Competition Policies in Emerging Economies

Discuss about the Competition Policies in Emerging Economies.

Introduction

Pricing and output decisions are some of the most significant decision in any organization in any form of the market structure. Therefore, the concept of price and output has been discussed in units. Price and output usually affected by the competitive structure of the market since an organization is an integral part of the market where it operates (Kierzkowski, 1989). In this case, the paper presents a critical analysis of oligopoly and monopolistic competitive market that lies between two extremes of the market structure and thus more applicable to the real world conditions (Baye & Beil, 2006). With these considerations, this report aims to evaluate and identify monopolistic competitive market and oligopoly market. It also aims to present an analysis of features; that is pricing and output decision of these two markets as well as an evaluation of the two markets based on their demand and supply.

Monopolistic Competitive Market Characteristics and Demand and Supply

The monopolistic competitive market comprises of several small organizations each with a relatively small market share (Folland, Goodman & Stano, 2007). In essence, in this form of market, organizations sell differentiated goods and services which are close substitutes. Basically, under this kind of the market, products of numerous sellers are usually differentiated based on brands (Phelps, 1997). The brands are therefore much advertised that customers start associating these brands with specific manufacturer and type of the brand loyalty are therefore developed. Differentiation of products gives rise to the element of monopoly to producers over competing products. In this case, producer of the individual brand could raise the price of the products with confidence that it would not lose a significant number of consumers to the other brands due to the absence of the perfect substitutability (Henderson, 2012).

Furthermore, in the monopolistic competitive market, organizations are price-setters in that they are capable of setting their prices by establishing their output levels. In this case, organizations experience downward sloping demand curve (Stole, 2007). Also, under monopolistic competitive market, there is a low barrier to entrance in the market meaning that organizations could make an average profit in long-term (ÇEvi? & Camurdan, 2007). Under monopolistic competitive market, organizations have relatively lesser power as compared to oligopoly market and therefore price charged by such organizations might be lower than prices charged by organizations in oligopoly market (Stole, 2003). Further, organizations under monopolistic competitive market make an average profit since the distribution of income which abounds with this market would be more equitable as compared with oligopoly market (Shahzad & Al-Swidi, 2013). In the monopolistic competitive market, organizations compete on another basis other than the .price such as product development, efficient after-sale services, aggressive advertising as well as better distribution arrangement (Santerre & Neun, 2012).

In essence, in the monopolistic competitive market, there is free entrance to the market; hence, other organizations would enter the market which is enticed by economic profits (Agranov & Schotter, 2010). The organization’s average costs might increase, or price might decrease, and ultimately economic benefits might end up disappearing (Hornstein, 1993). The monopolistic competitive market is somehow like a monopoly in that organizations try to price at a point where the MR=MC, nonetheless, it competitive in that the free entrance might eradicate economic profits in long-run (Gitonga, 2015).

Under monopolistic competitive market, the demand curve is downward sloping meaning that in case the entity wishes to sell one extra unit of the product, it should decrease it prices (Clerides, 2004). As a result, since lower prices would apply to all its previous output level, marginal revenue of organization under monopolistic competitive market would be lower as compared to price; therefore, sales curve would be lower than demand curve.

Interestingly, demand curve of the monopolistic competitive market is less than perfectly elastic. This is based on the fact that no single organization that dominates the market and as a result of differentiation in products, product of every organization appears to be a close substitute (Corts, 1998). As a result, organizations under monopolistic competitive market end up having a high elasticity of the demand. Basically, under monopolistic competitive market, demand curve tends to slope downward (Armstrong, 2006). This is based on varied tastes and preferences amongst different clients attached to products of their specification.

Oligopoly Market Characteristics and Demand and Supply

Oligopoly market is the form of market where there are very few large organizations each of which has a significant market share (Qaqaya & Lipimile, 2008). Organizations under this type of the market sell differentiated goods and services such as electrical appliances and cars. Nonetheless, other firms sell homogenous products like steel and cement. On the other hand, organizations under oligopoly market are price-setter in that they are capable of setting their prices based on their output level (Dulupçu & Demirel, 2005). Further, under this form of the market, there is a very high barrier to the entrance of this market meaning that organizations could make a supernormal profit during their long-term operations.

Another most crucial aspect of oligopoly market is interdependence during decision-making. This is based on the fact that there are few competitors, and therefore any change in price or output by one organization would have a direct impact on fortunes of the competitors, who would then retaliate by altering their prices and output. Organizations under could not have a definite or sure demand curve as it keeps changing as competitors adjusting their prices in retaliation to price variation made. Thus, in case the firm does not understand its demand curve, the economic analysis could not ascertain the price and output that it would fix. Thus, under oligopoly market, the price is kept unchanged for some time as a result of fear of reaction and it relatively inflexible and sticky.

Under oligopoly market, the demand curve is downward sloping while supply curve moves upward. This implies that that in case the entity wishes to sell one extra unit of the product, it should decrease its prices. It faces kinked-demand curve, meaning that firms under this market maximize profits by equating its marginal revenues with its marginal costs, resulting in equilibrium output or units q and price p (Schweitzer, 2007). In case, it increases the price, other firms in the market would not follow the price increase. Hence, the organization would experience a more elastic demand curve.

Price and Output Decisions for Monopolistic Competitive Market

As a result, since lower prices would apply to all its previous output level, marginal revenue of organization under monopolistic competitive market would be lower as compared to price; therefore, marginal revenue curve would be lower than demand curve. Price-output determinations under the monopolistic competitive market are achieved as; since products in this market are differentiated, each organization does not experience elastic demand for the products (Schatan & Riviera, 2008). In this case, everybody is viewed as the price maker and is seen as being in a position in determining the price of its products. As a result, an organization is said to have downward sloping demand for the product.

Price and Output Decisions for Oligopoly Market

Since there are few large organization and significant market share for every organization, actions of one group affect and are influenced by the action of another organization in the same market (Schweitzer, 2007). This means that when one organization under oligopoly market changes its price, it would have a significant impact on the other body in this market since the rival group would react by also changing its price which would end up affecting the firm organization (Schatan & Riviera, 2008). Thus, when an organization under oligopoly market makes its pricing and output decision, it needs to consider the reaction of other groups in the market. This means that price and output of the organizations under this market heavily rely on behaviors of the competitors.

Furthermore, as a result of interdependence in this market, organizations could not assume that their opponents would maintain their quantities and prices constant, whenever it makes variations in its quantity and price. Thus, when one organization changes its prices, its competitor would react and end up changing their prices in return which would, in turn, affect its demand curve.

Market that Provides Efficient Outcome

Based on the evaluation above, the monopolistic competitive market is more provide more efficient outcomes as compared to oligopoly market. This relies on the fact that organizations under monopolistic competitive market make a normal profit since the distribution of income which abounds with this market would be more equitable as compared with oligopoly market. Further, the monopolistic competitive market is viewed to provide more efficient outcomes as compared to oligopoly market since under monopolistic competitive market there is no barrier to entrance contrary to oligopoly market where there is a very high barrier to the entrance of this market meaning that organizations could make a supernormal profit during their long-term operations.

References

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