Monopoly and Oligopoly Analysis: Strategies for Market Power Retention

This report delves into the economic concepts of monopoly and oligopoly, exploring their defining characteristics and strategic implications. It begins by defining monopoly and explaining its emergence through single-price and price-discriminating models, supported by graphical representations and examples such as Tesco. The report analyzes how single-price monopolies maximize profits, again utilizing graphs to illustrate the relationship between marginal revenue, marginal cost, and profitability. Furthermore, it examines strategies for retaining market power in a monopoly setting, including price discrimination, large-scale production leveraging copyrights and patents, and the impact of limited competition. The report then contrasts monopoly with oligopoly, highlighting the dynamics of competition and cooperation within an oligopolistic market, using the airline industry examples of Boeing and Airbus. The report concludes by illustrating the use of game theory and the kinked demand curve model in understanding strategic decision-making in oligopolistic markets.

MONOPOLY AND
OLIGOPOLY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
a. Monopoly.................................................................................................................................3
b. Oligopoly.................................................................................................................................8
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Market powers is the ability of the firm for rising and maintain the price about such level
which helps in prevailing under competition, This results in reduced output and loss of financial
welfare. The report will shed light on the difference between monopoly and oligopoly and will
highlight it through various examples and graphical presentations. Various theories will be used
to signify their impact on the companies and the industry.
a. Monopoly
A monopoly is when an individual company produces the goods and there are no closed
substitutes of it. This exists in those areas where a company is the one and only dominant
company or force for selling particular product or service in the industry. This power gives the
company more than enough power which helps it in keeping the competitors away from the
emerging market as it gives high barriers to the entry which include the factors such a
technology, government regulation, steep capital requirements, high distribution costs or the
patents. Some companies strive hard to establish the monopoly because once it is established,
there is lack of competition and the company can increase its prices. This is why, these
companies are considered as the policy makers as they can change the price anytime because it
reduces the choices for the buyers (Alam, Parvin and Roslan, 2020). The aim behind this is also
to benefit the customers and the government also supports it.
Monopoly is raised when there are no close substitutes and there are barriers to the entry in
the same market regarding the product and services. Barriers of entry describes that there is
something which helps the company in protecting it from the arriving of new competitors. This is
basically of two types: Natural and Legal. Natural barriers to entry or the natural monopoly
exists when the goods from one company sold at lower process can meet the demands of the
whole community by using a technology.
3

Figure 1: Monopoly and how it arises
Source: Monopoly and how it arises, 2020
The second one is the legal barriers to entry or the legal monopoly which exists when a company
or a firm has the ability to create and develop its own barrier to entry through buying the
significant portion of any natural resource. In this, the entry or the competition are restricted by
taking the ownership of the natural resource or can also be done by granting itself as the public
franchise, patent, government license or copyright.
Public franchise is that which has the exclusive right granted for supplying the particular service
or good. Patent is also the same but it is given to inventor of service or product. Copyright also
gives the exclusive right but to the composer or the author of any work like literature, music or
drama or any artistic work.
There are also price-setting strategies for the monopoly which means there is a trade-off faced
between the quantity sold and price. In order to sell larger quantity of any good, the company has
to lower its prices. These can be done by single price or price discrimination (Wang and
Werning, 2020).
Single-price monopoly is basically a company or a firm which sells each output unit at the same
price to the consumers or the customers. Tesco which is the largest market leader of supermarket
in the retailer industry of UK also follows the single price monopoly. On the other hand, price
4

discrimination is basically a firm or a company which has the ability to sell its different goods
and services at different prices. Airlines can be the example of this as it offers variable prices for
the same trip.
Figure 2: Single-price Monopoly
Source: Single-price Monopoly, 2020
Price discrimination is basically deals in selling of a service or good at various processes. Fir
this, the firm needs to identify and segregate the various types of buyers. The company also
needs to sell the product which may not be resold. The main aim behind this is converting the
consumer surplus into financial profit. In this, the monopoly arises when the firm offers each
individual customer an individual price according to the willingness of the customer to pay for
the product or service. The discrimination can be in between the buyers or the goods to be sold.
In case of buyers, this can be on the basis of employment status, age etc. while in the case of
good, the firm sold those products at lesser prices which are available in larger units.
5

Figure 3: Price discrimination monopoly
Source: Price discrimination monopoly, 2020
The single price monopoly helps in increasing the profitability of the firm by evaluating the
marginal revenue and the marginal costs of producing the extra unit of any good. If the marginal
revenue is greater than the marginal cost then the company can increase its profitability of the
firm (Galetic and Kurtusic, 2017). The firms demand curve is the market demand curve as in the
monopoly there is only one firm.
6

Figure 4: Single-price monopoly increases profitability
Source: Single-price monopoly increases profitability, 2020
For the company to have the monopoly power, it must have market power of more than 25% and
Tesco has the market power of 30%. The Tesco is a monopoly firm as it has the ability to act in
the marketplace such that its rivals cannot do in the nearest possible way also. Tesco also possess
the ability to charge different prices in the stores especially which depends upon the strength of
the local competition. It also has the ability to sell some items below the original cost. The
company does this by developing and implementing certain strategies such as Tesco opens its
store just near the florist so that the company can decrease the margins on the flower bouquets
for attracting the customers away from the florist. This is also considered as the abuse of market
power. Under the Tescopoly, the company has brought the food prices down by making use of
their market power and also they provided various job opportunities in UK which is also known
as sourcing of cheap labour or the modern day slavery in other countries but providing jobs will
help in raising the standards of the people in the countries (Zhu, 2019). This is how; the company
retains its market power. Also, the company do the major production with the patents and the
copyrights which makes it very difficult for its competitors to follow the same which lessens the
competition and helps the company to increase its market power.
7

b. Oligopoly
The oligopoly exists when the group of companies are able to control the market or the
industry in the particular country or area. The competition is present which is why the prices are
moderate in this market. When a particular price is set by the company then the others will also
respond for remaining competitive. If the price is cut by one company then the existing players
also follow the same. There is no dominant force in the market and it creates a sense of
cooperation which makes them tough to keep the non-established players away from entering the
emerging market.
There are 5 companies in the UK market which own approximately 75% of the market. These
companies include Asda, Tesco, Sainsbury, Morrison and Safeway. Among all this, Tesco is the
largest company in the supermarket industry of UK (Kim, Lan and Dobson, 2019). The dilemma
faced by these companies is that each firm possess incentive to cheat. If all the firms in the
oligopoly market strive hard to work cooperatively and restrict the supply and keep the prices
high then the aim of each firm will be capturing the substantial business from each other and for
this they will break the agreement thereby undercutting others. This type of competition can be
waged through the prices or may be the single company tries to expand its own output which is
brought to the market.
Game theory is basically a framework which conceives social situations among the competing
players in order to maximize their returns. This also helps in decision making of the competing
or the independent actors within the strategic setting. In the oligopoly market, the firms are not
impacted by the decision making of their own firm but also the decisions made by the other firms
in the oligopoly market. The game theory also states that the firms must take the decisions by
considering the response of others to that decision or action. This theory is not required to
analyse the monopolized or competitive market. This theory helps in thinking about the ways in
which the firms act in context of the interdependence (Tsokhas, 2020). For example, the
competition between the Boeing and Airbus is considered as the duopoly in the market of large
jet airliner since 1990s.
8

Figure 5: Airbus v/s Boeing
Source: Airbus v/s Boeing, 2020
9

Tools of single game theory can help in restoring the common sense. The companies may not
mean what they say but they make sense of everything they claims. Both the companies Boeing
and Airbus were engaged in the activities of successive puzzling in the game known as
superjumbo which can help them in revealing at the end the motivation coherence (Zutshi and
et.al., 2018). At that time, the Boeing recognised that it could not win so it played the game of
the psychological card in the game itself.
Figure 6: Boeing v/s Aircraft
Source: How Airbus Has Grown Over The Years To Dethrobe Boeing As The Largest
Commercial Aircraft Maker, 2020
10

Figure 7: Oligopoly Diagram
Source: Pettinger, 2019
Kinked Demand Curve Diagram can be used for explaining oligopoly markets. It states that
the firms are considered as the profit maximisers. If there is increase in the prices of products and
services of one firm then the other firms won’t follow the suit. Therefore, for the increase in the
price demand is considered as price elastic. If there is price cut by one firm, then the other firm
will tend to follow the suit in order to protect themselves from losing the market share. This is
how; if there is cut in price demand is considered as price inelastic. Therefore, in this way this
demand curve is obtained. This can be explained by the example of Boeing v/s Airbus in which
Boeing was established in 1916 and that time it was considered as the only airplane supplier but
then in 1970, first commercial airplane was launched by Airbus. In today’s era, both companies
together have a share of 91% in the aircraft market across the world. But since 5 years, the
11

company Boeing’s market share was taken by Airbus and the company has the market share 56%
greater than Boeing.
CONCLUSION
The above report concluded about the monopolistic and oligopolistic companies and the
ways in which they make the profits. The various examples were given to show the difference
and various graphical presentations were made to show the relationship between its different
aspects. Various theories were used to explain the concepts and examples.
12

REFERENCES
Books and Journals
Alam, G.M., Parvin, M. and Roslan, S., 2020. Growth of private university business following
“oligopoly” and “SME” approaches: an impact on the concept of university and on
society. Society and Business Review.
Galetic, F. and Kurtusic, M., 2017. Oligopolistic Market Of Mobile Telephony In
Croatia. Journal of International Scientific Publications: Economy & Business. 11(1).
pp.77-86.
Kim, S.H., Lan, H. and Dobson, P.W., 2019. Identifying price-leadership structures in
oligopoly. Oxford Economic Papers.
Tsokhas, K., 2020. Book Review: The Big Four: The Curious Past and Perilous Future of the
Global Accounting Monopoly.
Wang, O. and Werning, I., 2020. Dynamic Oligopoly and Price Stickiness (No. w27536).
National Bureau of Economic Research.
Zhu, J.J.H., 2019. The market structure of the internationalization of communication research:
From monopoly to competitive oligopoly. Communication & Society. (50). pp.187-246.
Zutshi, A. and et.al., 2018. A game theory approach to online lead generation for oligopoly
markets. Computers & Industrial Engineering. 121. pp.131-138.
Online
Airbus v/s Boeing, 2020. [ONLINE]. Available through: <
https://www.pinterest.com/pin/680184349954191271/>
How Airbus Has Grown Over The Years To Dethrobe Boeing As The Largest Commercial
Aircraft Maker, 2020. [ONLINE]. Available through: <
https://www.forbes.com/sites/greatspeculations/2020/01/06/how-airbus-has-grown-
over-the-years-to-dethrone-boeing-as-the-largest-commercial-aircraft-maker/?
sh=27e5183e3a59>
Monopoly and how it arises, 2020. [ONLINE]. Available through:
<https://www.unf.edu/~traynham/ch13lecture.pdf>
Pettinger, T., 2019. Oligopoly Diagram. [ONLINE]. Available through: <
https://www.economicshelp.org/microessays/markets/oligopoly-diagram/ >
13

Price discrimination monopoly, 2020. [ONLINE]. Available through:
<https://www.unf.edu/~traynham/ch13lecture.pdf>
Single-price monopoly increases profitability, 2020. [ONLINE]. Available through:
<https://www.unf.edu/~traynham/ch13lecture.pdf>
Single-price Monopoly, 2020. [ONLINE]. Available through:
<https://www.unf.edu/~traynham/ch13lecture.pdf>
14