Explain how a monopolistic firm and a perfectly competitive firm make their pricing and output decisions in relation to the differences in the barriers to entry to their respective industry. [10]

This essay topic is on market structures, and in particular barriers to entry with respect to monopolies and perfectly competitive firms. What are barriers to entry? Barriers to entry refers to reasons that deter and prevents new firms from entering a market. They could be further categorized specifically into artificial barriers to entry and natural barriers to entry. What are monopolies and perfectly competitive firms? Monopolies refer to firms in markets with only one seller selling a uniquely differentiated product that have no close substitutes while perfectly competitive firms are those in markets that consist of large number of buyers and sellers selling homogeneous products. 

In order to explain the difference in pricing and output decisions between a monopoly and a perfectly competitive firm, a comparison between the characteristics of both firms need to be made. This Economics essay therefore talks about the various assumptions a monopoly and a perfectly competitive firm, before moving on to explain diagrammatically the difference in their pricing and output decisions.

        

Monopolies assumes the characteristics of high barriers to entry, uniquely differentiated product with no close substitutes, one seller or a dominant firm in a market and generally imperfect information. On the other hand, perfectly competitive firms assume characteristics of low or almost no barriers to entry, homogeneous products, large number of buyers and sellers, and perfect information.

           

The following diagrams will move on to explain the pricing decisions of a monopolistic firm and a perfectly competitive firm respectively.

[Insert diagram of a monopolistic firm]

           

Due to the high barriers to entry, a monopolistic firm is a price setter and thus is able to secure the profit maximization (or loss minimization) point at MC = MR, to earn supernormal profits.

[Insert diagram of a perfectly competitive firm]

           

On the other hand, the low barriers to entry means that a competitive firm is a price taker as it accepts the price pre-determined by the intersection of the market demand and supply curves.

Therefore, because it accepts the market price, it produces at an output level at MC = MR, and controls only its output level to vary its profits.

           

The high barriers to entry allows monopolistic firms to set their prices as it is unlikely that there will be an entry of new firms to reduce the market power and hence pricing influence of that monopolists. However, perfectly competitive firms are unable to do that since the low barriers to entry means that new firms could easily enter the market, diluting each firms’ market power, thus all firms have small market power, resulting in them being price takers.

In conclusion, barriers to entry are a significant assumption that affects the pricing decisions of monopolistic and perfectly competitive firms, although the other assumptions also play an important role.

JC Economics Essays - H2 A level Economics style, model, sample economics materials - tutor's comments: This economics essay is written in a simple, lucid, clear, short, and direct manner which addresses the economics question posed at the start. This makes this essay answer easy to follow and clear, direct, and easy to mark for the examiner, which are all plus points for this model paper. There is very good use of diagrams to illustrate ideas and points. While a bit short, the conclusion is simple, easy, and direct. The conclusion in this case can be short because this is not a 13, 15 or 25 mark essay question, which would require a longer, more evaluative, and higher value added response as a conclusion. The question is: how can you improve on this economics essay, to make it more of a model economics answer? At the same time, there are other essay styles to write this economics essay, some of which use more words and approach this question from a slightly different angle to answer the question equally well. What do you think? Thanks for reading and cheers. 

"Monopolies exist mainly because businesses create barriers to entry by manipulating their prices to keep potential rivals from entering their business markets." Do you agree with this statement? [15]

It can be argued that monopolies indeed exist because of the presence of barriers to entry such as patents, licenses and substantial economies of scale which deter potential entrants from entering their market. These monopolies can also deter the entry of new firms through policies such as anti-competitive pricing. This essay will therefore talk about how artificial barriers to entry, most importantly anti-competitive pricing policies and methods lead to the existence of monopolies, then moving on to the anti-thesis, which is how then natural barriers to entry contribute to the existence of monopolies as well. The essay will conclude with an evaluation of which barrier to entry, artificial or natural barriers, is more significant.

The artificial barrier to entry would arguably be anti-competitive pricing. Anti-competitive pricing could be further broken down into limit pricing, which refers to the case where monopolists set their prices below the expected average costs of a potential entrant, to deter them from entering the market since they will make losses.

Predatory pricing, on the other hand, is a similar concept, except it is used in such a way that existing competitors would be driven out of the market due to the making of subnormal profits. Therefore, anti-competitive pricing allows for the existence of monopolies, since potential and existing competitors are out of the way.

There are also other artificial barriers to entry such as those created by governments. Governments could support the creation of monopolies by giving patents and licenses to certain firms only. The issue of patents means that monopoly rights are given to a firm to produce a new product or use a new process for a specified time period. Such actions of the government can then allow for the existence of monopolies since such firms are given substantial market power.

           

However, the existence of monopolies could also be due to natural barriers to entry, rather than just anti-competitive pricing policies.

One of which would be natural monopolies. A natural monopoly refers to a market where average costs are falling throughout the entire range of market demand, which makes it less costly for one firm to supply the entire market, hence supporting the existence of monopolies.

[Insert diagram on natural monopoly]

As seen from the figure above, if there were to be more than one firm in the market, the AR of each firm is not even enough to cover the LRAC. Therefore, such a situation supports the existence of monopolies since if there is only one firm, the firm could make supernormal profits.

Next, another natural barrier could be substantial (internal) economies of scale, where larger firms could reap more economies of scale and be more cost efficient. This means that potential entrants will have to produce at a large scale in order to compete and this deters them from entering the market. Such deterrence then leads to the existence of monopolies.

In conclusion, artificial barriers could more adequately explain the existence of monopolies. This is because most monopolies are run by governments whom create artificial barriers like patents and licenses to deter potential entrants. Therefore, upon evaluation, the existence of monopolies would be more significantly attributed to artificial barriers as compared to natural barriers. Hence, the statement should read that monopolies exist mainly because of artificial barriers to entry.

JC Economics Essays - H2 (A levels) sample, model economics essay answer: tutor's comments - this economics essay is well crafted, well argued, answers and analyses the issue very well. The main learning lessons from this essay are: it answers the essay question directly, it has a lot of good solid economic theory, and it is properly structured using the thesis, anti thesis, and synthesis approach which is a very good essay system that you should apply. You might want to think about how could you improve on this essay, and what other examples could you apply to this economics question. More relevant, real world, and specific examples would massively improve this economics answer, and the response would be improved vastly. Special thanks to kind contributors. 

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

- Adapted from an actual A level Economics examination question

Introduction

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

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

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

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

Pricing and Output, Strategic Behaviour?

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

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

Non-price Competition - Oligopoly and Monopolistic Competition?

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

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

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

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

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

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

Explain with relevant examples the main differences between oligopolistic and monopolistic competition. [10]

Explain with relevant examples the main differences between oligopolistic and monopolistic competition. [10] 

Tutor's Note: This is an Economics question modified and simplified from an actual “A” levels Economics examination.

This paper explains with relevant examples the main differences between oligopolistic and monopolistic competition. 

What is Oligopoly?

What is oligopoly? Oligopoly refers to a market where the barriers to entry are high, such that there exist only a few large firms in that particular industry, each with a significant market share, selling either homogeneous or differentiated products. Homogenous products are products that are perfectly substitutable for each other and have little or no product differentiation, unlike differentiated products. 

What is Monopolistic Competition?

What is monopolistic competition? Monopolistic competition, on the other hand, refers to a market where the barriers to entry are low, such that there exist many firms, each with insignificant market share, selling somewhat differentiated products. This paper deals with the characteristics first and then the nature of the products sold, and then finally the performance of the two market structures. 

Barriers to Entry for Oligopoly and MC Firms

Let us examine the characteristics of the two market structures of oligopoly and monopolistic competition. First let us deal with the barriers to entry. There are high barriers for oligopoly, for instance large economies of scale (internal EOS) in the provision of telecommunications services, whereas there are low barriers for monopolistic competition, for instance low economies of scale (internal EOS) in the clothes retails.   

Homogeneous vs Differentiated Products

Next, let us deal with the nature of the product. A product is homogenous when, for instance, every seller sells exactly the same item, for instance, petrol for cars of a certain particular grade such as 95 or 98 octane, whereas on the other hand a product is differentiated when the product sold by a firm is similar, but not exactly identical to that of its competitor’s product, be it "psychologically" or physically different, for instance, branded cars or cars of different makes and styles. 

Monopolistic competitive firms sell differentiated products, and hence as such derive their pricing power from their product differentiation, whether it is merely psychologically perceived or actually substantially differentiated. 

Oligopolies, on the other hand, can sell either differentiated or homogenous products, and their source of market power comes instead from their large market share arising from the few players that exist within that industry, and their huge economies of scale.

Profits

Let us now examine the performance of the market structures. What kind of profits would these firms earn? In the long run, only normal profits exist in monopolistic competition, while supernormal profits exist for oligopolies, so monopolistic competition is likely to be more equitable compared to oligopoly, which seems more inequitable.

Efficiencies

In terms of efficiency, there are many arguments to make to show the differences. 

First, an oligopoly may be X-inefficient – meaning that it does not work energetically to cut costs – but monopolistic competition is X-efficient as well. 

Both market structures are allocatively inefficient, where allocative efficiency refers here to P = MC, but the extent is likely much greater for oligopoly, because the price will be much higher than marginal cost for an oligopoly compared to monopolistic competition, which also has P > MC, but not by that much. 

In terms of dynamic efficiency, oligopoly generates more research and development (R&D) than monopolistic competition, and as such is more dynamic efficient because it has the willingness and ability to innovate.   

JC Economics Essays: Tutor's Comments - This Economics paper is short, sharp, sweet, and to the point, and was contributed by a hardworking, dedicated student who composed it under model examination conditions. This Economics essay is also quite well organised and structured, and structured essays are very well received by Economics examiners and teachers. Certainly, we can all learn from it, not just content knowledge but also how to craft to-the-point essays. However, there are a few possible criticisms/ issues: one, the student has not consistently used examples throughout the Economics paper (in particular, "relevant examples") to illustrate his points; two, the student could be more accurate and specific in his introduction by telling the reader, examiner, or Economics tutor reading his paper EXACTLY what he is going to do and say in the paper; three, there is no conclusion, probably because he ran out of time writing; four, he could have defined his terms better and clearer, and more consistently too. Maybe the paragraphing could be slightly better as well, and arguments could be grouped together. Having said that, this Economics essay is still good and in fact the criticisms made would not hurt it very much, because overall it is well written and in examination conditions this precision and clear economic analysis is recognised, valued, and appreciated - although it could have been further improved. Thanks for reading and cheers. 

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.