Singapore and the United Kingdom, as well as all around the world, can use to excel in their economics examinations. 

This top-quality model essay with sample comments was contributed by WT, our resident Economics expert who helps students understand the beauty of Economics and its applications in real life. WT has a strong interest in Econometrics, Economic History, International Trade, and Game Theory, especially applications to real life. This economics post was edited by S. S., the editor of JC Economics Essays. Thank you for reading. 

Explain how the different features of monopolistic competition and oligopoly affect price and output determination in these market structures. [10]

This is a special contribution by WY in response to the ‘A’ Level H2 Economics November 2011, Essay Question 3 on monopolistic competition and oligopoly

This paper explains how the characteristics of the monopolistic competition and oligopoly firms account for their levels of price and output. There are five main characteristics which serve as assumptions for these two market structures. They include the number of buyers and sellers in the market, type of product sold, level of barriers to entry, price setting ability of the firms, and information level. These traits of each market structure would determine what level of price and output they produce at.

A monopolistic competitive firm refers to a firm that sells a slightly differentiated product with many close substitutes, in a market with many buyers and sellers, with relatively low barriers to entry and exit of the market, and imperfect information in the market. We take each of the features to be explained in turn. Product differentiation 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 differences, on the other hand, mean that the product is perceived to be different, due to persuasive advertising, branding, and marketing differences, which create a psychological difference. Monopolistic competitive firms are price setters, but have limited price setting ability due to the presence of many other competitors in the market selling differentiated but similar products.

What economics diagram would you draw here, and why?

According to the diagram, a profit maximising monopolistic competitive firm would produce at marginal cost (MC) = marginal revenue (MR), at price P and output level Q. In the short run, the firm could earn supernormal profits as long as average cost (AC) is below P. However, in the long run, because of the relatively low barriers of 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, monopolistic competitive firms earn normal profits.

A monopolistic competitive firm operates in a market with many buyers and sellers. Barriers to entry refers to any man-made or natural barriers to entry 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 industry. There are two types of barriers to entry, namely natural and artificial barriers to entry. Natural barriers to entry refer to barriers which are intrinsic to the industry, such as economies of scale. Artificial barriers to entry refer to laws, legislations, patents, and other obstacles to entering or exiting an industry, and are not intrinsic to an industry itself. Low barriers to entry and exit of a monopolistic competitive industry also allows potential entrepreneurs to capitalise profitable opportunities by providing easy access into the market, resulting in the presence of many sellers in the market. These conditions – many buyers and sellers in the market, low barriers to entry and firms selling slightly differentiated product – coupled with imperfect information in the market allows for  monopolistic competitive to have limited price setting ability. 

An illustration of monopolistic competitive firms would be chicken rice stalls located in the multitude of food courts and coffee shops in Singapore. There are many consumers of chicken rice and many chicken rice sellers, each selling a slightly differentiated form of chicken rice – Hainanese chicken rice, and lemon chicken rice, for instance. Low barriers to entry exist because of the relatively low rental and start-up costs of chicken rice stalls in coffee shops, as compared to those of restaurants, which would have to spend relatively more to hire more qualified employees such as chiefs and waiters for instance. Imperfect information could be illustrated in the form of special recipes withheld by different stall owners, and this coupled with the abovementioned conditions, allows for each chicken rice stall to have small market power and thus some degree of price setting ability. These conditions together, results in monopolistic competitive firms producing at MC=MR, at price P and output level Q and earning normal profits in the long run.

On the other hand, an oligopoly refers to a firm that sells either a homogenous or differentiated product depending on the particular or specific industry, in a market with many buyers but relatively few sellers, each mutually interdependent on each other, with relatively high barriers to entry and exit of the market, and imperfect information in the market. Due to the high barriers to entry and market power of the firms, oligopolies are price setters with high degree of pricing power. Mutual interdependence means that each of the firm in a oligopolistic industry will take into account each other’s price and non-price behaviour when making their strategies. This strategic or game theoretic behaviour occurs because each firm in such an industry is not a competitor, but rather a rival to the other firms. Oligopolies can be either collusive or non-collusive, where collusive means that the firms act in a concerted manner and co-operate with each other, while non-collusive means that each oligopoly operates on its own accord, taking care to strategically consider their rival’s likely behaviour. As collusive oligopolies will form a cartel and behave just like a monopoly, it would not be discussed in this essay.

What economics diagram would you draw here, and why?

Non-collusive oligopolies also produce at the maximising point MC=MC, at price P and output Q. Taking into account their rival’s actions, these 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 and cause a price war as their rivals would have little choice but to follow. According to the kinked-demand curve model, due to rival’s strategic behaviour and mutual interdependence, there would be a situation of sticky prices at price P, where oligopolies would not have any incentive to raise nor lower prices. The only way in which a price war is sustainable is if the MC curve fell for a firm, due to innovation or dynamic efficiency. 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.

Non-collusive oligopolies operate in an industry where there are many buyers but relatively few sellers, due to high barriers to entry. This, coupled with imperfect information in the industry, and the type of product sold – homogenous or differentiated – results in oligopolies having a high degree of pricing power. In the e-commerce industry, examples of non-collusive oligopolies include firms like Amazon, Alibaba, eBay etc. Barriers to entry in the e-commerce industry is relatively high, because it requires a lot of capital to set-up the firm, such as the search engine required to cater to global demand, and the logistics required to handle the delivery and shipping of thousands of product worldwide. Hence, only a few oligopolies dominate this industry, each selling a myriad of differentiated products. Imperfect information could exist in the industry where firms have no information regarding the operations of their rivals, such as how they innovate for instance. Therefore, these five characteristics of non-collusive oligopolies lead to these firms producing at MC=MR, at price P and output level Q, thereby earning supernormal profits in the long run.

In conclusion, the five characteristics of the two market structures ultimately determine their pricing strategy and what level of price and output they produce.

JC Economic Essays – This is a H2 Economics essay response on a market structure question, for the N2011 economics examination, Essay Question 3. Special thanks once again to WY for his kind contribution, which will help many economics students learn economics through model economics essays. Thank you to WY and SS for their kind contributions of economics essays.

This economics answer is really good, albeit detailed. As a model, this essay is clearly structured, focuses on the features (“structure”) of the market structures (both of them), and argues about the resultant P and Q. There is a good and strong use of examples, and economics diagrams as well. This economics response also refers explicitly to the P and Q, which are the focus of the question.

Just for discussion and improvement: What could the author have done differently to make this economics essay sharper and more focused? What could he have done slightly differently, or better, to make improvements to his response? There is always room for improvement. Always think of how you could have approached the economics question, and what you could have learnt from reading this model essay, and from other economics essays on this site. What synthesis or syntheses can you make? 

Thank you for reading and cheers.

Discuss how far increased specialisation and low barriers to entry apply to the growth of online shopping. [15]

Internet or online shopping has grown rapidly in recent years. Low barriers to entry have allowed a wide range of small specialised retail firms to market their products on the Internet. At the same time economies of scale have led to a small number of large Internet retail companies dominating the market for other products.

Increased specialisation and low barriers to entry have an impact on consumers and existing producers.

Discuss how far the traditional analysis of these economic effects applies to the growth of online shopping. [15]

An economics student’s response to the H2 ‘A’ level Economics November 2012 Essay Question 3

Part (b) of the H2/ A level Economics N2012 Essay Question 3 is kindly contributed by WYWS

This paper argues that while increased specialisation and low barriers to entry are able to account for the growth of online shopping, there exist other equally important theories in which the online shopping industry could expand. These other ways include online shopping retailers growing internally by expanding over time, or by growing externally by integrating with other firms via mergers, acquisitions and takeovers. Besides growing, alternative theories of firms postulate that aside from maximising growth, real world firms may aim to maximise profits or revenue.

Increased specialisation refers to the division of labour, and thus economies of scale. In the long run, rational profit-maximising firms aim to produce at the minimum efficient scale (MES), the point where the long run average cost (LRAC) curve shops falling, or where economies of scale are first exhausted.

Draw relevant economics diagram here – what diagram should be drawn?

This aim allows the firms to minimise the possibility of being undercut by their competitors, while giving them the ability to undercut their competitors. By reaping economies of scale, firms are also able to obtain cost advantages unavailable to their competitors, which allows them to lower their cost of production, produce more output, and thus increase their profits. A form of division of labour could be dividing one software engineer’s job of maintaining the integrity of the website and formulating creative new ways to improve the website into a job for two people, such that each could focus more intensively on their job scopes, thereby resulting in a higher quality and quantity of output. By increasing specialisation, firms could therefore reap economies of scale and ultimately promote growth.

Besides increased specialisation, low barriers to entry could also lead to the growth of firms in the online shopping industry. Entrepreneurs are decisive risk takers, who seek to coordinate the factors of production of land, labour, and capital, to bring out an increase in output from a given input. Low barriers to entry – both artificial and natural – allow potential entrepreneurs to capitalise profitable opportunities by providing easy access into these profitable segments of the market. The entry of new competitors would therefore apply pressure on incumbent firms, lowering output prices, and improving the overall allocation of resources. Low barriers of entry and exit of the market would therefore ensure that firms which are efficient and producing in accordance to market demand would survive and prosper in the market, while firms which are inefficient and whose production are not geared to the market would face their demise.

Other than increased specialisation and low barriers to entry, firms in the online shopping industry could grow by expanding internally over time or externally by integrating with other firms. There exists three types of integration, namely horizontal, vertical and conglomerate integration. Horizontal integration occurs when two firms that are producing the same product, or are engaged in the same stage of production, combine to form one entity. Vertical integration occurs when a firm in a stage of production combines with another firm from another stage of production, and consists of forward and backward integration. Forward integration occurs when a firm integrates with another firm at the next stage of production. Backward integration occurs when a firm integrates with another firm at an earlier stage of production. E-commerce oligopoly Amazon for instance, would have undergone vertical integration, as it does not only provide the service enabling consumers to search for products online, but also handles the logistics of delivering the product to the consumer’s doorstep. Conglomerate integration occurs when a firm mergers or acquires another firm from an unrelated industry.

Aside from expanding internally or externally, there exists several alternative theories of the firm which theorise that firms maximise profit and revenue, besides maximising growth. Maximising sales revenue increases the firm’s market share, which increases the prestige of the firm’s managers. Maximising growth via maximising output incurs additional costs such as advertising, investment, and research and development, but this would pay off in the long run with an expansion of demand and capacity. The behavioural theory of the firm by Cyert and March uses Herbert Simon’s theory of bounded rationality necessitating satisficing to argue that real world firms aim for satisficing behaviour, and proved this with real world empirical data. Satisficing refers to managers aiming to achieve other objectives by maintaining a satisfactory level of output to keep shareholders happy, rather than maximising growth. The managerial theory of the firm by Baumol and Williamson argues that managers seek to maximise their own utility rather than maximising growth. Bearle and Means argued regarding the ownership and control of the firms, where ownership of the firm is often spread over a large number of shareholders, and conversely control of the firm is often in the hands of a few managers.

Draw relevant economics diagram here – what diagram should be drawn?

According to the diagram above depicting a monopoly, firms can choose to maximise profit, revenue, or output, all of which would result in different levels of P and Q to be chosen, depending on the aims and objectives of the mangers. To maximise profit, managers aim to produce at marginal cost (MC) = marginal revenue (MR), at price P1 and output Q1. To maximise revenue, managers aim to produce where MR=0, at price P2 and output Q2 and still earn supernormal profits. To maximise growth, mangers aim to produce at average cost (AC) = average revenue (AR) and earn normal profits. Hence, applying this to oligopolies and monopolistic competitive firms in the online shopping industries, these firms could choose to maximise profits or revenue instead of maximising growth.

In conclusion, traditional analysis of increased specialisation and low barriers to entry are not as effective as alternative theories of the firm in analysing the growth of online shopping. The reason being is that the online shopping is a relatively new concept, since many consumers only have access to fast, reliable Internet post 20^th century. Therefore, imperfect information largely exists in such industries as compared to real world industries such as agriculture, thereby rendering traditional economic theories on the growth of the former being less accurate and reliable to alternative theories of the firm. However, these traditional analysis are still useful in certain cases, and therefore it is vital to keep them in our economic analysis toolkit.

JC Economics Essays – Special thanks to WY for his excellent contribution of a well-argued, well-written, and clearly-worded economics essay on the H2 / A level economics November 2012 examination essay question on market structure, economies of scale, barriers to entry, alternative theories of the firm, and internet retail firms.

Covering a lot of good economics material, this exemplary economics essay is an excellent model essay on how to effectively tackle examination questions. It succeeds greatly by using various economic theories and examples, and relevant economics diagrams, all targeted at making a reasoned, reasonable, and rational response to the economics essay question. This economics paper would easily achieve a grade A from an economics tutor during an examination. What else can you learn from this essay? 

Thank you for reading and cheers! 

N2012 Explain the existence of two different types of online retailers and which market structure best explains their market behaviour [10]

Internet or online shopping has grown rapidly in recent years. Low barriers to entry have allowed a wide range of small specialised retail firms to market their products on the Internet. At the same time economies of scale have led to a small number of large Internet retail companies dominating the market for other products.

Explain the existence of these two different types of online retailers and which market structure best explains the market behaviour of each of them [10]

From the N2012, H2 A level Economics paper, contributed by WY. Special thanks to WY his excellent economics essay. 

This paper argues the monopolistic competitive and oligopolistic market structures are the best models to explain the market behaviours of the two types of online retailers – small specialised retail firms and the small number of large Internet retail companies dominating the market for other products. Retailers are defined as firms which do not manufacture the goods which they sell, but rather only sell the goods produced by manufacturers. There are five characteristics of the abovementioned market structures, namely number of buyers and sellers, type of product sold, level of barriers to entry, price setting ability and information level in the market.

A monopolistic competitive firm refers to a firm that sells a slightly differentiated product, in a market with many buyers and sellers, with relatively low barriers to entry and exit, and imperfect information in the market. 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 existing the market. There are two main types of barriers to entry, namely artificial and natural barriers to entry. Natural barriers to entry refer to barriers that are intrinsic to the industry, such as economies of scale. Artificial or man-made barriers to entry refer to laws, legislations, patents and other obstacles to entering or existing an industry, and are not intrinsic to the industry itself. Product differentiation 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 means that the product is perceived to be different due to persuasive advertising, brand and marketing differences, that create a psychological difference. Monopolistic competitive firms are price setters, but have limited price setting ability due to the presence of many competitors in the market selling differentiated but similar products. Small specialised retails firms such as blogshops are relatively easy to establish with minimal start up costs required, and hence have relatively low barriers to entry. This would result in many online retail sellers in the market, each selling slightly differentiated products with many close substitutes. For instance, there exists many online fashion blogshops in Singapore selling apparel such as shirts, pants and dresses.

What economics diagram would you draw here?

According to the diagram, a profit-maximising monopolistic competitive firm would produce at Marginal costs (MC) = Marginal revenue (MR), at price P and output level Q. In the long run, a monopolistic competitive firm earns normal profits. Small specialised retail firms also earn normal profits in the long run. Non-price competition is a strategy whereby a firm tries to distinguish its product or service from others, on the basis of attributes such as design and workmanship. Non-price competition typically involves promotional expenditure such as advertisement, sales staff, sales promotion, coupons, free gifts, marketing, new product development and brand management costs. Although any company can employ a non-price competition strategy, it is most common amongst monopolistic competition and oligopolies. These small specialised retail firms also engage in some form of non-price competition in order to market their products on the Internet. A case in point would be usage of social media such as Instagram, Twitter and Facebook to market and advertise their products. Some online retailers for instance even employ users on the mobile application Instagram to do advertorials and collaborations with them.

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 exist, and imperfect information in the market. Mutual interdependence means that each of the firms in an oligopolistic industry would take into account each other’s price and non-price competition when making their strategies. This strategic or game theoretic behaviour occurs because firms in such an industry are not competitors, but rather a rival to the other firms. Oligopolies can be collusive or non-collusive, where collusive means that the firms act in a concerted manner and co-operate with each other, while non-collusive means that each oligopoly operates on its own accord, taking care to strategically consider their rival’s likely behaviour. This essay would focus on non-collusive oligopolies for collusive oligopolies often form cartels and behave just like a monopoly. Large Internet retail companies such as Amazon, Google and Alibaba have relatively high barriers to entry, especially natural barriers to entry such as economies of scale. Google for instance, has high artificial barriers to entry as it requires substantial financial capital and logistical effort to set up and maintain a global Internet search engine. As such, online industries such as e-commerce are dominated by a few firms including Amazon, Alibaba and eBay, which offer a myriad of products.

What economics diagram would you draw here?

According to the diagram, non-collusive oligopolies produce at the profit-maximising point MC=MR, at price P and output level Q. Due to high barriers to entry and market power of the firms, oligopolies earn supernormal profits in the long run. Therefore, oligopolies tend to engage in costly forms of non-price competition, such as celebrity endorsements, placing large and prominent advertisements on billboards, newspapers, popular magazines and websites, as well as advertising frequently 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. Amazon for instance, are able to finance huge discount sales such as the Black Friday sales, where items are discounted up to eighty percent, to attract consumers.

In conclusion, the market behaviours of the small specialised retail firms are best explained using the monopolistic competitive market structure as both of these firms have low barriers to entry. On the other hand, the market behaviours of the small number of large Internet retail companies dominating the market for other products are best represented by the oligopoly model, where high natural barriers to entry such as economies of scale exist. 

JC Economics Essays - Contributed by WY, this excellent model economics essay is well-written, clear-cut, and detailed, and it strongly explains both economic theory and examples together. This is a very good economics paper on market structure, and demonstrates a very good understanding of monopolistic competition and oligopoly, especially in a real world context. This economics essay is also very good in its strategic use of diagrams to explain key areas, especially for the behaviour of the market structures. In an H2/ A level economics examination context, this is an excellent sample piece of work. 

Special thanks to WY for his hard work and good effort on this economics assignment, as well as for this excellent, high-quality economics essay. Please continue to keep up your good work as a talented and strong economics student. 

Thank you all very much for reading and cheers!

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. 

Alternatively, are there more direct approaches to answering this economics essay question? Is there a more direct, simpler approach? What could the author have done to provide a stronger response to the economics question?

Thanks for reading and cheers!  

Retailers in Singapore supply a wide range of services & products in a variety of market structures. Explain the key differences between oligopolistic competition & monopolistic competition. [10]

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!

Discuss whether economic analysis favours large firms over smaller ones.

This paper argues that economic analysis, on the one hand, favours large firms because they are able to reap economies of scale, with all its implications on costs, prices, and profitability, but on the other hand diseconomies of scale might pose an issue and other economic reasons might also favour small firms over larger ones.

First, it can be argued that traditionally economic analysis favours large firms. This is because of the fact that they can reap internal economies of scale. Internal economies of scale are cost savings that accrue directly to the firm from the expansion of the firm's output, independent of what is happening to other firms. As the firm increases its scale of production by producing more output, the LRAC falls accordingly. On an economics diagram, the falling portion of the firm’s LRAC reflects internal economies of scale. A large firm producing at a larger level of output will be able to benefit in the form of enjoying a lower average cost as compared to a small firm producing at a lower level of output with an average cost higher than the large firm. 

What economics diagram could/should be drawn here?

The lower average cost that a large firm enjoys can be derived from various sources. For instance, when a large firm is able to reap more internal economies of scale, consumers may benefit in the form of lower prices if firms pass on their cost savings. Many oligopolies pass on the benefits of lower costs onto their consumers. Firms may also use the cost savings to carry out research and development (R&D) to improve on their production processes, which can bring down the cost of production and eventually be passed on to consumers in the form of lower prices, or improve on the quality of the goods sold, improving the welfare of consumers.

Large firms are able to earn supernormal profits in the long run as compared to small firms like that of a monopolistically competitive firm. The large firms’ supernormal profits are protected by high barriers to entry, making it difficult for potential firms to enter the industry. This means that large firms will have a higher financial ability to carry out R&D that can benefit consumers as explained previously. This often results in dynamic efficiency, the willingness and ability to innovate and improve processes over time, and as Joseph Schumpeter once said results in "creative destruction", the creation of new, novel, and disruptive technologies and products, just like the iPhone came to dominate the market and displace many other cellphone models, like Nokia. And in contrast, small firms may not have the financial ability to do so since they can only earn normal profits in the long run, which means that they have neither willingness nor ability to conduct R&D. In business terms, these small firms may therefore be forced out of business. 

On the other hand, economic analysis does not always favour large firms, and in fact sometimes may favour small firms. One reason could be due to internal diseconomies of scale. This happens when a firm expands beyond its optimum size. In theory, a firm that expands beyond its MES (minimum efficient scale) will start to face diseconomies. There are many reasons for this. First, this could be due to managerial diseconomies. As the size of the firm increases, it becomes increasingly difficult to carry out the management functions of co-ordination, control, and the maintenance of morale. Large firms may then pass on this higher average cost in the form of higher prices, and this would not be advantageous to consumers. In some industries, diseconomies of scale set in early, meaning that the MES is low and internal economies of scale is exhausted quickly. As such, costs rise sharply as output increases. Any advantage to large-scale production is more than offset by the disadvantage. The optimum size of firms in such industries is small. Therefore it can be convincingly argued that there are many reasons for diseconomies of scale - but in this paper's opinion, the most important factors are managerial diseconomies, or the nature of the industry is such that small firms are favoured in a particular industry. 

Furthermore, economists should consider demand-side or revenue-side factors, not just cost-side factors. The demand for a particular firm's output may be low, thus leading to the situation where the firm has to be small by its nature. The total demand, both domestic and foreign, for the firm’s output may be small because the firm is selling a niche product. Such a market may be limited by price. This is true for distinctive products like luxury sports cars such as Lamborghini, exclusive clothing such as Gucci and Prada fashion, and high quality jewellery, where only a small group of customers are willing and able to pay for the element of uniqueness and prestige.

Furthermore, if the product has great bulk in relation to its value or requires special transport arrangement, the transport cost will be high relative to the unit price. Under such circumstances, the market for such products is likely to be local rather than national.  

Another reason for firms remaining small could be the need to cater to consumer’s specific or individual requests. In this case, due to the varying nature of such requests, the size of production unit tends to be small. Thus, firms providing services in the area of law or repair services tend to be small. For instance, as cars do not break down in exactly the same way, the ‘non-standardised’ services make mass production of repair services impossible.

In the final analysis, since large firms’ supernormal profits are protected by high barriers to entry, this lowers the firm’s incentive to engage in R&D and become dynamic efficient since there is little chance for new firms to enter the industry to erode away its supernormal profits earned. This will in turn have implications on consumers as there will be little improvements to the quality of goods. As such, large firms may not always be favoured. On the contrary, small firms like a monopolistically competitive firm may have the incentive to engage in R&D since firms making subnormal profits will be the first to leave the industry. Hence, in order to ensure long-term survival and the possibility to earn supernormal profits in the short run, they will have the incentive to innovate. Therefore, it can be argued that while the argument for internal economies of scale seems to favour large firms, small firms can and often do coexist with large firms.

JC Economics Essays - This economics essay is on the traditional economics debate on the size of firms - does size matter? Does analysis favour large firms over small firms, or does it really depend - and what does it depend on? On the one hand, what are the good points of having firms large? On the other, are there situations where it would be better to have small firms? Why is this the case? Do think through your approach after reading this suggested essay. Special thanks to B for his contribution to this economics blog. Thanks for reading and cheers. 

Explain how the degree of market dominance affects the amount of profits earned by a firm. [10]

This paper explains how the degree of market dominance, which results from the level of barriers to entry in an industry, will affect the amount of profits earned by a firm, which is assumed to be a profit-maximising entity.

First, it has to be observed that a firm with market dominance will have a downward sloping demand curve. The higher the market dominance a firm has, the higher its price setting ability, and this results in a more price inelastic demand curve. The higher the ability of the firm to increase total revenue (TR, which is equal to P x Q), since an increase in price would lead to a less than proportionate fall in its quantity demanded, the more likely this would in turn indicate more profits for the firm, assuming no change in the total cost (TC). Market dominance and price setting ability arise because of the presence of barriers to entry.

What are barriers to entry? Barriers to entry refer to any man-made or natural barriers which are strong enough to prevent new rival firms from competing on an equal basis with the existing firms. A perfectly competitive and monopolistically competitive market structure both have no and low barriers to entry and exit respectively. Thus, a perfectly competitive firm possesses no market dominance and a monopolistically competitive firm possesses low market dominance. There are substantial barriers to entry and exit in an oligopolistic market and for a monopoly it has the highest level of barriers to entry and exit. Thus, an oligopoly and monopoly possess a high degree of market dominance. Due to the varying degrees of barriers to entry, the different market structures will see a different impact on the amount of profits earned in the long run. The amount of profits can take the form of supernormal profits (TR>TC), normal profits (TR=TC) or subnormal profits (TR<TC). In a perfectly competitive market, there are no barriers to entry. This implies that firms are free to enter and exit the market.

Explain using diagrams, how the PC firm eventually makes normal profits

In contrast, should a perfectly competitive firm be earning subnormal profits initially, this will cause some firms to leave the industry and decrease the market supply. This will in turn increase the market price and diminish the magnitude of subnormal profits. Firms will continue to leave the industry until the remaining firms earn normal profits in the long run.

Similarly, in a monopolistically competitive market, there are low barriers to entry in reality.

Explain using diagrams, how the MC firm eventually makes normal profits

In contrast, a monopoly faces high barriers to entry. If the monopolist is making supernormal profit initially, new firms cannot easily enter the market even when there are supernormal profits to be made. There will be no change to the firm’s demand and it can continue to retain its supernormal profits. Likewise for a firm in an oligopolistic market, it also faces considerable barriers to entry. As it is difficult for firms to enter or exit easily, an oligopolistic firm’s supernormal profits will not be whittled away and can continue to retain its supernormal profits in the long run.

In conclusion, the higher the degree of market dominance as a result of higher barriers to entry, the higher the degree of profits earned by the firm in question, which usually means ultimately that oligopolies and monopolies earn supernormal profits while perfectly competitive and monopolistic firms earn normal profits. 

JC Economics Essays - This economics essay was contributed by a student from a certain Junior College in Singapore. It was not written under timed examination conditions, but is supposed to reflect the best possible answer given by a candidate to the economics question about the degree of market dominance and how it affects a firm's profitability. Special thanks to S for his contribution to this economics blog. 

What comments would an economics tutor make about this essay response? First, take note that this is a purely theoretical question. Many times, candidates have to determine if the question is asking a purely theoretical question (usually the small part questions of CSQ or the 10 mark questions are about theory), or if the real world context is required. Often, the larger essay questions require application of economics to the context, or real world examples. In this case, this economics question seems to be a pure theory question testing if students understand the concepts of market structure, market dominance, barriers to entry, and the type of profits. While this essay is excellently crafted, perhaps there could be a more efficient way of writing it? While the material is sound and accessible to A level students, could there be a more parsimonious way of writing this paper, given that it is only 10 marks? Are there alternative approaches to answering this economics question? On the other hand, the level of detail is excellent and this paper deserves a very high grade for its targeted yet detailed response. Think about how you would approach this essay. Thanks for reading and cheers!

“A monopolistic firm has market power whereas a perfectly competitive firm has no market power. Perfect competition is, therefore, clearly preferable to monopoly, say economists. Discuss this statement. [25]

Monopoly is a firm which is the only seller of a unique product which has no close substitutes. In a market of perfect competition, the level of competition is very high, and each firm is a small entity, a price taker. There are four assumptions for a monopoly to exist: there is only one seller but many buyers, high barriers to entry (both natural and artificial), a highly differentiated product such that it is difficult or impractical to copy the product, and imperfect information. There are four main assumptions for a perfectly competitive market, which are: there are many sellers and buyers, low barriers to entry, homogenous product and perfect information. This essay attempts to explain the reasons for the high market power of a monopoly, low market power for a perfectly competitive firm, and the limitations of monopoly and the choice between a monopoly and a perfectly competitive market. 

Yes, it is true that monopoly has very high barriers to entry while a perfectly competitive market has very low barriers to entry. Barriers to entry refer to the reasons which deter potential entrants from entering the market. There are two types of barriers, which are natural barriers and artificial barriers. Monopoly often has high barriers due to various reasons. Firstly, when there is very high economies of scale of the existing monopoly firm, the starting cost of potential entrants will be very high as a result, and this is often because of high fixed costs, such as massive initial capital outlay followed by declining LRAC. 

Secondly, when there is limited and small market size, localized monopoly might arguably be present because the demand from the consumers is very low due to say a small population, which cannot support more suppliers. For example, there will be only one hairdressing shop in a small town because of its small population. 

Thirdly, when there are network economies, it is very hard for potential entrants to enter the market because of existing networks among users. For instance, after Facebook, it is difficult to have any more of the same type of online social network websites because users have built up broad network on Facebook already. 

These are main natural barriers. There are also artificial barriers to entry set up by governments and the existing firms as well. For example, patents, licenses, and regulations restrict potential entrants from entering. Existing will have limit pricing and predatory pricing to deter potential entrants from entering. Firms also can control retailers and suppliers to prevent potential firms. For example, deBeers controls the diamond resources of the world and can restrict diamond production. Therefore, a monopoly has very high barriers to entry to limit the number of existing firms to a very low number, i.e. one firm. The monopoly has very significant market share hence strong market power to control the price while a perfectly competitive firm has many competitors in the market and therefore their market share is insignificant as a result of this very low market power. Hence, a perfectly competitive firm is a price taker, whereas a monopoly can set output and accept a price, or set the price and accept the resulting output. 

[Insert diagram on PC Industry and PC firm]

The perfectly competitive firm takes the price from the intersection of market demand and supply. To maximize profit, the firm will produce at MC = MR at price P. In the long run, a perfectly competitive firm will gain normal profits when LRAC = P at minimum efficient scale (MES). 

Therefore, a perfectly competitive firm is productive efficient because it always produces along LRAC curve and every firm in the industry tries to produce at MES for maximized profits and minimized costs for survival. A perfectly competitive firm is also allocative efficient because P = AC. It gains maximum social welfare. 

A perfectly competitive firm is also equitable because it gains normal profits in the long run. There are therefore good and solid reasons for the preference of a perfectly competitive firm than a monopoly. A monopoly is productive inefficient , allocative inefficient, and inequitable as explained below. 

[Insert diagram on Monopoly Firm showing Supernormal profit and Deadweight loss]

A monopoly is productive inefficient because the firm has great market power and it can be X-inefficient, which means that it does not act energetically to curb its costs, for instance costs from lobbying for government intervention. It can produce above the LRAC curve due to overpaying for workers, building ostentatious buildings, or unnecessary perks. 

A monopoly is allocative inefficient because of the deadweight loss resulting from monopoly power. At the profit maximizing point, MC = MR, and P > AC. Hence, there is a positive welfare to be achieved by promoting perfectly competitive firms.

A monopoly is not equitable to consumers because of its supernormal profits gained in the long run. 

However, a monopoly can be preferred to a perfectly competitive firm because it is dynamic efficient. It has the willingness and ability to innovate and create to do research and development (R&D) and to improve its product variety through product proliferation. This is because of its supernormal profits in the long run, leading to its ability to conduct R&D. It also aims to utilise product proliferation to fill the product gap, and thereby prevent potential entrants from finding a niche to exploit in its market that it dominates. A perfectly competitive firm is also not willing to innovate because of perfect information in its market, so other firms can easily copy from it, so a monopoly does have some strengths. 

[Insert diagram to compare PC firm and Monopoly]

A monopoly firm usually restricts output and set high price at maximized profit level, while a perfectly competitive firm has lower price and more output at the intersection point of its demand and supply. At this point in time, a perfectly competitive firm is preferred to a monopoly. However, in the long run, when a monopoly grows and exploits its economies of scale, it moves its (LR)MC curve downwards. It can then produce more output at a lower price. At this time, a monopoly is preferred to a perfectly competitive firm due to its dynamic efficiency. 

In conclusion, it is not always preferable to have a perfect competition than a monopoly. Ostensibly there are many good points that perfectly competitive firms have, such as productive efficiency and allocative efficiency, among other ideal points, whereas monopoly does appear or seem not ideal, due to its lack of productive and allocative efficiency. However, a monopoly has more dynamic efficiency than a perfectly competitive firm and has the potential to have lower prices than a perfectly competitive firm. In addition, a perfectly competitive market is ideal but does not exist in the real world. Hence, monopoly is sometimes preferable to a perfectly competitive firm. 

JC Economics Essays - H2 Economics essay on monopoly and perfect competition. Normally I would give detailed comments for essays and make some commentary or remarks on how good the essay is, or how it can be further improved by identifying particular points, arguments, or even sometimes, rarely, mistakes. Sometimes, I even ask difficult thinking questions about how the essay can be improved. However, for this particular essay done under timed examination conditions, I rather like its style and content, and so instead of giving my comments I will let you do most of the thinking: one simple question is - what can you learn from this economics essay? Thanks for reading and cheers. 

Explain, with relevant economic theories and with the use of diagrams, the factors affecting the price and output decisions of an oligopoly firm. [10]

An oligopolistic market refers to a market that is dominated by a few firms, each possessing a significant market share. What are the assumptions for an oligopoly? There are four assumptions for an oligopoly firm. There are few sellers and many buyers, high barriers to entry, imperfect information and either homogeneous or differentiated product. There is mutual interdependence or rivalry between firms in an oligopolistic market, which leads to strategic, game theoretic behaviour of firms. Mutual interdependence or rivalry refers to a situation where a firm has to consider the reactions of its competitors when making its decisions, in which it might make strategic, game theoretic pricing and output decisions. This economics essay thus attempts to explain how mutual interdependence or rivalry affects a firm’s price and output decisions, and how collusion and advertising affect a firm’s decisions.

Oligopolies tend to have sticky prices that are rigid and are often unchanged. In an oligopoly, when a firm lowers its price, it will draw a significant number of customers away from its rivals. These rival firms are unlikely to sit back and do nothing but will instead lower their prices in response to avoid losing a big portion of their sales.

However, should a firm raise its price, it will instead lose much of its customers to its rivals. Since its rivals benefit by not reacting they will probably not raise their price in response. Based on such observations, oligopoly pricing behavior based on the kinked demand curve was derived, showing price rigidity.

[Insert a diagram on oligopoly’s kinked demand curve model]

The oligopolistic firm will set the price at MC = MR. The firm will not produce at any output where MC > MR as they generate losses. Hence, the profit maximizing or the loss minimizing point is when MC = MR. This kinked demand curve model shows that there tends to be price rigidity in an oligopoly due to mutual interdependence. Firms tend to stick to the prevailing price and are reluctant to change to alter prices.

An oligopoly firm will only alter its price if its marginal costs change substantially, and if the marginal costs fall significantly there could be a price war - an oligopoly will decide rationally that it could lower prices, increase output, and thus put some rivals out of business.

[Insert a diagram on oligopoly’s kinked demand curve model - showing a price war]

There are other factors affecting the decision of price and output by oligopolistic firm. For instance, collusion may affect the oligopolistic market and help make it become a monopoly market.

Collusion refers to the act of firms jointly determining the price or output. There are two types of collusion, namely explicit collusion and tacit collusion. Collusion can be explicit where firms formally gather to fix prices or output. A formal collusion oligopoly is called a cartel. Tacit collusion could still occur as firms cooperate informally by following a price leader. Both explicit and tacit collusion can work like a monopoly market which can control output and set the price.

[Insert diagram on collusive oligopoly - monopoly diagram]

           

A collusion oligopoly can be a price setter as a monopoly at maximum profit point i.e. MC = MR and set the price without the limit of price rigidity of an oligopolistic firm.

When there is a price war, the oligopolistic firms retaliate by cutting prices, triggering successive rounds of price cuts. Such an occurrence is known as a price war, which is generally detrimental to all firms as heavy losses are incurred throughout the market. A firm might want to punish its rival for taking unilateral actions. In addition, the reasons for price wars are less strategic and more short-term in nature. For example, due to an unexpected recession, managers might desperately slash prices in order to make sales targets or to raise revenue to overcome cash flow problems.

In conclusion, the factors affect the price and output of a firm in an oligopolistic market is mainly price rigidity which depends on the market itself. Collusion oligopoly will give the firm more market power to set its price beyond the limitation of price rigidity. A price war may result in decreasing prices of the firm. Therefore, the price and output of a firm in an oligopolistic market are affected by many factors in different conditions.

JC Economics Essays - H2, H3 Economics essays - tutor's comments: This economics essay deals with oligopolies, strategic behaviour, and pricing and output decisions of firms, with a simple hint of game theory, assuming that firms are rational and thus make rational decisions. Game theory is an important mathematical tool that can help in general economics analysis, but specifically, especially for H3 examinations, undergraduate economics courses, and economics in general. However, there was very little depth of game theory in this economics paper. There are many important elements of this economics essay which make it worth many marks and a rather good examination grade. However, the usual questions for improvement still apply: how could you make this essay answer better? Could examples have been used? Always try to answer the question, and think of how you could make your answers better when dealing with economics questions.