The Issues of Competition and Monopoly Associated with Oligopolistic Markets - Research Paper Example

Economics and Financial Markets: The Issues of Competition and Monopoly Associated With Oligopolistic Markets In order to be able to understand about the issues of competition and monopoly, especially in association with oligopolistic markets and using the example of airlines in particular, there are many different matters that need to be discussed. By using particular literature, especially that which discusses the most relevant factors, such as markets, supply and demand, wages, market failure and government supply, aggregate demand and supply, macroeconomic issues, national income, fiscal and monetary policy, unemployment, inflation, international trade, and balance of payments, for instance, then we will be able to come to a much more knowledgeable and understanding viewpoint on this subject matter as a whole. In order to be able to do this properly, there are several crucial questions that need to be addressed: 1. What are the Main Characteristics of Oligopolistic Markets? 2. What are the Characteristic Forms of Competition in Oligopolistic Markets? 3. What is an Appropriate Economic Analysis of Oligopolistic Markets in the Case of Airlines? 4. What are Some Particular Issues of Monopoly and Anti-Competitive Behavior That are Associated With Markets for Airline Services? By thoroughly examining and discussing these questions and their answers, we will be able to thus come to an incredibly informative and understanding viewpoint on the subject matter at hand, and we will thus be able to be more educated and knowledgeable overall. This is what will be dissertated in the following. What are the Main Characteristics of Oligopolistic Markets? There are in fact various different characteristics that are considered as being major in regards to oligopolistic markets, and each and every one of these characteristics is just as important as the next, however each also must be discussed in regards to its differences as well as similarities to the others; basically the main characteristics of oligopoly are: the market is for the most part dominated by only a few certain and particular companies which are all relatively large; the production of identical products which are similar; there are significant barriers to entry; the basic interdependence of production decisions within the market. In other words and to be more specific, an oligpolistic market basically exists when there is a small number of firms which dominate the supply to an entire market. The specific degree of market concentration is very high here, and “Firms within an oligopoly produce branded products (advertising and marketing is an important feature of competition within such markets) and there are also barriers to entry.” (Tutor, 2007). Another severely major characteristic in regards to oligopolistic markets is the fact of how there is interdependence between firms; basically this means that each separate firm must take into account for themselves the facts and the likely reactions of the other firms, and this is especially true when they are making pricing and investment decisions. Although the olipolistic markets are considered as being incredibly beneficial and positive in many ways, there are also certain downfalls, such as the fact that there is uncertainly created in such markets as these, and so therefore economists seek to model this through the use of game theory. What are the Characteristic Forms of Competition in Oligopolistic Markets? There are various different characteristic forms of competition in markets such as these, and the forms of competition are actually one of the most deciding factors in regards to the outcomes of such markets. Basically, imperfect competition is the most well known and popular type of competition in this regards, and there are many implications in regards to this form of competition, as the main significance of the four basic characteristics of this structure is that they are conducive to that of price competition (which is another form of competition that takes place in oligopolistic markets). Therefore, when those characteristics are missing, we may see the following: increased nonprice competition, or decreased price competition. Each of these more minor forms of competition has their own factors and issues that they include, and so with nonprice competition, this includes that of the following: advertising – informal and persuasive; and competition in the characteristics of the good – quality competition and differentiation. Furthermore, in regards to these different forms of competition, there are many other issues that need to be discussed. For instance, there are different forms of advertising that take place in regards to these forms of competition, and that includes informal advertising, persuasive advertising, and then there are also the matters of product differentiation and competition in quality. With informal advertising, it is important to recognize the fact that with a P-competitive market, there really is no need for advertising, as there is no need to advertise because the firm is able to sell its profit-maximizing output at the market price, and therefore there is no reason that they should spend money on advertising. As well, “When the aim of the advertising is to give people information about the availability, characteristics and prices of goods, we call it ‘informational advertising’. This sort of advertising can contribute to the effectiveness of price competition, so (in some markets) it may complement price competition and bring the market closer to the supply-and-demand outcome than it otherwise would be.” (King, n.d.). Persuasive advertising has its own purpose, and this is basically to shift the utility functions of the customers, so that this will thus end up shifting their demand curves in favor of the good being advertised, which is thus the most positive possible outcome. However, “Since we judge consumers’ benefits in terms of given consumer utility functions, it is hard to say if consumers benefit or lose – so persuasive advertising looks like spending money without making consumers any better off, and many economists regard that as a negative.” (King, n.d.). Both of these forms of advertising are very common in regards to olipolistic markets, and as well whenever products are differentiated, for instance as in monopolistic competition. This leads us into the issue of product differentiation and basically the most important and relevant thing to know here is that of the fact of how products are actually differentiated; when the products of different companies are not considered as being ‘perfect substitutes’, then they are differentiated. “Nevertheless, companies may compete by changing the characteristics of the products they sell…and…the idea is not necessarily to make a better product than the competitor, just different – to appeal to a different ‘market miche’.” (King, n.d.). It must be known that this form of competition in regards to oligopolistic markets is definitive of that of ‘monopolistic competition’, and yet as well it is observed in many different oligopolies. Then finally there is the issue of competition of quality, and this is different and varies with each separate company; for instance, in some industries there is a very strong force of competition in regards to the introducing of products that are superior to rival products, and this form of competition is the one that is most reputable, and this is for several different reasons in particular. The most primary is the fact that quality improvement makes all consumers better off in an ‘obnoxious’ and yet incredibly major way, and so competition is actually at its worst in this scenario. What is an Appropriate Economic Analysis of Oligopolistic Markets in the Case of Airlines? Although there are many different analysis that are taken on oligopolistic markets in the case of airlines, there are certain ones that would be considered as being more appropriate than others, and so it is these ones that we would want to take the most into consideration. Basically there are many different issues that need to be thoroughly examined here, namely the fact that the air transport sector has never been consistently profitable, and although there are many different reasons for this, the main explanation – especially as of recently – is in regards to the media and how airlines are portrayed, thus either influencing people to fly or not to fly. Furthermore, the true nature of the air transport market has long been rather hidden underneath that of a maze of regulations and controls, and “These have to some extent been gradually relaxed in many markets over the past twenty years, at least as far as operations are concerned. Fixed infrastructure, however, remains heavily regulated…however…There still remains opaqueness in our understanding of the true nature of the operational side of air transport markets.” (Button, 2002). There are many different oligopolistic elements that are involved here, and this greatly affects the overall appropriate economic analysis not only of airlines in general but as well to oligopolistic markets themselves. Any proper economic analysis will include the discussion of government economic regulations and how they apply to a specific market, and in this case, oligopolistic markets in the case of airlines in particular, they are probably as free from these government economic regulations as they have ever been. After all, it is incredibly important to note in this instance that “While safety and security controls have been strengthened and environmental constrictions have been tightened, the economic regulatory regimes in most major air transportation markets have seen a withdrawal of government from rate, ownership, and market entry controls over airlines…furthermore…the pattern varies by market, and infrastructure remains highly regulated, but the airlines themselves are gradually being pushed into providing services in a free market context.” (Button, 2002). There are also several factors that influence the economics of oligopolistic markets in the case of airlines, and two in particular are volatility and instability; both of these factors cause airlines to suffer, especially over time, and this has been seen in regards to various different terms, including especially that of fare levels, route structures, and as well – and perhaps most importantly – the number and profitability of the airlines themselves. However, in more recent years there have been many changes that have been made that have greatly affected the economics of the oligopolistic markets in regards to the case of airlines, and this has been mostly positive; “Numerous studies have suggested that the outcome has represented significant efficiency gains and service innovations, many of which have been reflected in consumer benefits…however…the outcome has not been without its problems…and the main…concern here is with the instabilities that seem to be a feature of the more liberalized air transportation markets.” (Button, 2002). There are many concerns over that of the economic stability of the oligopolistic markets in the case of airlines, and many theoreticians in the past have come to their own conclusions in regards to this situation, and they have conducted an economic analysis that is relevant to that of core conditions and furthermore, it can easily be considered as being of a highly mathematical and otherwise technical nature. “The analysis of the early papers related to general exchange condition issues, while the more recent applied work was not specifically directed at the peculiarities of network industries but more generally at matters of anti-trust policy and merges”. (Button, 2002). In order to have a proper economic analysis in regards to oligopolistic markets in the case of airlines, we must determine a few other factors as well and thoroughly discuss these, and this is speaking in particular of the fact that there is a notion that the core of these markets may actually provide some really great insights in regards to the actual nature of the equilibrium, in more familiar economic markets of competition, and everything to do with this. “In addition, some of the limitations of the core concept can be highlighted by comparing predictions of core models with conventional economic models of monopoly…as well…the simple examples highlight a general economic principle that is frequently overlooked in conventional economic models of oligopoly.” (Button, 2002). What are Some Particular Issues of Monopoly and Anti-Competitive Behavior That are Associated With Markets for Airline Services? There are several different issues of monopoly and anti-competitive behavior that are considered as being associated with markets for airline services, and in order to finish off a review of the issues of competition and monopoly associated with oligopolistic markets, these issues all must be discussed. One issues in relation that must be discussed here is that of the fact of government monopoly, and considering the negative effects of this government monopoly, it thus only makes sense that going instead with privatization would make better sense; however, of course there has been much debate over this issue, and so thus there has not yet been any conclusive resolution. However, there are many beneficial aspects of privatization that need to be taken into consideration, such as the fact that privatization allows for innovation, and obviously innovation is one of the key factors in regards to any positive change being able to be made. As well, there are other factors that can be improved on in regards to airlines which will thus cause them profit; for instance, “the better security and check-in an airport can provide, the more likely it is to survive and make a profit. Ideas for better security abound, and with the pressure created by the competition in the free market, airports would be forced to consider innovations to improve security”. (Johnson, 2006). Thus, in conclusion from this review we can make note of many things. First, we know now that there are many various issues of competition and monopoly that are associated with oligopolistic markets, as well in particular to airlines and the air transport system in general, and we can see also how influential the characteristics are of both oligopolistic markets overall as well as in regards to the forms of competition that are evident in oligopolistic markets, and we have also taken an incredibly closer look at all of this in particular regards to that of the case of airlines. As well we have identified the particular issues of monopoly and anti-competitive behavior that is associated with markets for airline services. Overall we have now gained an incredibly more informed and knowledgeable perspective on this subject matter overall, and thus we can come to much more critical conclusions in regards to these issues as a whole. We also now know that there are many positive solutions and strategies that can be taken to the problematic areas of this matter, and even furthermore we have seen how some solutions have already taken place and how they have positively and beneficially they affected various issues, such as the forms of competition and the economy of the airlines, for instance. Therefore, as one of the most major assessments and concluding thoughts from this entire review would be that there are many different views and opinions that are taken on this matter, however there are some issues in regards to this subject that are basically concrete, and each of these as well as the other we have discussed and examined thoroughly, thus allowing us to come to an incredibly more particular and prioritized point of view, and as well allowing us to be clearer and more understanding and be able to have a more critical and knowledgeable point of view overall. References Books. (n.d.). Executive Summary. Retrieved January 25, 2007, from http://books.nap.edu/html/airline_dereg/ Button, K. (2002). Empty Cores in Airline Markets. Retrieved January 25, 2007, from http://72.14.205.104/search?q=cache:6jjo-7DTy_0J:www.hamburg-aviation-conference.de/pdf/session1/button.pdf+Appropriate+Economic+Analysis+of+Oligopoly+Markets+in+the+Case+of+Airlines&hl=en&ct=clnk&cd=4 Cooper, M. N. (2001). Mergers Between Major Airlines: The Anti-Competitive and Anti- Consumer Effects of the Creation of a Private Cartel. Retrieved January 25, 2007, from http://72.14.205.104/search?q=cache:7dzaIZmLoIAJ:www.consumerfed.org/pdfs/airlinemergers.pdf+monopoly+in+markets+for+airline+services&hl=en&ct=clnk&cd=19 Dadgostar, B. & Poulin, B. (n.d.). Small Carrierism Small Markets for Better Customers. Retrieved January 25, 2007, from http://72.14.205.104/search?q=cache:4BddVNwT7s4J:www.cabe.ca/cbe/vol8_3/Dadgostar%2520and%2520Poulin.pdf+monopoly+in+markets+for+airline+services&hl=en&ct=clnk&cd=15 Hanlon, P. (1999). 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