Micro Economics – MCU 1205 Assignment No : 308

Q. Consider two local firms; one belong to Monopolistically Competitive industry and the other
belonged to Oligopolistic industry.

Analyze their behaviour in relation to pricing, output, advertising, product differenciation etc. How
useful are the theories in relation to these markets in explaining the respective behaviour.

The market structures means the extraction of the behaviour of the suppliers in the market. Basically
there are four types. That is Perfect Competition, Monopoly, Monopolistic competition and
Oloigopoly. In the real world most commomnly practicing market structures are, Monopolistic
competition and Oligopoly market. There are situatuions where that, both the characteristis of perfect
competition and monopoly are operating. That is named as, Imperfect competition. That can be
devided in to two as,

1. Monopolistic competition market

2. Oligopoly market
These market structures are described seperately in follows.
Assume that the two local firms taken according to the question are,
 Monopolistic competition – Restaurant industry
 Oligopoly - Telecommunication industry

The Monopolistic Competition Market

This can be defined as a market structure where there are a large number of firms, each firms
producing differenciated products and there’s free entry and exit to the industry. This industry is a
combination of both perfectly competitive market and monopoly market. This is a real world
situation. The main characteristics are,

 So many sellers
 Free entry and free exit
 Differenciated products

Ex: saloon, restaurant, hardware, shoe manufacturers

In monopolistic competition, the pricing behaviour is affected by the having numerous suppliers in the
market. When there are more sellers in the market, the individual price of a certain seller is not an
important percentage. Therefore the effect that can be done to the rest of the suppliers is limited.
Though there are many more sellers each seller is behaving independently when determining the
price. Other sellers do not attentive in determining output and the price of other sellers. Therefore the
pricing and the output descision is taken without considering other firms in the market.

Even if one firm reduces the price of its goods, the shift of customers from one product is very low.
They are nit price takers. If the price of their product increases the sales may fall by some amount but
not the whole as of perfect competition.

Product differenciation is a most distinctive feature in monopolistic competition market. Every

supplier tries to differenciate their product from others. Other products are close substitutes but not
the perfect substitutes. Because of that the ability to compete with other suppliers is strengthen. The
opportunity to compete with others is facilitated by the quality, price and the advertising.

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 Micro Economics – MCU 1205 Assignment No : 308

Due to the free entry and free exit to the market, in the shrt run as the firms are earning super normal
profits, more firms are entering to the market but at the long run they earn normal profits.

Therefore according to the example, the shoe manufactures like, DSI and Bata are two of the
manufacturers. The main purpose of buying footware is to wear it for the foot protection. Therefore
quality, comfortable, looking footwares should be made by DSI and Bata in order to compete. Product
differenciation can be seen as there are many patterns and types of wearings from both companies.
The customer’s perception is the most important thing. The quality, price and advertising, location of
the footware can be termed as the perceptions that lead the customers to buy from that products DSI
as of the satisfaction of the buyer.

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 Micro Economics – MCU 1205 Assignment No : 308

The oligopoly market

The market situation here is that whole market is in the hands of few sellers. This is also a real world
situation. The characteristics of this structure are,
 Availability of few sellers who are competing in the market.
 Barriers in entry (either natural / artificial)
 Either diffrentiated or same product.

Other than those following characteristics can be seen.

 Mutual relationship among suppliers
 Advertising
 Market domination

Ex: motor car production, newspapers, milk powder, communication networks, airlines.

In a oligopoly market there are few suppliers, therefore the pricing and the output of one firm can
affect to the others. That is the increment in the price will lead to loose the customer base of the
particular firm. Though it is so, there’s independence in determining their price than other market
structures. The products are not necessarily identical but they are closer substitutes and there’s a
competition among firms influence directly.

Due to the restrictions in entering to the market, the features such as, economies of scale, goodwill,
stratergic implements, the entry of a new firm is barriered. The market domination is another feature
in oligopoly. That is as there are less number of firms the significant of one firm is more, therefore
there’s a mutual understanding either in a proper or improper manner among firms in the market.

If there’s no such huge change in the cost they tend to remain their price as it is. This is called price
rigidity. And they are having stratergic descisions regarding the price changes, advertising, reactions
of other firms etc.

According to the example, the telecommunication services in sri lanka such as, Dialog and Mobitel
are in oligopoly market. The price reduction in Mobitel is directly affects on Dialog in determining
their sales and customer base. And Dialog and Mobitel are doing proper advertising to attract and
retain customers and spend on advertising and along give many benefits.

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 Micro Economics – MCU 1205 Assignment No : 308

The differences between monopllistic competition market and oligopoly are as follows.

monopolistic competiton oligopoly market

 a large number of suppliers  few powerful suppliers

 free entry and free exit  barriers in entry
 price competition  no price competition
 no advertising  a mutual relationship among suppliers
 no mutual relationship among  more advertising
suppliers  earn super normal profits in long run
 earn normal profits in long run

The behaviours of the monopolistic competition and the oligopoly market can be displayed as follows.

Behaviour Monopolistic compettion Oligopoly

Price Price taker Independent
Output Do not affect others Affect others
Advertising Can be seen Can be seen
Product Available. This is a vital feature here. May be available or not. Not
diffreenciation necessarily required.

When determining about the usefullness of the knowing about the above market structures, the pricing
stratergy of the firm is important. By just understanding the cost and revenue the price cannot be
setted, the nature of the demand curve, behaviour of the marginal revenue and cost,average cost and
revenue will be helpful in determining the price.

With different from a firm to firm, the profit making point which allows the number of units to be
produced at which price is known by studying the theories relate to the market structure. And also can
get an understanding about the behviour of the competitor. For an example, the behaviours in the
oligopoly market is explained under many theories such as, cournot model, edgeworth model,
chamberlain model, sweezy model, etc.

In order to know about the short run and long run behaviour of the market structure it is useful. As an
example in short run the monopolistic competition market makes super normal profits but in long run
they make normal profits.

And when investing also the knowledge of market structure of the firm is needed. Whether this
market is a price taker or a maker and will it make super normal profit/ normal profits and abnormal
profit/ loss before investing.

Alike that there are many uses from the theories of market structures to day today lives of all.

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