Length: 974 words (2.8 double-spaced pages)
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a) Using Australian examples describe the characteristics of the two of the following forms: Monopoly Oligopoly
The main characteristics of an oligopoly are:
· The market is dominated by only a few companies, which are relatively large.
· The production of identical products which are similar.
· There are significant barriers to entry.
· The interdependence of production decisions within the market.
An Oligopoly market exists in which a small number of firms dominate the supply to an entire market. Each firm producers a very similar product. In Australia the oligopoly is the major market form. It is because Australia is so small market located far from overseas markets and this thus requires producers to be larger, so they are more competitive. There are hundreds of examples of oligopolistic industries, e.g. cars (Holden), breakfast cereals (Kellogs)
This market form does not only depend on the larger producers, but the recognition of their interdependence, the action of one producer will affect the actions of others and each oligopoly firm watches their rivals closely. Oligopolies compete fiercely for market share, therefore the competition for existing or new consumes is intense, as each producers products are very similar. As a result oligopolists have little influence over price. For example Shells petrol is very similar to Mobil petrol, therefore these two companies watch each other closely.
Oligopoly firms attempt to make their products different in the eyes of consumers. This can be achieved in many different ways. Firstly by providing quality improvements in goods or services such as electrical sound equipment, secondly by different packaging or wrapping, thirdly by bonus offers or prizes on purchase, for example Just Jeans offering free sunglasses. The more product differentiation among oligopoly firms, there is a more chance of each firm has being independent from its rivals when setting price or output.
It is hard for new firms with a small market share to enter the oligopoly market and produce enough to make the product cheap for consumers to buy. The small amount of large firms can often produce large amounts of quantity to provide for all consumers to purchase. It is difficult for new firms to win market shares form existing producers, particularly if those firms have large advertising budgets, licenses, design patents or restrict access to raw materials on one way or another.
Oligopoly is a market structure, which is especially vulnerable to restrictive trade practices.
The main characteristics of a pure monopoly are:
· Only one seller within the market.
· The goods produced have no close substitutes.
· There are extreme barriers to entry.
· Complete control over price.
A monopoly is an industry in which there is one supplier of a good or service that has no close substitute and in which there is a barrier preventing new firms to enter. The supply of water and gas are local monopolies, while Australia Post, B.H.P and C.S.R. are examples of national monopolies. As there is only on supplier, the firms can chose where on the demand curve the industry will operate. They can either determine the price or the quantity traded. Either they can sell less at a higher price or sell more at a lower price; therefore their decision is based on maximizing their total profits.
The key feature of a monopoly is the existence of barriers preventing the entry of new firms. It is once the firm has entry the market system that is losses the advantage of monopoly control. Some barriers to entry may include; control over vital raw materials, tariff protection from importers, protective government legislation, temporarily low price to force out competition and large research and development budgets to help monopolists maintain their technological advantages over potential rivals. As there is no existence of competition, advertising is mainly focused on public relations or sponsorship of major sports events.
b) How effectively do the two markets forms that you described in part a meet the criteria for a successful market?
A market system exists when producers and consumers interact with one another. For a successful market system to exist the following criteria needs to be meet: does the market? Deliver lower prices, provide greater choice, encourage improvements in the quality of the goods and services traded, encourage the implementation of new technology and foster efficiency in resources allocation and use.
Although there is some price competition in an oligopoly market system the price is still high, as firms compete with one another. But the choice in this market system is better than in a monopoly market system where there is only one product. In a monopoly system like the oligopoly the price tends to be high, as there is only one producer.
Due to in a monopoly being only one seller, there is no close substitute, so there fore there is no pressure to improve the product. Unlike in an oligopoly market system the quality of the product is good, as firms compete with one another and try to improve their products.
New technology plays an important part in both market systems. In an oligopoly there is strong incentive to produce new technology to differentiate each firms products. As in a monopoly market system innovation is needed to maintain a monopoly.
It can be said that an oligopoly market system is more effective than a monopoly markets system, but only at an economic level otherwise it wasteful on advertising. Otherwise monopoly is ineffective to no competition.
In other terms, there is no market system, which fully satisfy the market system criteria. Both of these market systems lack in some features to fully satisfy the criteria for a successful market system. While the oligopoly provides better quality products, it has high prices. While the monopoly has only one product it also has high prices. For a successful market system, both of these market systems need to deliver their prices low.