Welcome back to my blog! Last time, we talked about monopoly structure, For this blog, we will discuss the oligopoly market structure.

Oligopoly market structure have few firms and high barriers to entry. Example for this market structure including Coca-Cola and Pepsi.

Oligopoly market structure has  five characteristics:

• Dominated by a few firms
• High or substantial barriers to entry
• Differentiated & undifferentiated products
• Uncertainty and risks associated with price competition may lead to price rigidity
• Non-price competition, which means firms will  compete only through advertising& promotion, brand proliferation, market segmentation, and product innovation.

Contestable market theory was developed by William Baumol in 1982 to explain why in some monopoly or oligopolistic markets, firms may operate in a competitive manner which will enable consumers to obtain the benefits of economies of scale and lower prices as well as reducing the welfare losses associated with markets dominated by a few firms. [1] The equilibrium position for a firm in a contestable market will be closer to that predicted by perfect competition than monopoly or oligopoly.

In the theory of contestable markets, If a company in a monopoly or oligopoly market believes that by fixing high prices and earning supernormal profits, it is possible to attract new companies to enter the industry, and these companies may occupy the market, then it may set the price at equal to or relatively close to the average cost level to prevent this from happening. This strategy of setting the price below the price that can maximize corporate profits to prevent new companies from entering the market is called limit pricing. In order for this strategy to succeed, existing companies must accurately understand the cost structure of potential entrants. This will enable the existing companies to set the price below the lowest average cost of potential new entrants, which means that they will not be able to set a price that will make them profitable. Another advantage of price fixing is that it reduces the possibility of monopolistic companies attracting the attention of a country’s competition authority. Obviously, the level of competition in a market will depend on how easy it is for new companies to enter the industry. Therefore, no entry barriers or low entry barriers are the key to determining this. For any potential new entrants, the standardization of products and their access to the same technology as established companies are also very important.

Thank you for your reading! It’s my pleasure to sharing these economics knowledge with you!

[1]: https://www.investopedia.com/terms/c/contestablemarket.asp

Welcome back to my blog! Last time, we finished the discussion of the perfect competition market. In Today’s blog, I will begin to introduce the Monopolistic market.

Monopoly is completely opposite to perfect competition, there is only one firm in the whole market, and the single supplier constitutes the entire industry.

The Monopoly market have four features:

• A single seller
• No close substitutes
• High barriers to entry
• The monopolist is a price make

There is a term named natural monopoly, which describe the market situation where a monopolist has overwhelming cost advantage. This situation Usually happens when there is only one person have the ownership of scarce resources, or there is a public ownership of essential goods and services (water, electricity, gas, railway, canals, etc). For example, Chinese government is the only institution which control the the water, electricity, and gas resources in the country, thus we can say that Chinese government is the natural monopolist of water, electricity, and gas in China.

Why could the monopoly market exist? Well, the first reason is the Legal rights given by the government. Like the important public service, government will control those products with high scarcity but are essential to people’s lives, so as to avoid the emergence of sky-high prices of necessities. Secondly, First mover advantage. The first one who entry the market will take the advantage of monopoly. Thirdly, Economies of scale. With the expansion of the company, they will have a high output with low average costs. The branding effect can also be the reason for the existence of monopoly, due to the extremely high brand Loyalty.

Economics believes that the monopoly market structure also create problem. A monopoly may abuse its market power to restrict market supply in order to force up market price and consumer choice. What’s more, monopolist may cut product quality to save costs. Monopoly will also cause x-inefficiency, because People may become unmotivated due to lack of competition. Just a reminder! I mentioned in my pervious blogs that X Inefficiency occurs when a firm lacks the incentive to control costs. This causes the average cost of production to be higher than necessary. [1] Moreover, monopolist will artificially create barriers to restrict competition. For example monopolist will threaten major suppliers that it will stop buying from them if they supply rival firms, and it will threaten retailers to stop supplying them with their product if the retailer stock rival products. Thus the situation of monopoly need to be regulated.

Reference:

[1] https://www.economicshelp.org/blog/glossary/x-inefficiency/#:~:text=X%20Inefficiency%20occurs%20when%20a,will%20not%20be%20technically%20efficient.