Construction Economics: Assignment 2

Ilya Malyavin (ID: 14840019)

Auckland University of Technology

School of Engineering. MCM

Auckland 2014
 Construction economics. Market structure
by Ilya Malyavin (14840019)

FACULTY OF DESIGN AND CREATIVE TECHNOLOGIES

AUCKLAND UNIVERSITY OF TECHNOLOGY
TE WANANGA ARONUI O TAMAKI MAKAU RAU

School of Engineering

Master of Construction Management

Name Ilya Malyavin

ID Number 14840019

Paper Name Construction Economics

Assignment 2

Number of words (excluding appendices) 2270

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 Executive Summary

This paper includes overview of the market structures and companies behavior for the
each case. Additionally, the wall/floor tiles and plumbing wares market in New Zealand
is recognized as a monopolistic completion. Thus in order to provide recommendations
for the investment decision the market research should be completed, however it is out of
scope of this paper.

Table 1 represents the summary of the paper and includes characteristics of the main
market structures and concept for the determination of the best price that may provide the
highest profit.
Table 1Main market structures’ characteristics (adopted from Welch and Welch (2010), Pass, Lowes, and Davies (2005)
Tremblay and Tremblay (2012)
Market
Characteristic Pricing determination
structure

 Numerous of
𝐷=𝑆
Pure (perfect)
competition

competitors
 Identic products
𝑝∗ = 𝑀𝐶
 Free entrance and exit
 Same products
𝑝∗ = 𝐴𝐶
 Exogenous price

 Numerous of
competitors
Monopolistic
competition

 Similar products 𝑝∗ = 𝐴𝐶
 Free entrance and exit
 Differentiated 𝐴𝐶 > 𝑀𝐶
products
 Endogenous price
 Few competitors
 Mutual independence
Oligopoly

The same as under monopolistic competition.

 Barriers for entrance
In case of explicit collusion agreement the same as under monopoly
 Same/differentiated with consideration of the game theory (illegal).
products
 Endogenous price

𝑎−𝑐
 No competitors 𝑞∗ =
Monopoly

 No entrance 2𝑏
 One product 𝑎+𝑐
 Endogenous price 𝑝∗ =
2

Notes: price that presents the profit maximum (p*); demand (D); long-run supply (S); average cost (AC);
marginal revenue (MR); marginal cost (MC); optimal output value (q); price intercept (a); slope (b); long
run marginal cost and long run average cost (c)

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 Construction economics. Market structure
by Ilya Malyavin (14840019)

Table of Contents

Executive Summary ........................................................................................................... 2

Market structure characteristics ......................................................................................... 4

Pure competition ............................................................................................................ 4

Monopolistic competition .............................................................................................. 4

Oligopoly ....................................................................................................................... 5

Monopoly ....................................................................................................................... 5

Sub-structures ................................................................................................................ 6

Duopoly ..................................................................................................................... 6

Natural monopoly ...................................................................................................... 6

Monopsony & oligopsony ......................................................................................... 6

Bilateral monopoly & oligopoly ................................................................................ 6

Price management .............................................................................................................. 6

Pure competition ............................................................................................................ 7

Monopolistic competition .............................................................................................. 8

Oligopoly ....................................................................................................................... 8

Monopoly ....................................................................................................................... 9
Conclusion and recommendations ..................................................................................... 9

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 Construction economics. Market structure
by Ilya Malyavin (14840019)

The report prepared for the New Zealand ceramic manufacturing investors.

The report aims to discuss characteristics of different market structures, including pure
(perfect) competition, monopolistic competition, oligopoly monopoly and substructures
such as duopoly, natural monopoly, bilateral monopoly, monopsony and oligopospony.

Market structure characteristics

Market structure represents competition situation on the particular market. In terms of the
competition markets are classified according tree parameters namely number of sellers,
product differentiation level and barriers for the entrance and exit on the market (Welch
& Welch, 2010). Additionally, market may be characterized by number of buyers.

Pure competition

Pure competition is characterized by big number of the independent competitors that offer
identical products. There are no barriers for the entrance or leaving the market.

Pure competition is hard to achieve and there is a statement that it is theoretical structure
that does not exist (Farnham, 2010) however, Welch and Welch (2010) give examples of
corporation stock market and crops and corn markets as pure competition structure.

In pure competition conditions companies have to take market price and the price is
determined by the demand and supply (Welch & Welch, 2010).

To achieve competitive position company cannot compete by nonprise factors. Thus

company operations should be focused on the minimization production cost and market
monitoring in order to get profit whenever it is possible. However the pure competition
assumes that in long run the price is as minimum as possible.

Monopolistic competition

This type of the competition is characterized by multiple sellers. The monopolistic

competition market is open for the entrance and exit. Due to the large number of
competitors the price control is limited as market includes different offers of the similar
product. Company would lose some, but not all, buyers if it would increase price as they
can find the similar product from other suppliers (Welch & Welch, 2010).

In this situation companies compete with each other not by nonprice values such as quality
services, guarantees, etc. To achieve the highest profit company should differentiate the
product. Hubbard (2008) suggests the following ways for the differentiation:

 Brand management may improve competitive position. However, tendency of

copying successful products by other market parties reduce the advantage in long
term perspective. Successful name and brand should be protected as it may
significantly distinguish the product from others.

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 Construction economics. Market structure
by Ilya Malyavin (14840019)

 Advertising that aims to increase demand without changes in products.

Advertisement can also protect losing of the demand after increasing prices. On
the other hand advertisement require expenses. To achieve the economic benefits
from the advertisement the revenue from it should be higher than its cost.
 Additional services may significantly improve attractiveness of the product.
Services may include installation, transportation, packaging etc.
 Improve production via cooperation with other market parties. It would decrease
the average total cost.

These factors should be consider in strategy development to achieve success on the

monopolistic competitive market.

Oligopoly

Oligopoly market structure is characterized by domination of the few large competitors

among big number of small ones. The products of the dominant sellers can be
differentiated or the same. Entrance into the oligopoly market requires finance input and
enough scale for competition (Welch & Welch, 2010).

The price under this type of market is defined by key companies. The market players are
interdependent on each other. Thus the reaction and actions of competitors are also should
be considered for the price control. Mutual interdependence is unique characteristic of the
oligopoly structure (Welch & Welch, 2010).

If there is a dominated firm it acts as a leader in price setting, the other companies react
as a followers and accept the price changes. However it may occur that companies follow
the leader only when it reduce price but not when it increase it. This situation outlined by
kinked demand curve model (Welch & Welch, 2010). The leader in this case may lose
customers as his price becomes less competitive. The price wars are also possible in this
type of market. The “price wars” means the decreasing of price by one key competitor to
attract the customers of other ones so everyone has to reduce the price to stay competitive.
The price wars are most dangerous for the small companies as they do not have enough
flexibility for the changes.

Monopoly

Monopoly market assumes absence of the competition. There is only one seller/supplier
who covers all demand and the entrance on the market for others is closed. Monopoly
market does not require a product development or differentiations as the supplier does not
need to compete for the customers, nonprice competition simplified and aims to aware
customers about the product but not to advertise the monopolist (Welch & Welch, 2010).

The monopolist has whole control over price. As the industry demand is equal to the
monopolist demand he can chose the price that would bring the highest profit (Welch &
Welch, 2010).

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 Construction economics. Market structure
by Ilya Malyavin (14840019)

In some cases monopoly may occur from the oligopoly. It happened when key companies
arrange to act together as a monopoly (Parkin, 2008). However such collusive agreements
are illegal in New Zealand according to the Commerce Act 1986 (2014). The breach of
the act may lead to the significant finance and image loses for the companies.

Sub-structures

Duopoly

Duopoly is the variant of the Oligopoly in which there are only two main competitors.
Duopoly may be either interdependent or nonreactive. All characteristics of oligopoly are
also applicable for the duopoly model (Pass et al., 2005).

Natural monopoly

According to Welch and Welch (2010) natural monopoly occurs in case when “it is more
effective to have the entire output of a product come from one large producer rather than
from several smaller producers”. This type of monopoly is typically created and regulated
by government.

Monopsony & oligopsony

Monopsony is the opposite structure to the monopoly. It is characterized by the number of

buyers. In this type of the market there is only one dominant buyer. The demand of the
buyer defines the total demand. Thus the price is also can be regulated by the buyer (Parkin,
2008).

Oligopsony is a market with few buyers. This structure allows buyers get benefits such as
discounts or credits from the suppliers (Pass et al., 2005).

Bilateral monopoly & oligopoly

These structures are the mix of monopoly, oligopoly, monopsony and oligopsony. It is
assumes the limited number of buyers and suppliers in the market. Bilateral monopoly
assumes one buyer and one supplier (seller), when bilateral oligopoly includes few buyers
and few suppliers (Pass et al., 2005).

Price management

This chapter includes description of methodologies for the price determination under the
main market structures. Chapter is based on the concepts from “new perspective on
industry organization” presented by Tremblay and Tremblay (2012)

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 Construction economics. Market structure
by Ilya Malyavin (14840019)

Pure competition

In order to maximize the profit under the pure market conditions the company should
determinate the optimal value of production (q).

From the price forming point of view pure competition includes the following
characteristics:

 Market demand (D) and long-run supply (S) are equal

𝐷=𝑆

 The equilibrium price that presents the profit maximum (p*) is equal to marginal
cost (MC)

𝑝∗ = 𝑀𝐶

 In long run profit is tend to zero. Thus p* is equal to long run average cost (AC)

𝑝∗ = 𝐴𝐶

The equilibrium for the pure competitive market presented on figure 1. It may vary
depending on the market size and industry production. For instance in small industries
production does not have influence on the price and the supply line becomes horizontal.
However, the concept for the market does not change.

Figure 1 Pure competition long run equilibrium (retrieved from Tremblay and Tremblay (2012)

In order to get benefit from these conditions the concept of static efficiency can be used.
The efficiency includes technical and economical efficiencies. The first one includes
minimization of resources for the production, former one assumes the minimization of
cost for the production.

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 Construction economics. Market structure
by Ilya Malyavin (14840019)

It is also required the accurate monitoring about the prices and products qualities to stay
competitive on the market.

Monopolistic competition

The main difference between monopolistic competition and pure competition is in

differentiation of the products. In this case each company acts as a monopolist for its own
products and has power for the price making, however, the power is limited by presence
of the similar products from other suppliers. The tendency of the long run profit under
monopolistic competition is the same as under the pure competition. The long run profit
is zero and price is equal to long run average cost.

To achieve the profit maximization marginal cost should be less than average cost and the
equilibrium (see Figure 2) can be described by following equation:

𝑝∗ = 𝐴𝐶 > 𝑀𝐶

Figure 2 Monopolistic competition long run equilibrium (retrieved from Tremblay and Tremblay (2012)

Oligopoly

Oligopoly price determination can be different from the monopolistic competition

conditions in case of cartel establishment. Cartel occurs in case of explicit collision
agreement when companies agreed to act as a monopoly. The determination of the strategy
in this circumstance include the game theory as it depends on the other companies
behavior and individual expectations. As it was mentioned cartels are illegal that is the
reason it is not reviewed in this paper.

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 Construction economics. Market structure
by Ilya Malyavin (14840019)

Monopoly

The profit maximum under monopoly can be achieved when the marginal revenue (MR)
and marginal cost (MC) are equal. Thus, the optimal output value (q) that maximize the
profit (𝜋) has the following interrelationship:
𝜋
= 𝑀𝑅 − 𝑀𝐶 = 0
𝑞

According to the given source the price strategy for profit maximization under monopoly
can be determine by the set of the equations:
𝑎−𝑐
𝑞∗ = ,
2𝑏
𝑎+𝑐
𝑝∗ = ,
2

∗
(𝑎 − 𝑐)2
𝜋 = ,
4𝑏
Where a – price intercept; b – slope; c – long run marginal cost (LRMC) and long run
average cost (LRAC)

Figure 3 Monopoly equilibrium (retrieved from Tremblay and Tremblay (2012)

Conclusion and recommendations

Identification of the market is significant step for the proper decision making (Tremblay
& Tremblay, 2012). This report is focused on the national New Zealand market of
wall/floor tiles and plumbing wares.

According to the New Zealand statistics the value of the ceramic import is significantly
higher than the export (Figure 5). Additionally, the total number of jobs in the industry is
not sufficient for the impact on the ceramic market (Figure 4). It means that the majority

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 Construction economics. Market structure
by Ilya Malyavin (14840019)

of the ceramic products comes to New Zealand from overseas and domestic production
cannot effect on the price.
420
400
380
360
340
2009 2009 2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Total Jobs 370 370 370 400 390 390 370 380 370 380 390 400 380 380 390 410 410 390
Figure 4Total jobs in New Zealand ceramic production manufacturing (source: Statistics New Zealand)

50
Millions

40
30
20
10
0

CIF (cost, insurance and frieght) Export, re-export

Figure 5 Value of New Zealand imports (CIF) and exports of ceramic products (source: Statistics New Zealand)

However, the wall/floor tiles and plumbing wares is a search goods that means that
customer know the characteristics of the product before the purchase (Tremblay &
Tremblay, 2012). It gives some influence on the market and the price.

It can be stated that the wall/floor tiles and plumbing wares market in New Zealand has
the monopolistic competition structure. Thus the strategy for the survival should include
differentiation of the product. Production and marketing play significant role for the stay
profitable (Tremblay & Tremblay, 2012). Consequently, the inputs and outputs of
marketing for each product should be taken into consideration as well as production cost
to make a correct strategic decision.

The next step for the investment decision should be wall/floor tiles and plumbing wares
market research in order to develop marketing mix (Pass et al., 2005).

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 Construction economics. Market structure
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References

Farnham, P. G. (2010). Economics for managers. Upper Saddle River, N.J: Pearson.

Hubbard, R. G. (2008). Microeconomics. Frenchs Forest, N.S.W: Pearson Education.

Commerce Act 1986 (2014).

Parkin, M. (2008). Microeconomics. Boston: Pearson/Addison-Wesley.

Pass, C. L., Lowes, B., & Davies, L. (2005). Collins dictionary of economics. Glasgow:
HarperCollins.

Tremblay, V. J., & Tremblay, C. H. (2012). New perspectives on industrial organization:

with contributions from behavioral economics and game theory. New York:
Springer New York. doi:10.1007/978-1-4614-3241-8

Welch, P. J., & Welch, G. F. (2010). Economics: theory and practice. Hoboken, N.J:
Wiley.

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