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(2) Retailers in Singapore supply a wide range of services and products in a

variety of market structures.


(a)

Explain the key differences between oligopolistic competition and


monopolistic competition. (10)

(b)

Consider different retailers in Singapore and discuss which of these two


market structures best explain their market behaviour. (15)

Approach
(a)
You are required to explain the differences in the structure and conduct of MC and
oligopoly. More importantly, focus on the implications of these differences on the
conduct of MC and oligopoly firms. e.g . pricing decisions, the effect of entry and exit
on profits , non-price competition and R&D activities etc.
Consider the differences in structure and conduct of MC and oligopoly
Nature of the product MC firms sell differentiated goods whereas an oligopoly firm
sells either homogeneous or differentiated goods. .
Barriers to entry In MC there is unrestricted freedom of entry whereas in an
oligopoly there are significant barriers to entry. Such barriers can be artificial or
natural like licensing requirements and natural like ownership of factors of production.
Number of sellers an oligopoly has a few dominant firms each with significant
market share while a MC market has many sellers.
This means that MC firms have much less market power compared to oligopoly firms.
In oligopoly because there are a few dominant firms, there is rival consciousness and
mutual interdependence whereas MC firms are non-rivalrous. Oligopoly firms tend to
avoid price competition and engage in aggressive non-price competition. In the case
of MC firms they engage in both price and non-price competition.
Due to the presence of a few dominant firms, oligopoly firms are interdependent and
may collude explicitly as in a cartel or tacitly as in price leadership or compete so
fiercely that a price war erupts. This is not possible in the case of MC with the large
number of firms.
Profit maximization aim while all firms seek to maximize profits, the differences in
structure (namely barriers to entry) allow oligopoly firms to earn supernormal profits
in the long-run while MC firms make only normal profits. This is because the minimal
barriers to entry in MC market allows the entry of new firms which capture part of the
incumbents market share, hence eroding their supernormal profits. (Diagram to
illustrate long-run profits)
EOS-Oligopoly firms enjoy EOS. This can be a source of barrier to entry to new firms.
In contrast, MC firms are small, having a small market share and thus do not reap
such EOS. MC firms not only do not reap the full EOS, they have excess capacity.
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R&D Oligopoly has the incentive and ability to engage in costly R&D whereas MC
firms do not. While oligopoly firms have supernormal profits to engage in innovation,
R&D and heavy advertising MC firms choose to engage in non-price competition in
the form of product differentiation e.g. advertising which promotes real or imaginery
differences in their products.
In the practical world, there are many overlaps, and it becames difficult to segment
some industries into either one of the two.
(b)
Approach
Choose two retail businesses in Singapore which exhibit behaviour of monopolistic
competition and oligopoly. Some possible examples of MC are hawker stalls,
hairdressing saloons, electronic retail shops, blogshops, cafes and restaurants.
Examples that can be used to illustrate oligopoly behaviour in the retail sector in
Singapore are telecommunications companies, supermarkets, bus transport , taxi
companies and petrol retailers. Analyse and compare their conduct in terms of price
and non-price competition, innovation and R&D. Link the discussion to the
differences in conduct as discussed in part (a)
As no markets in Singapore adhere strictly to either perfect competitive model or a
pure monopoly, it is possible to argue that retailers tend to display characteristics of
either oligopoly or monopolistic competition.
For market with many sellers selling differentiated products like hawker centres , the
MC model would be particularly applicable and useful in explaining firm behaviour. In
a structure where there are negligible barriers to entry, hawker stalls tend to engage
in non-price competition through product differentiation. Hawkers come up with new
dishes and are constantly improving the quality and taste of the dishes. Product
differentiation comes in the form of quality of service, convenience of location, hours
of operation and availability of delivery of service. They may promote their dishes as
exceptionally tasty or certifying themselves as health-endorsed food (via the
Healthier Choice Symbol). MC firms earn normal profits in the long-run and hence
choose instead to practice simple product differentiation. This phenomenon was
seen when bubble tea craze some years ago, and when new firms entered the
industry in order to capture some of the profits.
As there are many such stalls selling differentiated products, there is a lack of rival
consciousness and prices charged could vary. One stall charging less will not spark
off a price war; another charging more will not lose all its customers.
Telecommunications firms in Singapore exhibit market behaviour of oligopoly. There
are only three firms for the whole market namely Singtel, Starhub and M1. They offer
mobile, fixed line, Internet and pay-TV services. There is substantial market power
and rival consciousness and mutual interdependence. The most significant barrier to
entry is government licensing.
These firms aim to maximize profits from the sale of their products. Profit maximizing
behaviour is not the only conduct for these firms which are interdependent and would
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consider its actions would affect its competitors and vice versa. These firms have
had occasional price wars which benefited the consumers. For example, the slashing
of prices of mobile phone plans by all three firms to competitive levels.
Prices however ,tend to be sticky as each firm faces a kinked demand which
assumes that rival firms are quick to match a reduction in price but not an increase in
price . As such, oligopoly firms tend to avoid price competition and instead resort to
non-price competition including aggressive branding, advertising and product
enhancement such as 3G technology and faster download speeds toward which
firms invest substantially in R and D to gain a larger market share.
Given the strong market power, the telecommunications firms practice price
discrimination. This occurs when a product is sold at different prices not due to cost
differences. In the telecommunications industry in Singapore for example, the firms
charge a higher price for certain groups (working adults) but provide the same
services if not more to other groups whose demand is more price elastic at a lower
price ( students and national servicemen) . The firms also engage in second degree
price discrimination where for a typical mobile phone plan, a customer pays an initial
amount for a fixed amount of talk-time. Subsequent minutes are charged at a
cheaper rate. These firms also offer bundled deals where products are offered at a
lower price if they sold together. (Broadband, mobile and television subscriptions
plans).
Other non-price competition strategies engaged by these oligopolies include product
proliferation and first mover advantage. For example Singtel carries a wide range of
mobile phones brands and had locked a deal with Apple iphone. The firms have also
diversified their services to capture a larger market share. Singtel bundles mio TV
with internet and phone services. It has secured rights to broadcast BPL football
programme and ESPN, STAR Sports .
Conclusion:
The more common market structures in the retail business in Singapore are
monopolistic competition and oligopoly. Which market structure a retail business falls
into depends very much on the type of product and the barriers to entry which in turn
determine their behaviour. Oligopoly are mutually interpendent and rivalrous
whereas MC are non-rivalrous and act quite independently. Hawker stalls are
monopolistic competition with product variety and the ease of entry. Non-price
competition takes the form of production differentiation. Telecommunicatiions
companies on the other hand engage aggressively in non-price competition, price
discrimination and innovation to increase their market share.
Note: In the real world, it may be difficult to segment some industries into either
oiligopoly or monopolistic competition. For example, bakery or confectionary firms in
Singapore. Students will need to consider whether the characteristics would make
the industry more an oligopoly or monopolistic competition. Whichever market
structure you decide on, justification must be offered.

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