ECON20039: Market Structures - Competition, Monopoly & Oligopoly

This essay provides a comparative analysis of perfect competition and monopoly, detailing their characteristics, price and output determination, and impact on consumer/producer surplus and deadweight loss. It further examines oligopoly, using the Australian supermarket and banking industries as examples, highlighting the role of advertising and market dominance. The discussion includes the interdependence among firms, barriers to entry, and the nature of products in oligopolistic markets. Desklib offers a wide range of study resources, including past papers and solved assignments, to aid students in their academic pursuits.

Running head: ECONOMICS FOR MANAGERS
Economics for Managers
Name of the Student
Name of the University
Student ID
Course ID

1ECONOMICS FOR MANAGERS
Answer 1
Characteristics of perfect competition and monopoly market
Perfect competition refers to a market having a large group of buyers and sellers
selling homogenous or identical product in the market. Monopoly in contrast refers to a
market where a single seller in the market sells a unique product to numerous buyers. The
two market differs in terms of number of buyers and sellers, nature of produce sold and other
characteristics. The distinguishing features of perfect competition and monopoly market are
evaluated below.
Number of buyers and sellers
The perfect competition is characterized as having a large group of buyers and sellers.
As there are various sellers in the market, each seller constitutes only a small part of the
market and hence, has no market power (Baumol & Blinder, 2015).
Monopoly on the other hand is characterized to have a single seller and various
buyers. Only one seller controls the entire market and has considerable market power.
Nature of the product
Under perfect competition, firms sell homogenous or identical product. If one seller
increase price, then buyers can go to other seller as goods are perfect substitutes.
In contrast, product sold by the monopolist has no close substitutes (Mahanty, 2014).
This further increase monopoly power of the seller.
Price determination

2ECONOMICS FOR MANAGERS
With large group of buyers and sellers under perfect competition, neither buyers nor
the sellers can influence price. Buyers and sellers have to accept the price determined by the
independent forces of demand and supply. Sellers in the market are price takers.
The monopolist has considerable market power and hence, determines price of own
product in the market (Nicholson & Snyder, 2014). The single seller in the monopoly market
is the price maker.
Entry barriers
Firms under perfect competition face no forms of barriers to enter or exit the market.
During economic profits, new firms enter the market while in times of economic loss,
existing firms leave the industry.
Opposite is the case for monopoly. New firms face strict entry barriers to enter the
market. Either natural or regulatory barriers prevent entry of new firms.
Short run and long run profit loss under monopoly and perfect competition
Short run
Under perfect competition, each firm faces a perfectly elastic demand curve. The
demand curve is shown the horizontal line parallel to quantity axis. As firms in perfect
competition act as price takers, marginal revenue is same as average revenue which is same
as price. Firms maximizes profit where firms earn marginal revenue equivalent to marginal
cost in the production process (Cowen & Tabarrok, 2015). In the perfect competition, as
marginal revenue is same as price, the profit maximization condition becomes price =
marginal cost. In order to ensure equilibrium at this point, it is necessary that marginal cost
curve passes through marginal revenue curve from the below. In a perfectly competitive

3ECONOMICS FOR MANAGERS
market, firms in the short run can earn more than normal profit or suffer from an economic
loss or acquire just normal profit.
Figure 1: Competitive firms earning more than normal profit
Figure 2: Competitive firms earning just normal profit

4ECONOMICS FOR MANAGERS
Figure 3: Competitive firms suffering economic loss
The objective of the monopolist is to maximize profit. This is same as to minimize
loss. Monopoly firm in the short run operates where addition revenue from last unit sold is
same as the added cost of producing that unit. Unlike perfectly competitive firms, firm is
price maker in the market. Firms here face a downward sloping demand curve (Sloman &
Jones, 2017). Monopolist mostly earn economic profit in the market. However, in some
situation is might continue operation with economic loss in the short run if all the variable
costs are covered.

5ECONOMICS FOR MANAGERS
Figure 4: Economic profit in the short run
Long run
The long run situation is very much different between perfect competition and
monopoly. In a perfectly competitive market, firms in the long run enjoy only a normal profit.
This is because of free entry and exist of firms in the industry. Consider a situation of
supernormal profit in the short run. Short run profit in the industry attracts new firms to enter
the industry (Friedman, 2017). As new firms enter, there is an increase in supply in the
industry. The excess supply reduces market price and profit. In times of economic loss, firms
leave the industry, market supply reduces resulting in an increase in profit. The mechanism of
entry or exit continues unless the industry only has normal profit. This happens when price
equals minimum point of long run average cost.
Figure 5: Long run normal profit under perfect competition
The situation is different for the monopolist. With strict entry barriers, monopoly firm
can sustain economic profit in the long run. The monopolist does not necessarily operate at
the minimum point of average cost in the long run. It is free to expands plant size depending
on the profit motive.

6ECONOMICS FOR MANAGERS
Figure 6: Long run economic profit for monopolist
Price and output under monopoly and perfect competition
Firms under perfect competition have no market power. Hence, they produce at a
socially efficient scale. Competitive firms produce socially efficient output and charges an
efficient price. Firms under perfect competition operate where market price equals the
marginal cost of production (Mankiw, 2014). In the figure below, Pc shows price under
perfect competition and Qc is the corresponding output. Monopolist however does not
operate at the socially efficient point. It choses price and output by condition of equalizing
marginal revenue and marginal cost. Price in the monopoly market is PM and associated
equilibrium output is QM. As the monopolist charges higher price and sells a relatively
smaller output, there is misallocation of resources resulting in efficiency loss or deadweight
loss.

7ECONOMICS FOR MANAGERS
Figure 7: Price and output in monopoly and perfect competition
Consumer surplus, producer surplus or deadweight loss
Figure 8: CS, PS and deadweight loss
As discussed in the previous section, in the monopoly market consumers face a higher
price compared to that of a perfectly competitive market. The higher price puts consumers at
a disadvantageous position in terms of reducing their surplus. The consumer surplus is larger
in under perfect competition (A+B+E) compared to area A under a monopoly market.

8ECONOMICS FOR MANAGERS
Producer surplus in the competitive market is presented as C+D+F. Under monopoly market,
producer surplus is obtained by the area B+C+D. Loss in consumer surplus is the area B+E.
While B goes to the producers, the area E remained unexplained (Maurice & Thomas, 2015).
Loss in producer surplus is F. The net loss in social welfare is the area E+F. This is referred
to as deadweight loss.
Answer b
Characteristics of oligopoly market
Oligopoly market belongs to the category of market having imperfect competition. In
this market, there is a few sellers dominate majority of the market. The relatively small
number of sellers engage in intense competition in the market (Belleflamme & Peitz, 2015).
The dominance of few large sellers indicates that each of the firm has a considerably large
market share. With significant market share, each firm has some control on the market. The
distinctive characteristics of oligopoly market are given below.
Small number of sellers
Number of firms in the oligopoly market is relatively small. The few sellers enjoy a
dominating share in the market.
Number of buyers
Buyers in the oligopoly market belongs to a large group (Stiglitz & Rosengard, 2015).
The dominating firms serve a large group of buyers and hence, has control over a large share.
Nature of the product
Oligopolistic firms can sell products that are either homogenous or differentiated.
Oligopoly firms selling homogenous products is known as pure oligopoly. Differentiated
oligopoly is the market where firms sell products that are slightly differentiated.

9ECONOMICS FOR MANAGERS
Interdependence among firms
Firms in the oligopoly market depends on each other in determining their marketing
strategy. Each rivals have a close watch on the strategy of others. Knowing the strategy of
other firms, each takes a counteractive strategy (Chan, Narasimhan & Yoon, 2017). Price war
is the result of intense rivalry and interdependence among firms. Firms in the oligopoly
market often collude and form a cartel to act as a monopoly.
Barriers to entry
New firms face strict barriers to enter the market. Barriers can exit in the form of
government regulation, patent or copyright, high fixed cost, dominance of large firms and
others natural or regulatory barriers.
Advertising
Advertising plays an important role in the oligopoly market. Because of intense
competition among rival firms, firms have to adapt aggressive and defensive marketing
strategy. In order to maintain a relatively large share in the market firms incur a significantly
high cost for advertising spending. The importance of advertisement in the market depends
on varying degree of product differentiation. Firms can adapt either persuasive or information
advertisement depending on market condition and buyers’ demand (Han, Heywood & Ye,
2017). New and innovative advertisements helps to attract more customers. Advertising helps
firms to establish a separate identity and brand value for their products. Not only sellers but
also customers are benefitted from advertising and other promotional strategies. Through
advertising firms can convey information of the product sold in the market in a cost-efficient
manner (Schroeder & Tremblay, 2016). The intense rivalry and high degree of product
differentiation makes advertisement an integral part of oligopoly market.
Oligopoly in Australian supermarket

10ECONOMICS FOR MANAGERS
In Australia, an example of oligopoly market is the grocery retail sector. Like
oligopoly market, few large firms dominate the market of retail supermarket chain. The
important players in the supermarket oligopoly are Woolworths, Coles, Aldi, IGA and others.
In the market, Coles and Woolworth enjoy approximately 80 percent share in the
market. These firms are engaged in intensive competition. This is similar to that of the
oligopoly market. Location gives oligopolistic firms special power to dominate the industry.
The operation of Woolworths is limited to New Zealand and Australia only (Jericho, 2018).
Nature of product is another important characteristic of oligopoly market form. Firms in the
food retail sectors sell almost similar but differentiated product and have the power to affect
market price.
In the supermarket chain, advertising plays an important role. Coles and Woolworths
makes considerable investment for advertising. An important part of Coles advertising and
promotional strategy is to encourage customers to share their positive experience with other
customers. Both Woolworth and Coles include celebrities and sports start as part of their
advertisement strategy (news.com.au, 2015). Recently, Coles and Woolworths have taken the
strategy to reduce their advertisement spending. In contrast to this, another competitor Aldi
has increased its advertisement spending. Aldi’s advertisement spending amounted to be
$34.7 million. Advertisement spending of Aldi has increased by nearly 17 percent.
Advertisement related to Aldi’s product are broadcasted in newspaper, magazines, radio,
television and other online media (adnews.com.au, 2019). Digital advertising is the most
preferred medium of advertisement in the market.
In the retail supermarket industry, advertising plays an important role to attract new
customers. Advertisement though is an important part of marketing strategy of oligopoly
firms, it is not always necessary for oligopoly firms to spend huge amount on advertising.

11ECONOMICS FOR MANAGERS
This depends on the nature of product sold in the market. One such example is oligopoly in
Australian banking industry. The dominance of four major banks make the industry an
oligopoly market. The four dominating players in the industry are Australia and New Zealand
Banking Group, National Australian Banks, Commonwealth Bank of Australia and Westpac.
These four banks together constitute 80 percent of market share. The advertisement spending
in the baking industry is relatively less compared to other oligopoly business. This is because
of the importance of various banking service in the everyday life. Product and services are
not much differentiated and hence, there is not much need of advertisement.
Answer c
Housing affordability crisis in Australia
Accommodation counts as one of the necessities of human being. Finding house at an
affordable price especially in the capital cities of Australia has become the biggest challenge
today. The pressure from growing demand associated with limited supply causes housing
price to rise at an excessively high rate. The two important capital cities of Australia,
Melbourne and Sydney experience huge crisis of housing affordability. House price nearly
double or more than doubled in these areas since 2009. Data reveals that price of houses
increase increases faster than the growth in real wage (Birrell & McCloskey, 2016). This
forces people to borrow credit for financing expenditures in the housing market. An
associated problem with the housing affordability crisis is the growing debt burden of
Australia. The share of household debt in the GDP of Australian constitute an increasing
trend. The rapidly growing housing price thus has become a major problem for the economy
of Australia as a whole.