JC Economics Essay Monopolistic Competition & Oligopoly Model Answers
How many of you dread the test question on Oligopoly in the Market Structures topic question in your “A” Levels H2 Economics? How many of you in JC1 can afford to skip this essay question? Not many actually, as most JC Promos exams do set one question for Market Structures. Worse, if it is set as a compulsory section on its own!
Furthermore, the oligopolistically competitive firm and the structure of Monopolistic Competition are tested together, similarly as in the Econs CSQ section. Hence, let’s master some content right now, as well as build your exam skills and techniques!
Question
(a) Explain how firms in monopolistic competition and oligopoly compete in their respective market structure. [10]
(b) Discuss whether the view that the conduct of an oligopoly is more undesirable to that of a firm in monopolistic competition. [15]
JC Economics Essay – Monopolistically Competitive Firm
Introduction
Briefly state the key features of firms in monopolistic competition and oligopoly
Body:
Firms in monopolistic competition are price setters since they have some degree of market power and the demand for their good is highly price elastic due to their products being slightly differentiated from other close substitutes engage in price competition via discounts fall in price leads to a more than proportionate rise in Odd, ceteris paribus → rise in TR.
Given that it is not sustainable to engage in price competition, these firms also engage in non-price competition real or imaginary product differentiation as well as advertising. With advertising, demand for their product increases due to perceived superiority in the quality of their goods over their rivals rise in TR In the context that rise in TR> rise in TC → rise in profits.
JC Economics Essay – Oligopolistically Competitive Firm
Firms in oligopoly observe a mutual interdependence characteristic→ price rigidity in non collusive oligopoly market since any increase or reduction in price will lead to the firm experiencing a fall in its TR Assuming constant cost, lower profits will result if oligopolistic firms engage in price competition.
Since the firms could not engage in price competition, they resort to non-price competition such as product development and branding. For example, the major aims of product development are to produce a product that will sell well (ie. one in high or potentially high demand) and that is different from rivals’ products, which means that it has a relatively price inelastic demand due to lack of close substitutes rise in demand rise in TR->> Assuming cost constant, profit is higher.
(Sketch diagram of mono comp firm in SR equilibrium. Do we need to include the LR outcome?)
Alternatively, firms in oligopoly may also collude to drive out other competitors in the market
Firms in oligopoly may collude by mutually agreeing to fix price or output → For example, collusion could take place informally under the price leadership model whereby the firm with the largest market share might choose to set a price that does not maximise short run profits for the industry. The other firms in the collusion would also follow suit. Another purpose of limit pricing is to drive out the existing smaller competitors in the market since the smaller firms are not able to match the low price without incurring substantial losses.
Conclusion
in my opinion, competition to some extent is good for existing firms since it motivates them to be cost-efficient but when practised excessively, & may be detrimental to the consumers.
Econs tutor comments:
For oligopoly, the new H2 Econs syllabus of 9757 says, the sketch of the kinked demand curve is no longer required. What diagram(s) can be used here?
JC Economics Essay – Oligopolistic vs Monopolistic Competition
Discuss whether the view that the conduct of an oligopoly is more undesirable to that of a firm in monopolistic competition. [15]
Thesis: oligopoly (OG) is more undesirable: to consumers and society. Illustrate outcome with diagram
(Qn: which diagram should we use for OG firm?)
Antithesis: Mono Comp (MoC) is more undesirable: to consumers and society. Illustrate outcome with diagram
(Qn: Should we sketch short run or long run for MoC firm?)
EV: depends on type of product.
– The nature of good of service can determine the impact on consumers (such as ?)
– The characteristics of the market or the economy may also determine the impact on consumers / society ( For example, Singapore, being small and open, will it matter if we have a few dominant firms in the market?)
– ( What are evaluation options can you come up with? More evaluation ideas in our Post-Prelims Econs intensive lessons.)
Note: Both are not as undesirable as monopoly.