MONOPOLY 2 conditions

- Extreme market structure - No close substitute

- Only one seller provides a good or service that has o With a close substitute, the monopoly firm faces
no close substitutes competition from the producers of the substitute
- Barriers to entry
o Constraint that protects a firm from potential competitors
o Eg govt licence, copyright, and patent.

TWO MORE MARKET STRUCTURES (THAT LIES BETWEEN PERFECT

COMPETITION AND MONOPOLY)

Many competing firms – Products are differentiated → MONOPOLISTIC

COMPETITION (no barriers to entry, any number of firms can enter at any
time. They do have some degree of market power because they produce
different products.
Few firms competing → OLIGARCHY.
TWO MORE MARKET STRUCTURES (THAT LIES BETWEEN PERFECT
IS MONOPOLY LEGAL ? COMPETITION AND MONOPOLY)
Being a dominant business is fine, but in every country has
laws or institutions to promote competition and regulate Many competing firms – Products are differentiated → MONOPOLISTIC
anti-competitive activities. COMPETITION (no barriers to entry, any number of firms can enter at any
Singapore – CCCS oversees anti-competitive activities. time. They do have some degree of market power because they produce
- Merger – Uber and Grab – uber fined for this. different products.
- Anti-competitive agreements Few firms competing → OLIGARCHY.
o CCCS case 2018, penalised 13 fresh chicken
distributors for 1) coordinated amount and CHARACTERISTICS OF MARKET STRUCTURES
timing of price increases, 2) agreeing not to
compete for each other’s customers in the The number of firms is the key to determine the market structure.
market.
- Abuse of dominance.
o Protecting or enhancing the dominant position
is illegal
o Deter competitors from entering the market
o Drive competitors out of the market
o SISTIC Monopoly Case – largest ticketing
agency in Singapore
▪ Fined 769K
▪ Exclusive dealing: Agreement with
Esplanade
▪ All events must use SISTIC as the only
ticketing provider →deters
competitors

Oligopoly
An oligopoly is a market structure characterized by a small number of firms that dominate the industry. These firms hold significant
market power, allowing them to influence prices and output levels. In an oligopoly, firms are interdependent, meaning the actions of
one firm can directly impact the others. This often leads to strategic behaviour, such as price-fixing, collusion, or non-price competition
(like advertising and product differentiation). Examples of oligopolistic industries include the automotive, airline, and
telecommunications sectors. The presence of few competitors makes the market less competitive than perfect competition but more
so than a monopoly.
Can be divided into TWO CATEGORIES
HOMOGENEOUS PRODUCTS DIFFERENTIATED PRODUCTS
o Steel o Cereal
o Gasoline o Automobiles
o Computer hard drives o Laundry detergent
o Cigarettes
Oligopolies’ Problem
2 characteristics
- Significant barriers to entry (very similar to monopoly)
- High degree of interdependence between the few firms (quite unique)
o Only few firms are operating
o Each firm’s profits and maybe the profit maximising choices really depends on other firms’ actions/ There exists a high
degree of interdependence between the few firms.
One of the easiest cases of oligopoly is an industry with two competing firms – duopoly.
 DUOPOLY WITH HOMOGENEOUS PRODUCTS OLIGOPOLY WITH DIFFERENTIATED PRODUCTS
Industry with two firms that compete against one another by A more realistic industry is a set of firms that make similar but not
setting prices homogenous/different products
- Betrand competition Boeing VS Airbus, Coke VS Pepsi, Apple VS Samsung
Assumption: The firms are producing H OMOGENEOUS PRODUCTS Three important points
- These differentiated products are substitutes.
Example: Bottled Water o Consumers have incentive to substitute among those
• A and B products.
• Total demand=1000 bottles of water - As a result, no company will be able to capture the entire
• If your price is less than B’s price, demand = 1000 market
• If you price is equal to B’s price, demand = 0 - 1000 - When consumers view the products as less substitutable,
• If your price is more than B’s price, demand = 0 economic profits will be higher.
• What does the demand curve look like? o Consumers view the products as being somewhat
unique. This differentiation helps the seller a lot,
because the market structure is actually closer to a
monopoly. So, economic profits will be higher as well.
Equilibrium Apple Versus Samsung
Both have a MC of $1 • Innovation and Differentiation
A is charging $5 • Quality
B is charging $4 • Global Expansion and Localized Approach:
Is this an equilibrium? • Affordable Pricing
What should A do in response? • Marketing and Promotion
Then, what should B do in • Customer Service and Support
response? • Partnerships and Collaborations
Residual demand Where does it end?
It depends on the prices
charged by A and B • P=MC=$1
• Profit=0
• How could A and B avoid a
price war?
COLLUSION PROBLEMS OF COLLUSION KEY IDEAS FOR LECTURE 5
• Firms conspiring to set the • Illegal • Firms will shut down when price is lower than minimum AVC
market price • Strong incentive to cheat • Long-run equilibrium price equals min(ATC) and equilibrium
• P=$5, each company will • (4.9-1)1000=3900 profit is zero
get half of the demand • Detection and punishment • Monopoly represents an extreme market structure with a
• Profit=(5-1)500=2000 of cheaters single seller
• Two market structures that lie between perfect competition
and monopoly are oligopoly and monopolistic competition
• The residual demand curve depends on the prices of all firms
in the industry