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Chapter VI
Product
Pure competition good are
undifferentiated.
Monopolistic competition products are
slightly differentiated.
Oligopolistic products are substantially
diferentiated
Monopolies are highly differentiated.
Number of sellers
Business firms compete with one
another in one of four market
structures. While the four apply to
different industries, they share certain
similar characteristics.
Market
Pure
Monopoli
stic
Oligopolis
Monopoly
tic
Seller
Plenty
Many
Few
One
Buyers
It is assumed that buyers are
numerous enough to create a
substantial demand for a product
under each market model.
Market Knowledge
In pure competition, both sellers and buyers
are highly familiar with or possess
information about, the product and market
prices. Buyers and sellers know what the
other is doing. Buyers also have a good idea
whether a product is prices fairly or
excessively. Economis call such familiarity
as Perfect knowledge. In contrast is
Imperfect knowledge, which pervades in the
three other models.
Market Knowledge
Perfect knowledge - highly familiar with
the possess information about, the
product and market prices.
Imperfect knowledge - less or not
familiar with the possess information
about, the product and market prices.
Marketing Approaches
The approach to maximizing sales and
profits is a choice between in price and
non-price rivalry in all four models.
Government Control
Assume that all four structures operate
under a free enterprise economy.
Pure Competition
The pure competition is a market model that
classical or traditional economists - started
by Adam Smith - developed under free
enterprise regime.
The model is premise on the free interplay of
the demand and supply market forces with
little or no government interference. Pure
competition is the economic bedrock of
democratic states.
Characteristics of Pure
Competition
Homogenous product. The product
are homogenous, meaning they are
the same or highly similar composition.
One example is rice..
Rice is a given variety is homogenous
and so are most other agricultural
products.
Many Sellers
Total product supply is spread out to
numerous firms/sellers. Each is one
small - like a rice vendor - and,
therefore, sells only a tiny portion of
the total supply. In effect, no single
seller can control the product supply,
much less influence its price.
Many Buyers
The number of buyers of pure
competition products is large enough
to keep the numerous sellers in
business. Rice is an example of a
product with millions of consumers.
Pricing
The market forces of supply and demand
determine the pricing of products. Under
pure competition, the price of the product
essentially seeks its own level as the sellers
and buyers interact with perfect knowledge
in the marketplace.
The middle ground between them is struck
at the price-quantity combination where
consumer demand and supply meet.
The said common/middle ground, is known
as the equilibrium price.
Monopoly
it is a economic situation where only only
one producer supplies a community or
service to a particular community. The
sole store in a nieghborhood may be
classified as a local monopoly in much the
same way as the lone electric company
servicing one or more cities and
municipalities is a local monopoly.
There are also national monopolies that
are sole providers of product or service
nationwide.
Elements of Monopolies
The firm has full control of major resources
which no one else has. The said resources is
converted into a commodity or service.
The firm has the financial and technical
expertise to produce the commodity or service
at reasonable price. This will assure
continuance of customer patronage and its
own profits.
The firm has a long-term government patent
or franchise(i.e., Special License) that gives
full exclusivity and immunity from competition.
Characteristics of a Monopoly
Product. The commodity or service a
monopoly sells has no close
substitutes when it comes to function
and/or price. Let us take the case of
electric firms like MERALCO, PECO,
and the Iloilo Electric Cooperation
(ILECO). Electric Service, their main
business, is one of its kind.
One seller
Only one company services the needs
of the industry. The company is a large
entity that is aqequately equipped with
financial and technological resources.
One local Monopoly is Panay Electric
Co. (PECO). It possesses the three
elements of a monopoly.
Barriers to entry
One barrier to the entry of a new rival involve
legalities. PECO owns the exclusive government
franchise to provide electric service in Iloilo City up
to a given time. Until that franchise ends and is not
renewed, no one else can legimately compete with
PECO in the city.
Another barrier involve economics. The government
- the franchise grantor - frowns on the unnecessary
duplication of immense capital for use on another
electric company. To a lesser extent, but equally
vital, is aesthetics: how would the skyline look like
with all duplicate electric poles and endless miles of
electric wires crisscrossing one another.
Many Buyers
Monopolies are permitted to remain
and thrive only for goods and services
that are vital to the majority of the
population. Example: are public
utilities, such as water and electricity.
Note that these monopolies have
countless consumers.
Pricing
Theoritically, a monopoly can price its
product as high as it feels consumers
can afford or tolerate, the reason being
the absense of close and economical
product substitutes. In other words, the
monopoly believes consumers have no
choice but bear the burden of high
prices, unreasonable as they may be.
Monopolistic Competition
A monopolistic competitors shares a
monopolists strategy in that he tries to
dominate or monopolize the business
sector he is in. So that explain the
mono portion of the name
monopolistic competition.
Characteristics of Monopolisitic
Competition
Product. Examples of products
considered as belonging to
monopolistic competition include
laundry and bathroom soaps, RTWs
like designers shirt and jeans,
restaurants, purified water, handicrafts,
and similar retail consumer products.
Many Sellers
There are many sellers but not as
many as in pure competition. However,
monopolistic firms are generally bigger
that those in pure competition.
Consider the number of rice sellers
with restaurant operators in a given
locality and see the difference.
Many Buyer
Consumers of monopolistic
competition products are in large
numbers. You could describe them
generally as selective shoppers and
patrons. They have the luxury of
choosing from among retailers and
restaurants in shopping centers. They
also frequent their favorite stores.
Prices
Monopolistic competitor are price makers. They are
free to set their own prices if only to impress upon
consumers that their products are superior to all the
rest. You will find this pricing tactic rather prominent
in the jeans market, for example. Oftentimes, the
price gap between two brands is so wide consumers
are convinced their competitor is likewise free to
increase or decrease price as he sees fit. Unlike the
pure competitor, the monopolistic firm will not lose
all sales if it raises its price. In some cases, raising
price will even attract a greater number of
customers because of the equation between price
and quality that is brought about by brand names.
Marketing Approaches
The monopolistic firm has to highlight how
differentiated his product is when compared with
direct competitors and substitutes. The product
attributes (e.g., designs, color combination)
should not only be different but distinctively
superior. These differences should be advertised
in the appropriate mdia and at appropriate times,
depending on whether the product is seasonal or
not. Another way of making the product different is
by pricing it differently (within the bounds of
equality perception from the rest of the
competitors.
Oligopolistic competition
Operates in an imperfect competition
setting because no full knowledge
exists between buyer and sellers.
Oligopolistic competition is also similar
in some aspects to a monopoly
situation.
Characteristics of Oligopolies
Products. Oligopolostics goods and
services include those in the oil,
cement, steel, cars, machinery, and
shipping industries. Competing
products are highly similar and there
are close substitutes, except for oil.
Number of sellers
An oligopolistic industry has few producers.
Total industry supply, therefore, is
concentrated among these few producers
and sellers.
They could number from three to around 13.
In the Philippines, the oil refinery industry is
controlled by the Big Three: Petron, Caltex,
and Shell. In the U.S., the automotive
oligopoly is composed of another Big
Three, namely GM, Ford, and chrysler.
Barriers to entry
Oligopolists usually puts up stiff but
indirect barriers to discourage new
rivals who could cut their share of the
market. One tactic is for oligopolists to
constantly expand production capacity
to saturate the market and make it
more expensive for new entrants to
come in.
Number of buyers
Number of buyers in an oligopoly
approximate the number of buyers in
pure competition
Price
Each oligopolist has a substantial part
of the product supply and, therefore, is
a price makers whose pricing decision
affect competitors.
Marketing Approaches
Form of strategic marketing: (1) giving
the best sales terms to customers; (2)
extending the best service possible to
customers; and investing in heavy
advertising and sales promotions.
These approaches most evident in the
laundry soap and oil industries.
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