MAC firms have weak BET where firms’ entry into these industries is largely unrestricted by government’s rules and regulations. One example of an MAC firm is the hawker stall. The set-up cost including the rental cost Is low and due to the small- scale production of food, there is limited scope for GOES that act as a BET. This weak BET gives rise to the large number of hawker stalls being set up. With so many hawker stalls present, each hawker stall has a relative small share of the total food market.
Thus, each hawker stall has only a small amount of control over the market price of the food. Actions by one hawker stall with regards to changes In Its price or quality of food have little impact on the sales of any other hawker stalls and so are unlikely to elicit response from other hawker stalls. Each hawker stall makes independent decision on the price of food. The products sold in the MAC market are differentiated Just like how every hawker stall sells different food.
In the long run, with weak BET, hawker food stalls will enter or leave the food industry such that it earns only normal profits. On the other hand, an oligopolies firm has stronger ATE arising from the tutorial BET, endogenous sunk costs or strategic entry deterrence. One example of an oligopolies Is telecommunications such as Singlet, MI and Startup. These three firms have high set-up costs since they have to be engaged In piping the networks and advanced technologies for mobile connections.
By having a large-scale production of telecommunication services, they enjoy large GOES such as managerial GOES and marketing GOES. New entrants must enter the market at a large enough scale so that their average cost will be sufficiently low to be able to compete effectively and arrive against these three large firms. New entrants must also have a sizeable advertising campaign to compete against the telecommunication services from the three large firms that are well known to many consumers. This high cost serves as a form of BET.
This strong BET gives rise to the high market concentration ratio with each firm having a large share of the total market. This means oligopolies firms have high ability to set prices. Firms from the oligopolies market sells homogeneous or differentiated products. Singlet, MI and Startup sell homogeneous goods such that hey all sell telecommunication services. They sell differentiated goods as they have different packages and plans for telecommunication services. The high BET into into the market, allowing firms to earn sustained supernormal profits at long-run equilibrium.
The high market concentration gives rise to strategic behavior by firms. They are mutually interdependent. Each seller takes the actions and reactions of their rivals’ marketing strategy into account when making their own production and marketing decisions. This results in price rigidity. When the competition heats up, rims in the oligopoly may collude to act like monopolies instead of competing. The member firms will then agree openly upon a common uniform price in the market.
Due to the difference in extent of BET, the market share for MAC firm and oligopolies firm are different and therefore, the price and output determination will be different. For oligopoly, due to the fact that they have high BET, they face few competitors. Their market share will therefore be larger. As such, there will be fewer substitutes available among the firms. This leads to a price inelastic demand for the odds sold by oligopolies firm since there are few substitutes that consumers can switch to in the event of price increase.
For example, the rise in price of the telecommunication service provided by Singlet will lead to a less than proportionate fall in quantity demanded for it due to the limited availability of substitutes. Thus, oligopolies firms are likely to set higher price since there will only be little impact on their sales. Whereas for MAC firms, they have weak BET, leading to many sellers in the market. With many competitors in the market, there will be larger number of substitutes available.
One example will be the hawker stall such that when one hawker stall increases the price of their food, consumers will switch readily to other hawker stall for food. In addition, the goods that MAC firms sell are only slightly differentiated and thus, the substitutability is even stronger. This results in the demand of the goods that MAC firms sell to be price elastic such that the increase in price of the good will lead to a more than proportionate decrease in quantity demanded for it.
Therefore, MAC firms are likely to set a lower price for their good to retain their customers and maximize their profits. DIAGRAM 1 As shown in the diagram 1 above, due to the fact that the demand of the goods that oligopoly sells are price inelastic, it faces a steeper demand curve DO. This results in a higher price of POP. Whereas on the other hand, due to the face that the demand of the goods sold by MAC is price elastic, it faces a gentler demand curve DUMP as compared to that of oligopoly.
As such, it has a lower price AMPS given the same output Q for its goods, assuming that the marginal cost for both oligopoly and MAC is the same. Oligopoly has a larger scale of production as compared to that of MAC and Hereford they enjoy larger GOES. DIAGRAM 2 (a & b) production decreases. Assuming that the firms have the incentive to pass on this fall in cost of production to consumers in the form of lower prices, oligopolies firms are likely to set lower prices than that of MAC since MAC enjoys a lower degree of GOES and have limited ability to lower the prices.
As show in diagram AAA, due to the presence of large GOES, the marginal cost of production decreases causing the shift of MAC curve from MIMIC to MOCK, assuming firms have the incentive to pass on this GOES to consumers in the form of lower prices. This results in a lower price of POP as compared to MAC. As shown in diagram b, there is little or no GOES enjoyed by MAC firms, and therefore with no change in the marginal cost of production, the price of the good remains the same at AMPS and may be higher than that of oligopoly.
Lastly, oligopolies firms are mutually interdependent and thus, there is a presence of price rigidity. This is based on the assumption that firms in oligopoly wants to protect and maintain their market share, and are unlikely to match another’s price increase but may match a price fall. Due to the fact that the oligopolies firms have significant market share, a firm must consider the effects of its actions on other in the industry. DIAGRAM 3 As shown in the diagram above, assuming there is no collusion among firms and that firms are selling homogeneous goods.
No firms are willing to lower it’s price as other firms will also lower their price in order to remain competitive. This will cancel out any potential benefits of a price reduction, as the firm initiating the price cut will not be able to lure many customers away from his rivals. If the firm increases its price, rival firms are unlikely to react because they will gain as customers turn to their rodents which are now relatively cheaper. As a result, firms are unlikely to change its price, resulting in price rigidity. The price remains relatively constant for oligopoly.
In addition, when oligopolies firms decide to collude and stay away from price competition, they act similarly to a monopoly. DIAGRAM 4 Being an artificial monopoly, it means that the demand for the good is price inelastic and that the demand curve will be steep as shown in diagram 4. This means the rise in price will result in a less than proportionate fall in quantity demanded for the good. Thus, these oligopolies firms are likely to set a higher price and maybe engage in price discrimination to maximize their profits.
In conclusion, the features of MAC and oligopoly such as extent of BET, nature of product, and possibility of enjoying GOES will affect the price and output determination. High BET results in lack of competitors and with the goods’ demand being price inelastic, oligopolies firms are likely to set a higher price as compared to lower their price, assuming they have the incentive to pass on this GOES to consumers in the form of lower prices. There may be cases whereby the oligopoly face mutual interdependence and keep price constant.
Oligopolies firms may also collude and act as a monopoly as a whole, setting high prices or engage in price discrimination to maximize profits. 1 b) Recession will affect firms in different ways depending, for example, on what they produce and the market structure in which they operate. Discuss the likely effects of a recession on different firms. Recession will result in a rise in unemployment and fall in incomes. This therefore results in a fall in consumers’ purchasing power. Recession is able to affect firms depending on what goods they produce.
The revenue for firms selling normal goods that are income-inelastic such as necessities will not decrease much while the revenue for firms selling luxuries or any other goods that are income-elastic will decrease during the recession period. The revenue for firms selling inferior goods will increase during the recession period. Recession is also able to affect firms depending on the market structure in which they operate. The effect of recession on oligopolies firms is less than that of unapologetically competitive (MAC) firms.
This is because oligopoly, earning supernormal profits in the long run, will have reserves to sack them up even during recession. Whereas on the other hand, MAC earns normal profits in the long run and will not have sufficient funds to help them tide over recession. MAC may leave the market in the case of recession since they are much more flexible as compared to that of oligopolies. Recession is able to affect firms depending on what goods they produce and the income elasticity of demand (YET) of the good can determine the effects. The YET is a measure of responsiveness of demand to changes in income, cutters Paramus.
For normal goods that are income-inelastic such as necessities, the fall in income during secession will result in a less than proportionate fall in demand for the good. This is because necessities are goods that household need for survival and therefore, the demand for such goods has little dependence on the level of income. Thus, firms selling necessities will not earn a lot less in terms of revenue. For normal goods that are income-elastic such as luxuries, the fall in income will result in a more than proportionate fall in the demand for the good.
This is because luxuries are consumed only after the expenditure on necessities have been accounted for. The fall in income feet consumers with less ability to purchase these luxuries. Firms selling luxuries will earn a lot less revenue during the recession period. Even though both firms selling luxuries and firms selling necessities will face a fall in revenue, but the fall in revenue for firms selling necessities will be less than that of firms selling luxuries. As such, firms selling luxuries will most likely introduce more economical version of goods.
They might even produce a relatively poorer quality of goods so as to reduce the cost needed for factors of production. Also, with the fall in total revenue, firms ay consider retrenchment to cut cost, or merger to increase customer base while In the event of recession, the demand for inferior good will increase. This is because the fall in income during recession meant that purchasing power has decreased. Consumers’ willingness and ability to buy normal goods decrease drastically and thus, they will readily switch to inferior goods which are relatively cheaper and suitable for their fall in purchasing power.
Thus, firms selling inferior goods will earn more revenue during recession. Recession is also able to affect firms depending on the market structure in which hey operate. Recession will have same impact on firms operating in all imperfect markets which is the fall in total revenue. However, the amount of reserves that each market structure has will affect the degree of fall of profits earned as it serves as a back up for the firms. The degree of fall of profits for firms in monopoly and oligopoly will be less severe as compared to that of monopolistic competition (MAC).
This is because the entry barriers into oligopoly and monopoly industries are usually high enough to prevent new entrants from coming into the market, allowing firms to earn sustained supernormal profits at a long-run equilibrium. Thus, in an event of recession, the profits earned by firms operating in the monopoly and oligopoly will not fall as much as compared to that of MAC since they have earned super normal profits even before the recession occurred and they would have sufficient funds to help them tide over during recession.
This is because with excess back up funds, they are able to invest in product differentiation such as advertisements to retain existing customers and reduce the extent of fall in quantity demanded. They may also engage in price competition such as bundling the goods whereby there will be discounts if consumers buy in bulk. They may face a drop of profits from supernormal profits to normal profits or small degree of subnormal profits. This results in lower degree of fall in profits for firms operating in these both oligopoly and monopoly.
Luxuries are usually produced by oligopoly and thus, oligopoly are likely to face a larger fall in revenue as compared to natural monopoly who usually produce necessities. For example, Public Utilities Board (PUB) is the only firm that supplies the action with water and thus it is a natural monopoly. Water, being a daily necessity for human, is income-inelastic. Thus, during recession when incomes fall, the quantity demanded for water will only fall less than proportionate.
Whereas on the other hand, the telecommunication industry which includes Singlet, MI and Startup, are the few dominant firms that supplies telecommunication services to the nation. Thus, they belong to the oligopoly. Telecommunication services, is not a necessity as it is not needed for survival, thus it’s demand is income-elastic. The fall in income would mean that there will a more than proportionate fall in quantity demanded for telecommunication services. Thus, the revenue earned by Singlet, MI and Startup will decrease more than that of PUB.
Therefore, the fall in revenue for oligopolies will be more than that of natural monopoly. Industry as compared to that of monopoly and oligopoly. This is because MAC firms have little market share and it has a smaller scale-production. It is more flexible in terms of operation as compared to that of oligopoly and monopoly. Thus, during the period of recession, MAC firms are able to change the style of operation while oligopoly and monopoly are unable to do so due to their large-scale operation system.
For example, a hawker stall, being a MAC firm, has a small scale production and thus, when there is recession, it is able to change it’s operation style by introducing an economical set lunch which will appear relatively affordable and worth-it for consumers whose income has fallen. On the other hand, due to the large operation system, monopoly and oligopoly have to undergo many procedures before deciding on the change in operation style. With MAC firms being more flexible in arms of operation, it is more likely to stay viable in the industry.
In conclusion, recession will affect firms differently, depending on the type of goods and the market structure in which the firms operate. The revenue for firms selling necessities will fall less as compared to firms selling luxuries, while the revenue for firms selling inferior goods will increase. Firms operating in the monopoly and oligopoly will have a smaller degree of fall in revenue as compared to that of MAC firms due to the accumulation of funds for the supernormal profits earned in the long run before recession occurred.
MAC firms lack of sufficient funds to tide over the recession since it has been earning normal profits. However, there may be a possibility that MAC firms stay stronger than monopoly and oligopoly during recession due to the greater flexibility in terms of operation. In comparison between monopoly and oligopoly, the fall in revenue for oligopolies will be more than that of natural monopoly since oligopolies are more likely to produce luxuries while monopolies are more likely to produce necessities. However, it also depends on how long the recession last as it will affect the amount of profits the firms earn.
