Table of Contents
Introduction ............................................................................... 1 Oligopoly ........................................................................................... 1 ? Entry barriers ....................................................................................................... 1 ? Non-price competition ......................................................................................... 1
Explanation for Diagram in Oligopoly .......................................... 2 Pure Competitive Market ............................................................... 3 ? Lower prices ........................................................................................................ 3 ? Low barriers to entry ........................................................................................... 3
Explanation for Diagram in Pure Competitive Market ............... 3 Roles of Profit in Market Economy ............................................... 4 ? Demand for factor resources ............................................................................... 4 ? Market Entry ........................................................................................................ 5
The other two alternatives to profit maximization ....................... 5 ? Satisficing behaviour ........................................................................................... 5 ? Sales revenue maximization ................................................................................ 5
Influences on a Firm in the Short Run .......................................... 6 References ......................................................................................... 7
1.0 Introduction
Marco and Micro economic knowledge we had learned in this period is mainly to discuss about some major market structures in the entire market now. And they are oligopoly, monopoly and pure competitive market and so on. In this case, the Virgin Mobile had entered in mobile phone market in the UK, which is an oligopoly market. In this market, Orange, Vodafone, BT Cellnet and One2One are the oligopolists.
2.0 Oligopoly
When a market or industry is dominated by a small number of sellers, we usually believe an oligopoly appears. And there are two main features of oligopoly: ? Entry barriers: It’s a great block for the new company to be a long-run part
of an oligopoly market. Usually, many smaller firms operate on the periphery on such s market, which means these companies cannot reach the supernormal profits or affect much to market prices and output. Take Virgin Mobile (VM) as an example: Before VM engaged in the mobile phone market in the UK, there were some industrial giants conquered the market- Orange, Vodafone, BT Cellnet and One2One, which account for a large market share. Although VM is making profit, the money it earned is far less than any one of these oligopolist.
? Non-price competition: As a few company be dominant to an industrial,
pricing can be no longer an effective competitiveness for those oligopolistic firms. Compared with pricing, after-sales service, extension of new market and advertising seem to be more emphasized by them. In this case, the VM is better to promote the competitiveness in such ways -- improving the after-sales quality, expanding into new markets , building their own brand and so on.
3.0 Explanation for Diagram in Oligopoly
In the oligopolistic market, the oligopolists may react diversely to the different price variation trend of their rivals. If one oligopolist raises the price and other companies will not follow it to maintain the market share, however, if the company reduce the price and other companies must follow, which is to keep more market shares. It can be seen in the kinked demand curve below.
Price MC3 G P2 P1 MC2 F MC1 AR Q2 Q1 MR Output
Before the price is higher than P1, the product demand is elastic that means the price raises and the total revenue will reduce. But when the price is lower than P1, the product demand is inelastic -- the price reduces and the total revenue will also do. Thus, the company may able to reach a stable profit-maximizing equilibrium at the point G, so the companies in the oligopolistic market can not change the price optionally.
4.0 Pure Competitive Market
In the pure competitive market structure, the company can compete with each other perfectly. There are two common characteristics that are considered to be “competitive” are:
? Lower prices: Generally, a perfectly competitive market exists when
every participant is a \able to raise price for facing elastic demand curves, and no participant influences the price of the product it buys or sells. ( ) .
So simply raising price will make a loss of demand and total revenue. The cross-price elasticity of demand can reflect the customers’ attitude towards some particular goods. The demand of substitute goods is holding pace with the price when it has any change. Conversely, the demand of complementary goods would decrease when the price increase. In this condition, customers will always find the most proper goods for themselves.
? Low barriers to entry: Compared with oligopoly, the new firms would
be easier to enter in the pure competitive market. And the entry of new participants will probably provide competition and ensure price is kept low in the long run.
5.0 Explanation for Diagram in Pure Competitive Market
It is known to all that each individual firm is considered as a price taker. Customers may not prefer to buy a product with a higher price. Because of the characteristic (perfect knowledge) of pure competitive market, neither buyers nor sellers can gain an advantage and firm may sell their goods at the point where they have the maximized profit.
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