Econs - Market Structures
1a) Explain how the different features of monopolistic competition and oligopoly affect price and output determination in these market structures.
Both monopolistic competition (MPC) and oligopoly generally determine price and output based on the profit-maximising condition that marginal cost (MC) equals to marginal revenue (MR). Due to the different features of both monopolistic competition and oligopoly such as the barriers to entry (BTE), which affects the number of sellers as well as market power, nature of product and possibility of enjoying economies of scale (EOS).
MPC firms have weak BTE where firms’ entry into these industries is largely unrestricted by government’s rules and regulations. One example of an MPC firm is the hawker stall. The set-up cost including the rental cost is low and due to the small-scale production of food, there is limited scope for EOS that act as a BTE. This weak BTE gives rise to the large number of hawker stalls being set up. With so many hawker stalls present, each hawker stall has a relative small share of the total food market. Thus, each hawker stall has only a small amount of control over the market price of the food. Actions by one hawker stall with regards to changes in its price or quality of food have little impact on the sales of any other hawker stalls and so are unlikely to elicit response from other hawker stalls. Each hawker stall makes independent decision on the price of food. The products sold in the MPC market are differentiated just like how every hawker stall sells different food. In the long run, with weak BTE, hawker food stalls will enter or leave the food industry such that it earns only normal profits.
On the other hand, an oligopolistic firm has stronger BTE arising from the structural BTE, endogenous sunk costs or strategic entry deterrence. One example of an oligopolist is telecommunications such as SingTel, M1 and Starhub. These three firms have high set-up costs since they have to be
Both monopolistic competition (MPC) and oligopoly generally determine price and output based on the profit-maximising condition that marginal cost (MC) equals to marginal revenue (MR). Due to the different features of both monopolistic competition and oligopoly such as the barriers to entry (BTE), which affects the number of sellers as well as market power, nature of product and possibility of enjoying economies of scale (EOS).
MPC firms have weak BTE where firms’ entry into these industries is largely unrestricted by government’s rules and regulations. One example of an MPC firm is the hawker stall. The set-up cost including the rental cost is low and due to the small-scale production of food, there is limited scope for EOS that act as a BTE. This weak BTE gives rise to the large number of hawker stalls being set up. With so many hawker stalls present, each hawker stall has a relative small share of the total food market. Thus, each hawker stall has only a small amount of control over the market price of the food. Actions by one hawker stall with regards to changes in its price or quality of food have little impact on the sales of any other hawker stalls and so are unlikely to elicit response from other hawker stalls. Each hawker stall makes independent decision on the price of food. The products sold in the MPC market are differentiated just like how every hawker stall sells different food. In the long run, with weak BTE, hawker food stalls will enter or leave the food industry such that it earns only normal profits.
On the other hand, an oligopolistic firm has stronger BTE arising from the structural BTE, endogenous sunk costs or strategic entry deterrence. One example of an oligopolist is telecommunications such as SingTel, M1 and Starhub. These three firms have high set-up costs since they have to be