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

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

Introduction - market structure, oligopolies and monopolistic competitive firms

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

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

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

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

Oligopoly can be applied to Singapore’s context

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

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

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

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

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

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

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

Monopolistic competition can be applied to Singapore’s context

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

Conclusions

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

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