JC Economics Essay Globalisation & Market Structures Model Answers
Often, Cambridge and JC examiners may choose to set much harder questions by mixing concepts across Micro and macro Econs topics. This example of Globalisation and Market Structures illustrate the combined analysis of both concepts. Such an essay question testing both tough concepts of Market Structures and the global economy, not for the ill-prepared A-Level Economics pupil!
(More on globalisation and WTO here)
Discuss the view that the market structure of an oligopoly is less prevalent than monopolistic competition in a rapidly globalized world. (25)
JC Economics Essay – Monopolistic Competition & Oligopoly
Explain the main characteristic of both oligopoly and monopolistic competition. Use real world examples of such firms and industries.
JC Economics Essay – Globalisation & Market Structures
Detailed Answer Outline:
What increasing globalisation entails
1.Even more integrated world economy, further reduction in trade barriers
2.Even greater flow and access to information
3.Even lower price of raw material / capital good from abroad due to more competition brought about by increasing globalisation; countries with vast raw material opening up to trade
Thesis: Oligopoly may be less prevalent than Monopolistic Competition
Households have an even easier access to imported goods and services. Domestically-produced goods and services could be easily substituted. Demand is relatively more price elastic. Domestic firms do not have significant control of the market, given the greater competition from abroad.
The level of imperfect information in production is reduced. More firms can enter the market and provide a given good/service.
These new firms are also able to enter the market due to lower start-up costs of production compared to before. The lowered cost is accrued to the greater ability of new firms to obtain cheap raw material / capital good from abroad.
Anti-thesis: Monopolistic competition may be less prevalent than oligopoly
What increasing globalisation entails
Monopolistic competition may not be more prevalent than oligopoly
Access to an even larger world market, more countries reduce restrictions on entry of foreign capital
Incumbent large firms could have a first-mover advantage. With increasing globalisation, these firms access to the larger world market first and could make it hard for new firms to enter the market, thus securing a large market share. The reasons to this is the following:
The incumbent firms, being able to reap significant E.O.S. due to its access to greater world market (first), are able to charge much low prices, making entry of new firms difficult as these new firms are not able to compete with the prices as they do not already enjoy significant E.O.S.. The incumbent large firms would also have already created artificial barriers to entry that could make it hard for new firms to enter the market. E.g. of artificial barriers to entry
– Long-standing advertising and customer service efforts – The established competitors could have gained customer loyalty. This creates a barrier to entry by forcing new entrants to spend time and money to differentiate their products in the marketplace and overcome these loyalties.
– Exclusive arrangements with key distributors or retailers can be prohibitive for new entrants. A firm which enjoys control of a resource vital in a particular production prevents other firms from competing in the market. Established competitors also control the logical channels of distribution through long-standing relationships. In order to persuade distribution channels to accept a new product, new entrants often must provide incentives in the form of price discounts, promotions, and cooperative advertising. Such expenditures act as a barrier by reducing the profitability of new entrants. Other factors that act as barriers to entry.
Incumbent firms’ favourable locations of sale and their experience/learning curves
1. Can be a mixture. Recall the U-shaped LRAC curve, allowing both small and big firms to co-exist in an industry.
2. If can sell more exports, then more oligopolistic.
3. If open to to capital flows, then FDI inflows, then more monopolistic competition
Hence depends on each government’s response to globalisation impacts.
Oligopolies are able to perpetuate themselves in the globalised market, as mentioned above. Even though globalisation has enabled freer flow of information that could help firms enter an industry, such advantage can be negated by actions of incumbent firms. Hence, whether markets would develop to be more competitive, like monopolistic competition, would also depend on Competition Act of the country.
For a thorough and balanced answer that provides good analytical structure.
For a balanced but undeveloped answer that has some analysis.
For an answer that is largely descriptive and lacks a clear structure. Not much reference to particular features of globalisation.
Allow up to 5 additional marks
E1: Judgment is based on economic analysis and adequately substantiated
E2: For an unexplained assessment, or one that is not supported by economic