Exercise 9-2) Comparing Market Structures

Comparing Market Structures

• Market structurse comparison

	Perfect Competition	Monopolistic Competition	Oligopoly	Monopoly
Number of firms	Infinite	Many	Few	One
Freedom of entry	Easy	Easy	Difficult	Very difficult
Product differentiation	None	High	Absolute (across industries)	Yes
Implications for demand curve	Perfectly elastic	Highly elastic	Relatively inelastic	Relatively inelastic
Average size of firms	Small	Small	Large	Large
Possible consumer demand	Consumer demand set in equilibrium price	Consumer demand is different with each firm.	Consumer demand is changed by price change.	Consumer demand determined by price change
Profit making possibility	Earn normal (Not economic, profits in long run	Lower efficiency from consumer preferences (Not economic, no profits in long run)	Profitability, Price > MC (Long run profits are possible.)	Not always profitable P=MR=MC=Demand If MR>MC, profitable
Government intervention	Basic regulations	Entry may be blocked by law or regulation	Laws control to regulate monopoly & oligopoly or to protect consumer
A new example	Commodities like a wheat	Different soaps have same basic material but have different features like odour, shape	Oil, Automobile, cigarette	SAQ (Société des alcools du Québec) and LIPA (Long Island Power Authority).
Features	Easy entry means all firms earn normal.	Advertising is important for product differentiation.	Advertising is important part of competition.	Advertising and innovations are not necessary.

Perfect Competition

 Maximum profits cause when total revenue is over the total cost. In the points TC is same with TR, they are break-even points.

 

Monopolistic competiton

The firm maximizes its profits by equating marginal cost with marginal revenue. The intersection of the marginal cost and marginal revenue curves determines the firm's equilibrium level of output.

Oligopoly
There are two theories that explain oligopoly and they are Kinked-demand theory and Cartel theory. Kinked-demand theory can be applied when each firm sells differentiated products. Each firm can face two demand curves.

Long-run equilibrium- Monopolistic competition

Short-run equilibrium- Monopolistic competition

Monopoly

Profit maximizing in the monopoly is found by equating its marginal cost with marginal revenue. It is the sale condition with perfect competition.

 

Exercise 8-1) Defining Oligopoly and Game Theory

Defining Oligopoly and Game Theory

Defining oligopoly

·         Compare an oligopoly market to a perfect competition and monopolistic competition type of market

Oligopoly market and perfect competition: In oligopoly market, oligopolies are price setters. There are a few big sellers in this market so large big sellers significantly influence on setting price. On the other hand, perfect competition market sellers are price takers because there are many small sellers so each seller has little influence on the price of a good or services and output etc.

Oligopoly and monopolistic competition market: Both are in imperfect competition and they are on market structure continuum become perfect competition and monopoly. Oligopoly consists of a small amount of large firms and monopolistic competition contains many small firms.

·         The similarities and differences between each type of market

	Number of firms	Market power	Elasticity of demand	Product differentiation	Pricing power
Perfect Competition	Infinite	None	Perfectly elastic	None	Price taker
Monopolistic competition	Many	Low	Highly elastic	High	Price taker
Monopoly	One	High	Relatively inelastic	Absolute (across industries)	Price setter
Oligopoly	Few	High	Relatively inelastic	Yes	Price setter

·         The market type you consider the best choice. Explain why

In my opinion, monopolistic competition is the best choice. It is because that monopoly and oligopoly are influenced by a few big powers and consumer’s demand may not affect the market control. Perfect competition looks like just theory and not fit for present market.

·         With your new knowledge, how do you feel as a consumer?

o   Do you feel in control of your purchasing choices?

According to the market type, price and providing quantities, it is possible that consumer’s purchasing choices are controlled by firms and government. Cartels are adjusting their benefit for maximizing the reward on controlling customers like robots.

Game theory

·         What are the main ideas behind game theory?

Game theory is used in oligopoly firms in order to illustrate interdependent decision-making. It means that when one firm makes a decision, it is influenced by the other firm.

·         How did it develop?

Game theory refers to a branch of applied mathematics using in social sciences, economics, biology, engineering and political science etc. Game theory uses mathematics to explain that how the success of individual’s choices is connected to the choices of others. Game theory was originally developed in order to analyze competitions that a person reaches better results at another person’s expense. Game theory was first developed by economists John Neumann and Oskar Morgenstern in the 1940s. .

·         Is there evidence of game theory in the current economy? Explain.

I think that telecommunication market shows the example of game theory. A few firms set the price and their prices are almost similar price range. At the early period telecommunication service just started, the prices are almost same and they moved in almost similar price range. However, a few of them tried to deduct the consumer price for increasing sales so they could obtain better profits than the others. However, except a few, others keep their prices appropriate ranges. It is true that collusive action is illegal but they seem to do collusion when prices are changed.

·         How does the payoff matrix work?

Where both parties do no cheating, both can equal profits. If one of them does cheating, the party that does cheating can get more profits that the other party comparing with no cheating benefits. However, in the case that both parties do cheating, both can obtain less equal profits than the amount of no cheating. This amount is less than the amount that cheating party can achieve.

·         Describe the principles behind collusive and cartel actions.

Especially in oligopoly market, a few big firms tend to be collusive for maximizing their profits. A cartel is formal agreement among competing firms so they move based on this for obtain the best reward by reducing competition.

Exercise 7-1) Defining Monopolistic Competition

Defining Monopolistic Competition

* Definition for monopolistic competition

Monopolistic competition is hybrid between perfect competition and monopoly. There are large numbers of small firms that are relatively competitive with little market control on price. Similar but slightly different products exist and they can be substitutes for one another. Monopoly competitive firs are relatively free to enter and exit and buyer can get information of necessary alternatives but not all.

Monopolistic competitive companies

Where do you think the company Nike would fit in the table? Would it be considered a brand name company? What about the Dollar Store?

In my opinion, Nike is in the large company group. Even though Nike products are similar with other competitive products, the branding and advertising are making the brand name & company name Nike more famous. Sports marketing star marketing using TV commercials and sponsoring sports events are enough to appeal and improve brand value.

In the case of Dollar Store, it is similar with convenience store example in small company group. There are many dollar store but not combine together with franchise agreement so I think that it is like small business type. No brand power and no guarantee quality of product but just concentrating on cheapest price products.

Size:	Small Company	Medium Company	Large Company
Features:	Convenient store	Franchise restaurant	Walmart
Differentiated products	Almost similar products but slightly different price affects the differentiated products	Almost similar products but creates differences with branding, packaging etc	Almost similar products with branding, packaging and high qualified services.
Control over price	Price competition with other stores	Market competition and marketing cost make differ product cost	Government regulation, buying power
Mass advertising	Word of mouth marketing	Newspaper, outdoor advertising	TV commercial, Newspaper
Brand name goods	Few	A few	Many