International Trade and Enterprise: Market Analysis and Case Studies

This report provides an analysis of two key market structures: monopolistic competition and oligopoly. It begins with definitions and features of each market type, highlighting aspects such as product differentiation, number of buyers and sellers, and entry/exit conditions. The report then applies these concepts to real-world scenarios in Australia. For monopolistic competition, it examines the case of Starbucks in the Australian coffee industry, discussing Starbucks' product differentiation efforts and challenges in meeting local preferences. For oligopoly, the report analyzes the Australian banking industry, focusing on the concentration of market share among a few major banks and the barriers to entry. The report concludes by summarizing the key characteristics of each market structure and providing insights into their practical applications within the Australian context.

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Executive Summary
The report investigates distinctive characterstics and other related aspects of monopolisically
competeive and oligopoly market. Both are form of imperfect competetion having some unique
charaterstics. In case of monpolistic competeition the associated features are large number of
buyers, product differentation, free entry or exit and others. In the oligopoly market, the most
distinctive feaure is concenteation among large firms. The report is not limited to theoretical
disusson rather it anlyzes application of each of the two market forms in Australia. For
monopolistic competetition, case of coffee industry and for oligopoly, case of Australian banking
is taken into consideration.

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Table of Contents
Introduction......................................................................................................................................3
Monopolistic competition: Definition and features.........................................................................3
Oligopoly market: Definition and features......................................................................................5
Monopolist competition: the case of Starbucks in Australia...........................................................6
Oligopoly: the case of Australian banking......................................................................................8
Conclusion.......................................................................................................................................9
Reference list.................................................................................................................................10

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Introduction
In common terminology, “market” indicates specific place where buyers and sellers of
various goods meet with each other and involve in physical transaction of the good. Market
however has a different significance in economics. Economic definition of market however is not
restricted to a single place rather it implies spread of buyers and sellers over the whole area. One
definition of market as stated by Cournot, a French economist suggests that market does not
refers to a single place where goods are bought and sold. Market is the entire region that where
sellers and buyers are involved in free intercourses to one another. In the market, price of the
product tends towards equality (Baumol & Blinder, 2015) there are several determinants building
the basis of different forms of market. These include nature and number of seller, nature and
number of buyers, kind of product sold in the market, condition to enter or exit the market and
economies of scale.
Depending on degree of competition, there are four common forms of market- Perfect
competition, monopoly, monopolistic competition and oligopoly market. The current research
paper makes intense research on two of these popular market forms namely monopolistic
competition and oligopoly.
Monopolistic competition: Definition and features
The concept of monopolistic competition indicates condition of a market that has a keen
competition among a considerably large number of sellers. The degree competition however is
neither pure not perfect. There is rather a large group of small producers enjoying some form of
monopoly following product differentiation (Nguyen & Wait, 2015). Monopolistic competition

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is thus considered as a form of market that is a mixture of perfect competition and some degree
of monopoly. Some salient features of monopolistic competition are given below
Number of buyers and sellers
In a monopolistically competitive market, large number of sellers operate in the market.
The number of firms however is not as large as that of perfect competition. Each firm therefore
has some market power to control combination of price and output. In the market, there are large
number of sellers. Each firm follows its own strategy. When a single firm lowers its price, the
acquired gain from sales is not much large giving rivals’ little incentives to react.
Free entry and exit
In the monopolistically competitive market, firms are allowed to enter or exit the market
freely. Entry occurs when existing firms in the short run enjoys a supernormal profit. The entry
of new firms increases supply in the industry. The excess supply then lowers price and erodes
profitability gain. Firms incurring loss in the market on the other hand exit the industry creating a
supply shortage (Bertoletti & Etro, 2017) Prevailing excess demand then increases price and
reduces loss. Entry or exit continues unless all the firms enjoy have only normal profit.
Product differentiation
Product differentiation is another distinctive feature of monopolistic competition. Product
differentiation inclines to a situation in which buyers are able to differentiate products that are
close substitute to each other. Since the product of the operating firms are not much different,
firm differentiate their product by adding some distinguishing features. Firms producing
differentiated products though has monopoly but faces extreme competition.

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Elastic demand
Though not infinitely elastic like perfect competition, firm under monopolistic
competition faces a relatively higher elasticity of demand (Assenza et al., 2015). Each firm faces
a downward sloping demand flatter market demand curve. Firms need to lower its price to sell
more of its product.
Oligopoly market: Definition and features
A market is said to be an oligopoly market if only few sellers operate in the market. Each
firm has the ability to influence its own price and output combination in the market. Give that,
number of firms is not much large each firm has control over a large part of the market supply.
Strategy of an individual firm influence its rivals very much. In a pure oligopoly market where
firms sell homogenous product, market price remains fixed (Moulin, 2014). Even in situation
where firms sell differentiated products agreements like monopoly market have less possibility to
occur. Some of the distinctive features of oligopoly market are given below.
Monopoly power
In the oligopoly market, there is some extent of monopoly power. The monopoly power
arises because small number of firms operate in the market and each controls a large market
share.
Strategic interdependence of firms
In the oligopoly market, each firm produces goods that are either homogenous or
differentiated slightly. Independent strategy of firms affects their rivals as well. Firms cannot
ignore the action or reactions of their rivals in the market (Adlakha, Johari & Weintraub, 2015).

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Conflict among existing firms
In an oligopoly market, there are two forms of conflicting attitude among the firm. There
is one instance where firms recognize it is disadvantageous to compete and intend to collude
achieve maximum profit jointly. This form of oligopoly is known as collusive oligopoly. There is
however situation in which firms seek to maximize their individual profit leading to conflict
among them (Gugler & Szucs, 2016). There are clashes among firms regarding profit distribution
and allocation of market share. This form of oligopoly market is known as non-collusive
oligopoly.
Fewer firms in the market
Under oligopoly, there are fewer firms controlling the entire market. When there are only
two firms operating in the market, it is called duopoly. Market with smaller number of firms has
extreme concentration.
Nature of the product
Oligopoly market selling a homogenous product is called pure oligopoly. An oligopoly
market is said to be differentiated oligopoly when firms sell differentiated products.
Large number of consumers
Number of seller in the market though is relatively smaller but there are large number of
buyers in the market.
Indeterminate demand

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In the oligopoly market, the market demand curve is indeterminate in nature (Stiglitz &
Rosengard, 2015). This is because action taken by one firm may cause a change in market
demand.
Monopolist competition: the case of Starbucks in Australia
The coffee industry in Australia has a monopolistically competitive market structure. As
of March 2013, coffee shops in Australia numbered 6,488. The coffee shops are employing
nearly 83,000 staffs. The estimated market value of the coffee industry is AU $ 5 billion. In the
coffee industry, there exists low entry barriers. New players can easily enter the market but they
need to differentiate their products highly. Starbuck in Australian market in 2008. The company
was able to make successful operation only for eight year succeeding their market entry.
Starbucks failed in Australian market. In a monopolistically competitive market, product
differentiation plays a critical role (Barrios et al., 2016). Starbucks put several effort for
differentiating its coffee. Starbucks collected its beans from all over the world and offered
several choices of coffee recipes. The coffee market in Australia however is very much localized.
The offerings of Starbucks though stand in world standard; it however failed to make
considerable appeal in Australian market. Starbuck was not enough responsive to meet local
tastes and preferences. Starbucks though attempted to differentiate the offered drinks by
introducing newer coffee recipes; its sustainability in the market however was questionable.
In a monopolistically competitive market, despite prevalence of large number of sellers,
owners of each brand enjoys some control in deciding price. Buyers are willing to a high price
only when the product seems to be as good quality. Offering in the Starbucks coffee shops did
not seem as premium to Australian customers, despite it charged a premium price over other
local seller. Courteous servers that offers a satisfactory level of personalized service is one

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distinctive advantage of Starbucks over other rival players in the industry (sbs.com.au, 2018).
The service standard of Starbucks however has declined in recent years as the company hired
less experienced and untrained baristas. This created a sense of discontent among Australian
customers.
Starbucks was unable to recognize the fact that differentiation is not a onetime effort.
Once the product is easy to imitate, there is further need for innovation to add some variability to
the product. Another that that needs to be considered is that people’s tastes change overtime.
Firms need to make product differentiation in line with changing tastes and preferences (Knox,
2016). The failure of Starbucks to review product differentiation effectively despite of its
operation in a highly competitive and differentiated market environment.
Oligopoly: the case of Australian banking
Banking industry in Australia is dominated by four major banks accounting almost 75
percent share in the entire industry. Concentration in the banking industry is mostly resulted
from mergers that were taking place back to a century. Followed by the mergers there is an
increasing tendency of concentration in the industry (Bakir, 2017). The number of competitors in
the industry has declined overtime. As of October 2007, there were more than 150 financial
institutions offered 2117 loan products. However, in 2010, the number of financial institution
lowered to only 100 with number of offering declined to 1600 products.
Two measures can be used for measuring concentration in Australian banking industry.
The first one is simple comprising industry’s share of largest three to five form. Australian
banking is currently dominated by four large banks accounting largest share in assets, deposits
and home loans. Another measure used to analyze market concentration is Herfindahl –

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Hirschman index. The measure varies between 0 and 1 (aph.gov.au, 2018). Higher the index,
higher is the concentration. The computed index for Australian banking in the year 2011 was
0.16.
There are different form of entry barriers exist in industry. The entry barriers prevail in
the form of branch network, low interest deposit, significant control in the financial planning
market advantage of product bundling, advertising, perceived size and safety. The presence of
economies of scale is another factor contributing to banking industry concentration (Tyers,
2015). The oligopoly market structure and dominance power of largest banks considerably
increase profitability of banking.
Conclusion
The report summarizes two common structural form of market namely monopolistic
competition and oligopoly. Monopolistically competitive market is a market structure having
combined characteristics of monopoly and perfect competition. Oligopoly on the other hand is a
form of concentrated market dominated by few firms. Product differentiation is one of the most
crucial aspect of monopolistically competitive market. Other features of monopolistic
competition include large number of sellers, free entry or exit and elastic demand. The main
characteristics of oligopoly market include interdependence among firms, monopoly power, high
entry barriers, conflict among firms and others. Australian coffee industry is an example of
monopolistic competition. An example of oligopoly market in Australia is the banking industry.

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Reference list
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Assenza, T., Grazzini, J., Hommes, C., & Massaro, D. (2015). PQ strategies in monopolistic
competition: Some insights from the lab. Journal of Economic Dynamics and
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Bertoletti, P., & Etro, F. (2017). Monopolistic competition when income matters. The Economic
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