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!

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JC Economics Essays - Our popular, useful, and relevant economics website is mainly about H1, H2, H3 Economics, A level Economics, & economics essays in general, and beyond A level economics essays, this economics site is even for undergraduate and masters level essays (on a variety of interrelated topics such as economics, economic history, and economic development). Thank you very much 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!

"Oligopoly is the most appropriate economic model of market structures that can best explain the behavior of companies in Singapore." Discuss. [25]

There are four models of market structure, namely, perfect competition, monopolistic competition, oligopoly and monopoly. In a perfect competition market, many sellers sell a homogeneous product to many buyers. In a monopolistic competitive market, many sellers sell slightly differentiated products to many buyers. A monopoly refers to a market which has only one seller of a unique product without close substitutes. An oligopoly is a firm that has several rivals, selling either a differentiated or homogeneous product, and with high barriers to entry. Firms of different industries belong to different market structures because of their different products and conditions, and different market structures have different assumptions. This essay attempts to explain the behavior of firms in Singapore according to different market structures and conclude whether oligopoly is the most appropriate model of market structure to explain the behavior of firms in Singapore.

As oligopolistic firms are always rivals to each other and have significant market share in which they jostle and engage other rivals, there will be non-price and price competitions among the few firms in an oligopolistic market. It can be argued that non-price competition includes engagement in research and development and advertising. In the long run, oligopolistic firms usually gain supernormal profits hence they have the ability and the willingness to innovate and differentiate their products from the rest further more.

Oligopolistic firms also involve in advertising. Advertising increases the demand for a product and makes it more price elastic. This enables a firm to charge higher prices but yet sell more output, thus raising its total revenue. A firm decides to advertise if it believes that the additional revenue earned will exceed the advertising expenditure incurred, thereby raising profits. Oligopolistic firms often advertise and innovate to compete effectively for survival. 

Advertising can be seen as either being informative or persuasive in nature. Informative advertising informs the consumers about the characteristics of the product while persuasive advertising aims to create brand awareness and loyalty by creating a certain image of the company of the type of consumers that the product is targeted at. Oligopolistic firms usually implement persuasive advertising. They tend to engage in more costly forms of advertisements, like having celebrity endorsements, placing large and prominent advertisements on billboards, newspapers, popular magazines and websites and advertising frequently on television. This is because they have very large output to spread out such high advertising costs unlike monopolistic competitive firms, which have considerably lower levels of output. In Singapore, firms which are oligopolistic also set up many advertisements to attract consumers and create loyalty. For example, famous brands that operate in Singapore such as L’OREAL, VISA or Ricola, always have advertisements showing before movies in the cinema. These advertisements are usually very costly due to the fact that every audience has to watch them and the advertising effects are great.

There is also price competition between oligopolistic firms, which can often be observed in reality in Singapore. Anti-competitive pricing, for example, limit pricing or predatory pricing manage to deter the entrance of potential firms or undercut existing rivals in oligopolistic markets. In addition, the high possibility of price wars also raises barriers to entry. Therefore, only few large firms remains in several industry groups in Singapore. For instance, the fast food industry, Mcdonalds , KFC and Subways are the oligopolies. 

However, there are alternative models of market structure to explain the behavior of firms in Singapore. For instance, monopolistic competition, which has four assumptions. There are large number of buyers and sellers, low barriers to entry, differentiated products and imperfect information. As individual firm’s action has no impact on its competitors and it is thus able to make independent price and output decisions. Monopolistic competitive firms, such as restaurants (Ding Tai Fung) in Singapore, hair salons (Kimage) in Singapore, and so on, sell differentiated products. This means that the products sold by one firm are similar but not identical to those sold by its competitors. Product differentiation can be real or imaginary. Due to product differentiation, a monopolistic competitive firm has some degree of market power. A monopolistic competitive firm is able to charge more than its competitors without necessarily losing all its customers because there are some customers who would still prefer its products as it better suits their preferences. 

In the long run, monopolistic competitive firms gain normal profits due to free or low barriers to entry or leaving of the market. Hence they have much lower willingness and ability to do research and development or advertise compared with oligopolistic firms. The price competition among monopolistic competitive firms is very low. They set prices independently of other firms. There is no reason to undercut competitors or engage in price wars as impact on other firms is insignificant. In Singapore, many firms are monopolistic competitive firms. For example, all the food stalls in the food courts in Singapore are monopolistic competitive firms, just as are hawker food stalls in Singapore. This is because they sell differentiated food from each other and they set their own prices. To open a small food store is not difficult or expensive. There are many food stores in Singapore and many people having their meals at these stores.

In Singapore, the national train company SMRT can be treated as a monopoly in train service industry because it takes a large proportion of the routes. A monopoly of train service, there is no price competition because SMRT is the price setter. If people want to take the train, they generally have to choose SMRT without any close substitutes. The high startup costs and running costs deter other companies from entering the train market. Hence there is no need for SMRT to use predatory pricing or limit pricing. In the long run, a monopoly gains supernormal profits. Hence, it has the ability to innovate and do research and development although it has no need to do so. SMRT can do that for increasing profits but not for survival. However, it has to in Singapore because if it cannot provide better and safer services, the government may choose to change it to other firms. 

In conclusion, oligopoly, monopolistic competition and monopoly can be used as models of market structure to explain the behavior of firms in Singapore, while clearly the idealistic model of perfect competition is always not present in the real world. In my opinion, among the three economic models, oligopoly may not be the most appropriate model because there are more small firms present in Singapore, which are monopolistic competitive firms. Different industries have different conditions hence firms may behave differently. People cannot predict that one model of market structure can explain everything. To conclude, oligopoly is an important and quite appropriate model of market structures only in some contexts and for some firms in Singapore, but not all.

JC Economics Essays - H2, H3 economics essays - tutor's comments: The essay answer addressed the requirements of the question quite well, but in an actual economics essay examination there should be appropriate, relevant, and useful economic diagrams. This is important - diagrams are important in economics and should be used whenever appropriate. What economics diagrams could have been used here? Note that when it comes to "A" levels or even undergraduate economics, economic concepts and ideas can be expressed in words, diagrams, or mathematics (which some say is a language). Therefore, for economics essays it is best to be fluent in words and diagrams/ graphs/ picture representations (for economic pictures, think of the "circular flow of income"). Also, think of the usual questions posed: how could this economics essay have been better written? Perhaps it could have benefited from more relevant and real world examples, or perhaps the examples could have been better explained in the context of the economic models? Having said that, this economics essay was answered under examination conditions, and is therefore quite high quality, well crafted, and well thought out with the required depth and range of economic ideas and concepts given a time constraint. Time management is very important in dealing with economics questions. What else do you notice about this economics essay answer? How would yours be similar, and how would yours be different? Special thanks to the contributors. 

Discuss, using examples from the United Kingdom, whether high levels of research and innovation are best achieved in competitive compared to monopolistic markets. (25 marks)

This Economics paper argues that high levels of research and innovation are best achieved in monopolistic markets, compared to competitive markets, because dynamic efficiency is best achieved when companies have the willingness and ability to conduct costly research and development (R & D).

First, what is dynamic efficiency? Dynamic efficiency means that companies can invest in education, research, innovation, and other creative processes that help them increase their efficiency over time, and in the long run will help them earn supernormal profits above opportunity costs and explicit costs. Competitive markets are markets with low barriers to entry, and can be idealised using the model of perfect competition.

What is perfect competition? Perfect competition is the market structure where there are many buyers and sellers of a single homogeneous product with perfect substitutes, low barriers to entry, suggesting that they earn normal profits in the long run, and where there is perfect information.

This is in contrast with monopoly, which in theory is a firm that sells a product with few close substitutes, with high barriers to entry, and which thus earns supernormal profits in the long run.

It can be argued that competition might not lead to research and development. Taking perfect competition to benchmark competitive firms in the UK, because they earn normal profits in the long run, they have neither the incentive nor the willingness to invest in research and innovation. For instance, small shops along the streets of London, especially monopolistic competitive firms, will not engage in research. 

However, having said that, if these firms are able to borrow from capital markets or get funding, or perhaps even due to external events causing temporary supernormal profits due to changes in demand and supply, they could have the willingness to invest in innovation so that they can because more “monopolistic”, when they produce a highly differentiated product.

It can be argued that monopolistic markets have firms that earn supernormal profit, because of their high barriers to entry. They therefore have both the ability and willingness to innovate to keep their monopolistic position. First, they have the ability because they earn supernormal profits, and can allocate massive funds to R&D. Second, they have the willingness because if they are in monopolistic markets that could potentially be contested by more efficient firms that could displace them to take over their market, they need to innovate to maintain their long term dynamic efficiency. 

For instance, Rolls Royce which manufacturers engines and aeroplane systems is a dynamic company probably because it has incentive and ability to innovate. BAE Systems plc is also another such company, and in fact both Rolls Royce and BAE are multinational companies, companies that span international borders with their unique product chains that require high levels of research and development. In fact, it can be said that some monopolies are monopolies because they have developed a product that is unique, differentiated, and wanted by consumers.

However, having said that, on the other hand contestable markets are usually perfectly competitive or competitive in nature, and as such competitive markets could help dynamic efficiency better in that respect. Thus competition might also lead to research and innovation, but the level could be lower than that of monopolies that have incentive and ability to do research and innovation.

Also, there are problems with monopolies. It can be argued that monopolies sometimes have x-inefficiency, where they do not act energetically to curb costs, and they could therefore become slothful and inefficient firms. This is because they may preserve their position through the use of patents, laws, legislation, and other legal means that have nothing to do with their level of technology or the sophistication of their product.

In the final analysis, this paper argued that high levels of research and innovation are best achieved in monopolistic markets, compared to competitive markets, because dynamic efficiency is best achieved when companies have the willingness and ability to conduct costly research and development, even though there are indeed some limitations to monopolies such as x-inefficiency. Competitive markets may have the incentive to conduct some research, but their levels are lower, and most of the time they neither have willingness nor ability due to the lack of barriers to entry which ensure supernormal profit. 

JC Economics Essays (H2, H3 A levels): Economics Tutor's Comments - This Economics paper on research and development and comparison of monopolistic and competitive firms was crafted under model examination conditions and has a few good points that one can learn from, but also some problematic areas, such as simplistic analysis and lack of many other relevant examples from UK manufacturing or service industries. Do think: if you were an Economics tutor, what advice would you give this student to help him make the Economics essay better? Perhaps you could focus on an area of improvement, such as the structure or organisation of this essay. Think of how this Economics paper could be made better. Thanks for reading and cheers!

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.