Chapter 05 Market Structure- Iskamic PerspectiveChapter 7 MARKET STRUCTURE IN AN ISLAMIC PERSPECTIVE IKey concepts: perfect competition — marginal cost ~ marginal revenue — equilibrium conditions — full cost pricing — mark up ~ monopoly: natural, artificial, Islamic — monopsonist — price differentiation — oligopoly — duopoly — kinked demand curve — informative and educative advertising] In the conventional economics basically two types of markets are analysed. These are perfectly competitive market and imperfect market. Under the latter monopoly and oligopoly are very prominent: This chapter is devoted to,an analysis of the market structure with special reference to an Islamic economy. 1, PERFECT COMPETITION (a) Traditional Theory We begin with perfect competition, The elementary intermediate students of economics know that a profit-maximising firm has to fulfil three conditions. These are: (1) For a given output to be profit-maximising output, it is necessary that total revenue (TR) is equal to or greater than total variable costs (TVC). (2) For a given output to be the profit-maximising output, it is necessary that at that output MC (marginal cost) = MR (marginal revenue). (3) For a given output to be the profit-maximising output, it is necessary that for slightly smaller outputs MR>MC, and that for slightly larger outputs MC>MR.Market Structure in an Islamic Perspective 131 This is illustrated in Figure 1 below. The geometric interpretation of condition (2) is that the profit-maximising output must be at the point where the MR and MC curves intersect, and of condition (3) is that the MC curve should cut the MR curve from below. Figure 1 shows that MR=MC at two points. Output OQ; is, a profit-maximising output because, as output is increased up to OQ:, each unit is adding more to revenue than to cost, while beyond OQ., each successive unit is adding more to cost than to.revenue. On the basis of the same argument, it is possible to show that output OQ, is a profit-minimising output, i.e., profits are falling as output rises to OQ, and rising as output increases beyond OQ, Price AR 9 Q@ 3% Output Figure 1: The Firm Showing Necessary and Sufficient Conditions for Profit Maximisation (b) Some Comments from an Islamic Perspective What does it mean to firm’s behaviour in the Islamic society? In the Islamic economy, the firm may have to produce an output in which only the necessary condition for maximum is satisfied. Of course, it is not unethical if the firm may decide to produce an output where the sufficient condition is also satisfied. In an Islamic economy, a firm under the public sector may have to produce’ an output at a negative profit level where MC > MR, keeping in‘ view the existing dimension of poverty of the country.132 Islamic Economics If MR-MC mechanism is not satisfactory, what is the alternative? The most popular alternative is what is known as full cost pricing. According to Mannan, this theory may be more relevant to the Islamic firm. This principle implies that the firms in an Islamic economy use available data to compute full costs per unit (variable costs plus overheads) and add to this a conventional mark up; price is set at this figure and sales are determined by what the market will clear at this price. If the market-clearing price is beyond the reach of the common people, a subsidy may be given; if it is considered appropriate from social viewpoint. Here the firms are conceived of as having a perfectly elastic supply curve at the level of full cost. It is not difficult to establish that this full cost principle leads to different prediction than does profit maximising theory. 2. MONOPOLY (a) What is Monopoly? By ‘Monopoly’ we generally mean control over the supply, and, hence, control over the price of a product as well. In a perfect monopoly, there is only one producer of a_ particular product and that the commodity has no close substitutes. Unlike competitive firm, he is not bound to take the market price as given. In effect, given his objective to maximise profit, he can either fix the price or let the buyers decide the quantity or he can fix the volume of sales and wait to see the price offered by the buyers, He can not control both. (b) What is the Attitude of Islam Towards Monopoly? * Technically speaking, monopoly may be of two types namely, natural monopoly and artificial monopoly. There are certain goods and services, which by nature can not normally be supplied by too many persons/companies., These are provided by one or very few persons. Supply of-electricity or gas or special herbal medicine is some examples in point. Persons dealing with the supply of these types of commodities may be called ‘natural monopolists’. [slam doesMarket Structure in an Islamic Perspective 133 not deny their existence subject to certain restrictions in their dealings. There are certain persons, on the other hand, who artificially become monopolists by resorting to asocial means. For example, hoarding of essential goods and services during crisis period by a single person and selling those at prices much higher than the normal prices. This is evident from the Hadith: ‘If any one withholds grain for forty days out of the desire for a high price, Allah will renounce him.’ islam is against this type of monopolist. (c) Distinction Between an Islamic Monopolist and a Conventional Monopolist The behaviour of an Islamic monopolist would be different from that of a conventional monopolist. This can be shown as under. First, an [slamic monopolist will not consider maximisation of profit as the only objective of his business. Instead, he may consider ‘satisfying profits’ rather than ‘maximum possible profit’ as one of the basic objectives of his business. Second, the prices charged by an Islamic monopolist would be lower and that would be comparable with the price in the competitive market. Third, the volume of sales would be higher for an Islamic monopolist when compared with conventional monopolist. (d) Price-Quantity Relationships (i) Under conventional economics One important point about a monopolist is that the prices charged by him are always higher and outputs offered are always smaller when compared with the competitive firm. Explanation is simple. In the case of the competitive firm, average revenue (AR), marginal revenue (MR) and demand curves coincide and are represented by a horizontal line. Equilibrium is established at the point at which MR= MC and the latter cuts the former from below. In contrast, in the case of monopoly, AR, or demand curve, is not horizontal, rather slopes downward from left to right. When134 islamic Economics equilibrium’ is established at the intersection of the MR and MC curves, price automatically becomes higher and the quantity sold smaller when compared with the competitive firm. If the monopolist also becomes a monopsonist. i.¢., he is the only buyer of certain inputs, his power becomes double: in this case he can also manipulate his cost of production aceording to his sweet will, From any standard textbook, one can see relationship between price and quantity in a monopoly market as depicted in Figure 2. where, AR = average revenue curve (= demand curve) MR = marginal revenue curve MC = marginal cqst curve P= Price (equilibrium) q = quantity supplied Price AR MR . 0 q Output Figure 2: Equilibrium of a Monopoly MarketMarket Structure in an Islamic Perspective 135 Gi) Islamic dimension It is of crucial importance to note that-under monopoly, the equilibrium as shown above is not unique. Here the equilibrium is established at the point where MR is equal to MC; but, unlike perfect competition, it (MR) is not equal to price. In other words, under monopoly, MC is not equated to price; it is rather, as can be seen from the diagram, much lower than the price. From these conditions Lipsey (1975) inferred that ‘it is possible for different demand conditions to give rise to the same output but to differing prices.’ In effect, when a firm faces a downward-sloping demand curve, there is no unique relation between price and quantity. Mannan (1984: Chapter 11) has expanded this idea as can be seen in the following two diagrams. , SAME OUTPUT BUT TWO DIFFERENT PRICES Figure 3 illustrates two different demand curves, D, and D2, same output and two different prices. When demand is D;, marginal revenue is MR;. Equilibrium is established at the point where MR, is equal to MC. This gives quantity at OQ, and price OP2. Again, when demand is Bz, marginal revenue is MR2. Equilibrium is established at the point where MRo=MC>. Here the output remains the same but the price is different i.e., OP. Thus, it is possible to the have same cop sold at different prices under monopoly situation. Price 0 MRUMRz Quantity Figure 3: Monopoly Market Showing Two Different Prices Associated with the Same Output136 Islamic Economics SAME PRICE BUT TWO DIFFERENT OUTPUTS In Figure 4, it is shown that it is possible to have a situation where we have the same price but have various outputs. That is, when demand is D3, we have marginal revenue as MR; and marginal costs MC;. Equilibrium output is OQ). and the price is OP;. Again when demand is D4, marginal revenue is MR4 and marginal cost is MCy, equilibrium output is OQ,. but the price remains the same i.c., OP. The above analysis has clear Islamic dimensions. According to Mannan, ‘Since the monopolist faces the downward-sloping demand curve, he may be induced to sell the same output at different prices or increase output at the same prices by assigning weights to the consumer’s surplus either through Islamic orientation or through legal cover, thereby urging. monopolists to adopt a public utility pricing principle, particularly in favour of the low-income group or people living below the poverty line.’ (1992, p.178). The normal rule by which price is related to marginal cost under monopoly becomes: Figure 4: Monopoly Market Showing Two Different Outputs Associated with the Same PriceMarket Structure in an Islamic Perspective 137 where, P =price MC = marginal cost e =price elasticity of demand vy =weight From the above equation, it can be shown that when v=0, we have a normal monopoly situation i.¢., price becomes equal to MC times e upon 1-e. It can also be shown that when v=1, price and MC become equal. Where interests of different groups must be weighted, individuals may differ in their assessment. According to Mannan, ‘We cannot entirely depend on economic analysis, a political process is involved’ (p. 265). (e) Is Price Differentiation Permissible in Islam? First a few words about the terminology. In the standard economic textbook, tlie phrase ‘price discrimination’ is used. Truly speaking, the word ‘discrimination’ has a bad reputation and connotation to many, and, therefore, in the Islamic economics literature this phrase is replaced by ‘price differentiation’ meaning ‘price discrimination in its operational aspect” (Mannan 1984, p. 179). The difference between these two phrases lies in its objectives and emphasis. Given the maldistribution of resources in the society, the basic objective of price differentiation, unlike price discrimination, is to ensure an equitable price to all and hence maximisation of social welfare is emphasised. Defined in this way, price differentiation is very much permissible in Islam. Mannan has given many examples where this sort of price differentiation is permissible. We mention ‘only two just for illustration. Example 1: In many Muslim countries, there exist disparities in income among different regions. An internal transport company in such a country charges different prices for different regions depending on their relative backwardness. Example 2: Suppose an electrical company started selling electricity more.cheaply to those industries which are devoted to the138 Islamic Economics production of basic needs of the community than to the luxury-goods industries. The way the firm in question may charge different prices to different groups of customers can be shown in terms of diagram as follows. 0 f Quantity Figure 5: A Set of Differential Prices Covering Costs Where ATC = Average total cost AR = Average revenue (demand curve) Here the total cost is OA (quantity) x AB (= OP, price) i.e., OABP. Total revenue is OA x OC .i.e., OAEC. Whether OAEC (total revenue) will be greater than OABP (total cost) will depend upon the difference between the triangle PCD (revenue earned due to higher price) and DEB (the revenue lost due to lower price). As long as long the former is greater than the latter, there are profits. It is important to note that if each block can be sold at a set price, then MR of selling an additional block is the price of that block. Here MR is no longer less than price as in the case of a normal monopolist. Thus in the case of price differentiating monopolist, the demand curve becomes the MR curve and the cohtrolled monopolist reaches equilibrium at the point where P=-MR=MC, the picture that ‘one gets in the case of perfect competition. But this is equivalent toMarket Structure in an Islamic Perspective 139 perfect competition. The present competitive equilibrium, unlike perfect competition, actually offers an equitable price, taking into consideration the level of income and its distribution. It has a grater appeal to the Islamic system. The above analysis, therefore, shows that if price differentiation (planned price discrimination), is properly supervised and planned, can very well be used to achieve the goal of an Islamic economy. 3. OLIGOPOLY (a) What is Oligopoly? Oligopoly stands between, perfect competition and pure monopoly. According to Chamberlin, oligopoly (and duopoly) is defined as those cases ‘where the number of sellers in a market is greater than one, yet not great enough to render negligible the influence of any one of them upon the market price’ (Chamberlin 1950, P. 39). When the number of sellers is exactly two, the market is called duopoly, so that the oligopoly is characterised by the number of sellers as greater than two. Another characteristic of oligopoly is that as the number is small, it is possible for the seller to observe the policies of the others, calculate the possible repercussions upon ‘his own sales, and make his own policies accordingly. Still another characteristic of this type of market is that entry of new firms is either not possible, or too difficult. Due to these characteristics, the oligopolistic market comes very close to the monopoly market in certain respects. (b) Determination of Price and Output Under oligopoly, it is not possible to determine the price and output in the same manner as in the case of perfect, competition or monopoly, ‘The source of the problem is the fact that oligopolistic arrangements are notoriously undependable’ (Baumal 1968, p. 330).140 Islamic Economics The firm’s policy here depends upon how it thinks its rivals will react to its move, and the outcome of the firm’s policy depends upon how they do in fact react. There is no set rules for the equilibrium price and output. This does not, however, mean that the price and ctitpat are indeterminate in an oligopolistic market. The factors which actually help determine the price and output is the ‘competitors’ real and imaginary reactions to each other’s behaviour’. This has, therefore, led the theoreticians to form several hypotheses regarding oligopolistic behaviour. One such hypothesis, which has Islamic. dimension, is what is called the Kinked Demand Curve. This is discussed below. (c) Oligopoly and Islamic Dimension: The Case ot Kinky Demand Curve This can be explained with the help of Figure 6. In this figure, as usual, the x-axis and y-axis measure price and quantity, respectively. Let us assume that C represents the firm’s current price- quantity combination, ic. OP (=QC) is the price and OQ is the quantity demanded. This can happen either through the shape of the DD’ demand curve or the dd’ demand curve. The issue before us is to examine the impact of changes in the price from this situation. Two types of effects are anticipated: (i) Price reductions If the firm in question reduces its price and expects that the other competitive firms (whose number is very few) would not follow suit, it reap the benefit of larger sales. However, having known this price cut the other firms also reduce their prices and the firm in question faces a steeper (inelastic) demand curve i.e. the lower portion of the DD’ demand curve.Market Structure in an Islamic Perspective 141 9 Q. ‘Quantity Figure 6: Oligopoly Market: The Case of Kinked Demand Curve (id) Price increases When the firm decides to raise its price, the other firms do not co-operate, In this case the firm will face a demand curve which is rather elastic in character. The upper segment of the dd’ curve represents this situation. All these show that the demand curve through the point C is not a continuous line, but rather has a kink at point C. The new demand curve dCD’ is hence called Kinky Demand Curve. For this demand curve, it is possible to draw the corresponding MR and MC cost curves as shown in the figure. dUVW (kinked) is the MR curve and MC, and MC; are marginal cost curves. This kinked demand curve suggests that the firm in question does not gain either by reducing the price (other firms do the same) or by raising it (other firms do not follow). In cither case his-profit gets reduced. Therefore, on the demand side, there is good reason to believe that prices under oligopoly tend to be inflexible or ‘sticky’. Again, from the cost side, the broken MR curve indicates that within limits, there will be no significant change in cost as shown by the movements of the MC curves between U and V. Cutting of MC curves anywhere along the vertical segment of the MR curve causes no impact either on price (OP) or on quantity (OQ). This implies that142 Islamic Economics under the oligopolistic market, it is possible-to introduce an element of stabilisation of price and hence may ensure real income at least to the working class. Herein lies an Islamic dimension. If through Islamic orientation or through appropriate institutional arrangements the basic feature of kinked demand curve is retained, this will bring good to the society. If, however, it so happens that the oligopolists resort to non- price competition, this may still be accepted in Islam if the non-price competition is reflected in the programme of minimisation of wastage, or in the improvement in the quality of the product. 4, ADVERTISING (Is it permissible in Islam?) In the present day, advertising has evolved into an industry. It _ plays a dominant role in creating demand for goods and services. In particular, when the products are new, there is always a-fear in the minds of the producers that the products they are producing may not have a market, given the pattern of income distribution and stability of tastes. Advertising comes to the rescue in the situation. In effect, advertising has a direct bearing on the behaviour of a firm. Under the free market system, advertisement very often becomes too glamorous, wasteful and éven aggressive. Its contents are often imprecise and untrue. The qualities of the products highlighted in the advertisement also conceal harmful or negative aspects of the products. This in effect creates artificial barrier to entry into the specific commodity market. This unholy act is sustained in the capitalist economy by a scries of interlocking arrangements. The producers are to pay a very . high price for advertisement which helps the media sustain. The producers either directly or through the intermediaries shift the whole advertising expenditure on. the shoulder of the consumers. So the consumers are forced to finance the advertising expenditure without their consents,Market Structure in an Islamic Perspective 143 In Islam, advertising is neither condemned, nor accepted in a very high esteem. While the aggressive advertisement intended to manipulate the demand for the product is clearly against the principles of Islam, informative advertising intended for educating the customers is very much within the Islamic norms. The introduction of new techniques and products has been possible through advertising. In Islamic economics, the basic principles of advertising are as follows. First, Advertising information will not resort to false oaths, incorrect weights and measures and hence ultimately create ‘bad will’ in the business world. This has its origin in the Quran, The Quran says, ‘Woe unto those who give short measure, those who, when they take by measure from other people, take it full, when they give by measure to others or weight out to them, they give them less. Don’t such people know that they will be raised again unto a terrible day, the day when mankind will stand before the Lord of the worlds?[Tatfif 83:2-7]. The Prophet also prohibited sellers from promoting sales by false vows. He made it the responsibility of the seller to inform the buyer about the negative aspects of :product (Muslim). Thus, advertising information must contain both hard and cold facts about the product. ‘ Secendly, Islam does not allow that advertisement which lead. to artificial barriers to entry and helps earn abnormal profit at the cost of the masses. 3 Thirdly, on the positive side, advertisement expenditure should be directed to educate the customers as well as 'the producers by the supply of correct market information about the quantity, price and quality of the goods and services concerned. In an Islamic economy, advertising expenditure can, if properly handled, create demand and hence can increase the volume of sales, of course, up to an acceptable level of profit. The following diagram illustrates the point we are going to make. From Figure 7, it can be seen that under perfect competition, a profit-maximising firm will push its advertising expenditure up to the point where maximum profit is attained. In the diagram, this happens at point B. That is, when his advertising expenditure is OB, he attains maximum profit i.e., BD, The Islamic firm does not strive to attain the +144 . Islamic Economics maximum profit, but must maintain a minimum level of profit in order to run his business. It is assumed that the line PC (called profit constraint) represents this level of profit. Under this assumption the firm may push his advertising expenditure up to OE. Interestingly, at this point his volume of sales would be much larges than that of the non-Islamic firm. Value of sales “or profit Oo pe Quantity Figure 7:'Advertising Expenditure Here, TC =Total cost including advertising expenditure TR = Total revenue PC = Level of minimum acceptable profit PP’ = Total profit If the firm wants to maximise its profit, the advertising cost will be OB and the profit BM. But if-the firm wants to maximise its sale, the advertising cost will be OC and the profit OA. REFERENCES FOR FURTHER READING! 1. W. J. Baumol (1964), 2. M. A. Mannan (2984). For details, see the list of references given at the end of the Book.MONOPOLY IN ISLAM. Monopoly Monopoly ordinarily means control over supply, and therefore, over price of a product. The definition of Monopoly is quite stringent. First : There must be only one firm in the industry Second : There must be no close substitute for the monopolist’s product. Third: There must be some reason why entry and survival of a potential competitor is extremely unlikely. Antisocial Phenomenon of Monopolist The distinctive feature of monopolist is that, unlike the competitive firm, monopolist is not bound to take market price of his product as given. Being the sole supplier in his market, he can fix the price of his product as he likes. With a motive of profit maximization, he sets his price so that largest profit is ensured, That only incentive to change the price would be the possibility of increasing total net revenue by selling a large quantity at a lower price, or a smaller quantity at a higher price. Therefore, a monopolist has the power to control the price or quantity within certain limits. The prices charged by monopolist are always higher than the prices of a competitive industry and the output is always smaller compared to competitive one. A monopolist can also arbitrarily affect the quantity of the goods or services he produces. As there is no substitute for the goods or services in question, the consumer will have to accept such measure, willy-nilly, for the only choice that they are to do without the consumption of the monopolist’s goods, a move which they do not always, or even often, find agreeable. If the monopolist is also a monopsonist, that is, he has the extreme control over the factor market; his powers are doubled, for now he can exercise his power in lowering his cost of production as well. His capacity to widen the Tevenue-cost margin has increased. Positive Roles Played by Monopolist, Deeply influenced by Islamic Spirit A monopolist deeply influenced by Islamic spirit can play positive role in the following manner- ‘Abdullahil Manum, Assistant Professor, DBA, ITUC.E As to profit maximization the only objective of business policy is unislamic that results insults injury to the society in the form of unsatisfied need, it is obvious that he can no longer continue his profit maximization policy. He would lower his price as he is now content with ‘satisfactory profit’, contrasted with the ‘maximum possible profit’. This is likely to a fall in the price of his goods which called for increased supply. If the monopolist had been a monopsonist as well, assuming sincere devotion to Islamic spirit, he would now abandon the policy of forcing down the factor prices by virtue of his monopsony power as it is unislamic to exploit the weakness and need of a seller and thus force him to accept an ‘unjust’ price. ail: ahm_economies@yahoo.com Page 1* The monopolist can, due to the economies of large-scale production, maintain a cost of production lower then the competitive cost. + As the number of the recipients of profit being unity, or, at the most, very small as compared to the competitive case, be content with a rate of profit much lower than the corresponding competitive rate. By virtue of above two facts, the monopolist would be able to charge prices lower than the competitive prices. * Monopolist can improve the quality of the goods, and act which could happen under competition only if there is more than proportionate increase in prices (other things remaining fixed), as additional cost of such an improvement is likely to be higher where the scales of operation are smaller. A monopolist is also in better position to avoid waste, undertake research, and effect technical improvements, in comparison to large number of small competitive firms. Thus besides eliminating the antisocial nature of monopoly, the influence of Islamic spirit would make it serve the society in a manner better than the smaller competitive firms. ISLAMIC DIMENSION OF THE ABSENCE OF UNIQUE PRICE- QUANTITY RELATIONSHIP Unique price-quantity relationship means one-to-one relationship between price and quantity produced. When there is a single quantity for a given price, the price-quantity relationship becomes unique. But such kind of unique relationship is absent in case of monopoly. A monopolist can supply different quantity at a give price, or it can charge different prices for the same quantity depending on the elasticity of demand. We can explain it in the following graphs. A monopolist can supply different quantity at a given price ” Price ‘Abdullahil Manum, Assistant Professor, DBA, ITUC. E-mail: ahm_economics@yahoo.com Page 2A monopolist can charge different prices for the same quan’ Islamic dimension of such Price 0 The above analysis of the theory of monopoly provides some interesting clues which have clear Islamic dimensions, ‘Abdullahil Manum, Assistant Professor, DBA, ITUC.E Since the monopolist faces the downward sloping demand curve, he may be induced to sell the same output at different prices or increase output at the same price by assigning weights to the consumer’s surplus either through Islamic orientation or through legal cover, thereby urging monopolists to adopt a public utility pricing principle, particularly in favor of the low-income group or people living below the poverty line. As same quantity can be sold at deterrent prices, monopolist under Islamic spirit can offer goods at low price to the household having lower purchasing power. In the interest of minimization of wastage, competition may not be desirable or possible in some cases, it is always less costly to supervise one or two products and to initiate joint action under such special situations. ail: ahm_economies@yahoo.com Page 3Planned Price Discrimination, iF price discrimination pesmissible in i tetim’? ‘One normal answer lo ihe yiitstiou is: im” the negative, because discrimination being ener of the wont of moaapeles considered to be anlawfal. But whether or case should. be acceptable ~--~"Fiemn ihe suandpoiat of the Shariah. sientie ata a eel gcnterekpaieees— s, ‘Wak to achieve. Thus, a carefot economic analysis from an Islamic: perspective. should enshle ut oo scc that there ure a oumber of_valid reasons why price ‘Gocimination can consciously be used to achieve Tie gual of the Islamic economy. Since very lion” has 3 itanon ‘connotation of Undesirability to many, it is bewer to explain their simation Tn of ‘price ‘ifferensianion™ rather than. rice discrimisatioo. By price diffeceatiation, T mean price ice iscruni in i The dit Les ta 1s objective and Weline. The multidimensional objectives of the firm is iicnded to maximize social Sdvaniage man Islamic fromework, 7 Price differendanon bke price discrimination will be both fitable and __whete the supplier bas conirol a over ‘cost where the buyers are read signifi have clear Islamic dimensions, 1 Suppose in a large community, thete is a distinct low-income group, ‘whose children are undernourished. A dairy fanm, either voluntary or induced by the Jocai authority, started supplying milk lo this group of children at a lower price —i. ¢. milk is sold at a lower price if it is used for drinking but at a higher price if it is usedto make ice-cream or chesse inwended mainly for ibe consumption of die velubively ‘Example 2 Suppose an electrical company stuted velling clecuicity 2 these industries which are devnted tn the production of basic needs af the sane thar co the luxury goods DEB, there are proiis, & 188Each of the wbove exzaples involves prce discrimination. te consequence: of which canno: soley be determined by mere ezonomic analysis. Theue awe clea: Islamigidictensions in cari uf the cases [nvolved. This +s mo: to suggest that all sors i J& moaosely business. uz ‘Gis incriinaulon wer Towed i Wheat is Waportant po nics drscnmiinalon = -ueh a Way Tiggmge vpsoge sed GLRUMIEE SOE) Tans Thoratare, COT welalaect oly or price discrmimpen maynot Te fee ranie 7a an I gconoyly Wilhwul prope: examination. It tuilively plausible thar the planned price disermmmazon may gives Maher foal revenue to the fim. as weil 2s a larger output anda more equiwble prive dha -he bess single pict tall, regardiess cf tre income ot the people. The possibility of plaaned price disctimsnuriom suygesié that merginal revenue will toad 10 be aigher brews: die lower price that the procucsr sharges for a curtain quautsy ill act spply tm all previous units sold es is done ins the cave of the usual monopolist. This has ar imporant heoreticwl inpplication in the sees thar if each block can ze sold al a separae prise, them the marginal revere of seihng an additional Binek is the price of “amt blocs, Here, marginal neweus: MR) is no boger kes thon price as im the case Uf he usual monopolist: Thna, the demand curve becomes the MR carve and the commolled monopolixt reashas equilidriuza at the poial at which che peica = margnal revenue ~ margin cost. This is alte the esse of ‘coenpatitive equilibrium which offers @ single price tor all, But am such a manopo!y case, we isa veach a competitive equillgtuc sirvation which ofisrs ws equitatlc- price, taking inte cowsideration the Tevel of income and its distribution. [thas 2 greater appead ty a) Islamic econamy: . If the initial. disiribution of-ineome is not equitable-ur highly stewed,.a single drice for all. repanlless of de consumers” ability to buy. violas ‘the spirtt of Islamic: values, In woh o simetion, the Islamsc economic system needs & price mechunisri whereby it should be possible ta classify buyers tivo readily identifiable income grouns of to idersify 2 basket of goods and services considered 10 be bzsic needs for all end charg: cacir icentifable class of buyers scconding at thei ability wr pay amd willingness (0 pay us redlevicd it devannd cneves. The downward sloping demand curve shews that sre unite can always be sold at a higher price If vellers ane permined to deviate from a single price In othe: wonds, what wo are saying 13 the differenditlon, if properly supervised and plained, can vory wall be used to achieve ths goal o* un Jslamie sconomy., Oligopoly: Temtative Appraisal ‘AL (his stage, a review 0° the functioning of the oligapelistle markers s.hic> refer wo impectect competiticn among the few fins of an industry muy be cecessary: Readers ‘ce cecaumed 19 3e aware thal there iy co sing!e wel-levelped theory of ci. gopolistic markets, although a high proportion of manufactucmg Industries in ell Western epunitnics ere olignrolistis in nanre, Although it is possibie to pur forwed severel Eypotheses about oligopoly behaviour which concerns severs! cepondeme variables such as level af price, {nlexibllity of price, extent of net-price competition, tnd so- on, yet we stall confine: ‘our discussion to whether there exists any aeope for oligopolistic markets in anOLIGOPOLY Oligopoly is a market structure characterized by a small number of large firms that dominate the market, selling either identical or differentiated products, with significant barriers to entry into the industry. The market can be dominated by as few as two firms or as many as twenty, and still be considered oligopoly. With fewer than two firms, the industry is monopoly, As the number of firms increase (but with no exact number} oligopoly becomes monopolistic competition. This is one of four basic market structures. The other three are perfect competition, monopoly, and monopolistic competition. Oligopoly dominates the modern economic landscape, accounting for about half of all output produced in the economy. Cligopolistic industries are as diverse as they are widespread, ranging from breakfast cereal to cars, from computers to aircraft, from television broadcasting to pharmaceuticals, from petroleum to detergent. Characteristics The three most important characteristics of oligopoly are: 4) an industry dominated by a small number of large firms, 2) firms sell either identical or differentiated products, and 3) the industry has significant barriers to entry. + Small Number of Large Firms: An oligopolistic industry is dominated by a small number of large firms, each of which is relatively large compared to the overall size of the market. This generates substantial market control, the extent of market control depending on the number and size of the firms. + Identical or Differentiated Products: Some oligopolistic industries produce identical products, while others produce differentiated products. Identical product oligopolies tend to process raw materials or intermediate goods that are used as inputs by other industries. Notable examples are petroleum, steel, and aluminum. Differentiated product oligopolies tend to focus on consumer goods that satisfy the wide variety of consumer wants and needs. A few examples of differentiated oligopolistic industries include automobiles, household detergents, and computers. + Barriers to Entry: Firms in a oligopolistic industry attain and retain market control through barriers to entry. The most common barriers to entry include patents, resource ovinership, government franchises, start-up cost, brand name recognition, and decreasing average cost. Each of these make it extremely difficult, if not impossible, for potential firms to enter an industry. Behavior Although oligopolistic industries tend to be diverse, they also tend to exhibit several behavioral tendencies: (1) interdependence, (2) rigid prices, (3) nonprice competi (4) mergers, and (5) collusion * Interdependence: Each oligopolistic firm keeps a close eye on the activities of other firms in the industry. Decisions made by one firm invariably affect others and are invariably affected by others. Competition among interdependent oligopoly firms is comparable to a game or an athletic contest. One team’s success depends not only on its own actions but on the actions of its competitor. Oligopolistic firms engage in competition among the few. + Rigid Prices: Many oligopolistic industries (not all, but many) tend to keep prices relatively constant, preferring to compete in ways that do not involve changing the price. The prime reason for rigid prices is that competitors are likely to match price decreases, but not price increases. As such, a firm has little to gain from changing prices. ‘Abdullahil Manum, Assistant Professor, DBA, ITUC. E-mail: ahm_economics@yahoo.com Page 1+ Nonprice Competition: Because oligopolistic firms have little to gain through price competition, they generally rely on nonprice methods of competition. Three of the more common methods of nonprice competition are: (a) advertising, (b) product differentiation, and (c) barriers to entry. The goal for most oligopolistic firms is to attract buyers and increase market share, while holding the line on price. + Mergers: Oligopolistic firms perpetually balance competition against cooperation. One way to pursue cooperation is through merger--legally combining two separate firms into a single firm. Because oligopolistic industries have a small number of firms, the incentive to merge is quite high. Doing so then gives the resulting firm greater market control. * Collusion: Another common method of cooperation is through collusion--two or more firms that secretly agree to control prices, production, or other aspects of the market. When done right, collusion means that the firms behave as if they are one firm, a monopoly. As such they can set a monopoly price, produce a monopoly quantity, and allocate resources as inefficiently as a monopoly. A formal method of collusion, usually found among international produces is a cartel. Kinked-Demand Curve Model or Sweezy Model Short-run production activity of an oligopolistic firm is often illustrated by a kinked-demand curve, such as the one presented in the exhibit to the right. A Kinked-demand curve has two distinct segments with different elasticities that join to form a kink. The primary use of the Kinked-demand curve is to explain price rigidity in oligopoly. The two segments are: 1) A relatively more elastic segment for price decreases and 2) A relatively less elastic segment for price increases. The relative elasticities of these two segments is directly based on the interdependent decision-making of oligopolistic firms. The kink of the demand curve exists at the current quantity (Qo) and price (Po). © Firm following the elastic segment continues to reduce price to raise total revenue and stops at P. + Similarly, firm following the inelastic segment continues to raise price to raise total revenue and stops at P’. Ultimately, price becomes sticky or rigid at P’. Marginal revenue corresponds to the more elastic demand curve is MR; and marginal revenue corresponds to the less elastic demand curve is MR:. The vertical middle segment connecting the top and bottom segments that occurs at the output quantity Qo corresponds with the kink of the curve. This vertical segment is key to the analysis of short-run production by an oligopolistic firm. It means that the firm can equate marginal revenue with marginal cost, and thus maximize profit, even though marginal cost increases or decreases. If marginal cost increases @ bit, the profit-maximizing price and quantity remain at Po and Qo. If ‘Abdullahil Manum, Assistant Professor, DBA, ITUC. E-mail: ahm_economics@yahoo.com Page 2marginal cost decreases a bit, the profit-maximizing price and quantity also remain at Po and Qo. Islamic Perspective The price sticky nature of oligopolistic market may results non-price competition which may or may not be permissible in an Islamic economy depending on the merits of the case. Non-price competition is socially desirable when firms realize economies of scale, improve productive technique, improve the quality of product, minimize wastage, try to ensure cost-effectiveness. Obviously, it is not desirable in light of Islam that firm will follow unfair advertising technique or take steps to abuse their market power as a part of non-price competition. Costs Reverie NELASTIC P2 a a\ a Output Ccopyinhs wonseconcenecntso ‘Abdullahil Manum, Assistant Professor, DBA, ITUC. E-mail: ahm_economics@yahoo.com Page 3