Solution
Robert answered on
Dec 26 2021
Market structures are
oadly categorized in four major types: namely perfect competition,
monopolistic competition, monopoly and oligopoly depending on various parameters. The
number of firms, the nature of the product, ba
iers to entry, degree of market power, short run
and long run behavior of the firms and efficiency level are considered as some of the key
parameters based on which we can identify the particular market structure. Let us now analyze
two imperfectly competitive markets: monopoly and oligopoly.
Monopoly Market structure:
Monopoly market has only one single seller – there is no close substitute in the market. Being the
single seller the monopolist firm enjoys the absolute market power in the market. The entry
a
iers are huge that deters the entry of new firms in the market. Patents, copyright, complete
ownership of key resource or very high infrastructural costs are some of the major entry ba
iers
in monopoly market. Monopolist can enjoy the economic profit not only in the short run but even
in the long run due to absence of competition.
The above figure shows the profit maximizing behavior of monopoly both in the short run and in
the long run. As the profit maximization rule, the monopolist will produce at the equality point of
MR and MC. The price can be determined by the co
esponding AR curve. Total revenue =
OP*SQ* whereas the Total cost= ORTQ*. Profit is shown by the red shaded rectangle P*RTS.
From the efficiency point of view, monopolist is found to be inefficient with misallocation of
esources. Since the price is much higher than ATC, it is not productively efficient. Again the
price is more than MC, thus it is not allocative efficient too. There is deadweight loss in
monopoly market. The presence of deadweight loss in the imperfect market is nothing but the
cost to the society. The yellow shaded triangle is the deadweight loss to the society.
Natural Monopoly, as economic theory suggest, refers to the industry where the production can
e done at the cost cheaper cost than by multiple firms. Natural monopolies charge the price
equal to average total cost. The public utilities in US and many other countries are mostly
Price
ATC
MC
AR
MR
Output Q*
P*
Profit
O
S
R
T
characterized by natural monopoly –single firm is found to be cost efficient to provide the utility
service at a particular geographical market. The utility service offered by multiple companies is
inefficient and expensive and thus discouraged.
Monopolist can only discriminate price and increase the profit. The monopolist being the singe
seller can charge different prices to different customer segments and enjoy higher profit than
single price monopoly. But the primary condition for price discrimination is differences in prce
elasticity of demand. For example, the monopolist charge lower price for the movie to the
students because they are more price sensitive. But they charge higher price to less price
sensitive adults. Similarly airlines also charge higher price to less price sensitive business
travellers but charge lower price to more price sensitive leisure travellers. Microeconomic study
suggests first degree, second degree and third degree price discrimination for monopolist. In case
of first degree the monopolist charge highest willingness to pay and abso
s the entire consumer
surplus. (William Baumol, 2009)
Oligopoly
Oligopoly market structure is another form of imperfect market largely dominated by few large
firms. They only constitute the larger share of the market. The market is consistent with heavy
entry ba
iers – economies of scale acts as the key ba
ier to the market. Airlines or
communication network, soft drinks are some of the examples of oligopoly market. Mutual
interdependence is one of the salient features of oligopoly. Since there are few large firms, they
are mutually interdependent. Any pricing decision or decision on promotional policy has a huge
impact on the rival firms. They will exhibit an immediate response by changing their strategies
too. The oligopoly firms often engage in price wars due to protect their market share. Pepsi and
Coke are the perfect example of oligopoly- any change in the product attributes or pricing
options for coke will have an immediate reaction from Pepsi. This feature is unique in oligopoly
market. There are several models in oligopoly: Cournots model, Bernard model, Sweezy model
and Stackelberg model. In cournot;s model, the Nash equili
ium in the market occurs at the
point where two reaction function intersects to each other .
Differences in key features of monopoly and oligopoly:
1) In monopoly the number of seller is only one but in oligopoly few large sellers only
dominate the market.
2) Price discrimination is possible in monopoly – but oligopoly firms cannot pursue
price discrimination strategies.
3) Oligopoly firms also enjoy the market power but it is significantly less compare to
monopoly since they so not face any competition.
Nash equili
ium
BR for firm 1
BR for firm 2
Firm 2
Firm 1 Q1*
Q2*
4) Merger and acquisition is very common in oligopoly. Two or more oligopoly firms
can collude and act like a monopoly – maximize their joint profit. This is not
applicable in monopoly since it is the single sellers.
5) Patents, copyright, high cost of infrastructure of ownership of key input are the major
a
iers to entry in monopoly. Economies of scale are the key entry ba
iers in
oligopoly.
6) Oligopolies charge moderate fair price due to presence of competition but monopoly
price is substantially higher. Thus consumers are worse off in monopoly market
elative to oligopoly. (William Baumol, 2009)
Construction Industry in India: an overview
Construction industry plays a vast role in growth and economic development of India. The
industry has a significant contribution to GDP and employment. The industry is huge, complex
and highly fragmented. It has grown at an annual compound growth rate of 20 % over last five
years and contributes 5-6% of India’s GDP. The sector is unorganized in the sense the key
players operate in the sub contract basis. The construction industry comprises of both
commercial...