Comparison between Monopoly and Oligopoly Market Situation - Assignment Example

Comparison between Monopoly and Oligopoly market situation Introduction Monopoly market structure is an economic market condition whereby one seller dominates the entire market. Oligopoly market structure is an economic market condition whereby numerous sellers have their presence in one single market, they are usually small firms that dominate the entire industry (Pindyck & Rubinfeld 2001). An example of oligopoly market structure is the health insurers. Similarities Oligopolies and monopolies consist of large organizations in the market; they also hold considerable market shares over specific services and products in the industry. Also, the two market structures hold specific copyrights for services and products that they produce (Albano & Lizzeri 1997). Both oligopolies and monopolies are affected by the increased production in the sense that higher production decreases the prices of products and services. The two market structures, unlike other market structures, are able to attain a monopoly on production in the specific goods or services under their copyright (Albano & Lizzeri 1997). Differences Monopolistic markets are solely controlled by a single seller only. The seller has absolute power to influence market decisions and prices. Consumers attain limited choices, and they have to make a choice from what is being supplied at the market. Conversely, oligopoly is characterized by few sellers in the market. The market situation is friendly to consumers since it encourages competition among the sellers (Spanjers 1994). A monopolistic market gets its power from three sources: these include, legal, economic and deliberate. A monopolistic market will make into use the position it has to its advantage and completely drive out competitors. It can achieve this either through reducing prices to such levels that existence for another firm may become nearly impossible or through virtue of economic situations like large capital requirements when starting companies. Though an oligopolistic market situation does not have sources of power, it, however comes into existence merely due to the accommodating character of other sellers already in the market (Spanjers 1994). A monopolistic market might quote very high prices because of nonexistence of other competitors. The monopolistic sellers will make use of their status of dominance in the market and maximize their profits. Oligopolistic markets, on the other hand, ensure competition in the market hence fairer prices for the consumers (Spanjers 1994). Barriers to entry into the market These are regulations that are put into place to prevent entrance of firms into the market. Barriers to entry into the market enable control of the market by limiting the number of competitors and the availability of close substitutes (ZhangJ & Zhang Z 1995).The three primary barriers to entry into the market include; Resource Ownership One of the most basic barriers to entry into the market is resource ownership. This is the control and ownership over a significant input that is used in the production of goods. Limiting the ownership of these inputs effectively limits the entry of new firms into the existing industry (Weber 1975). Patents and Copyrights In most cases, a major productive input or the output itself comprises a copyright and patent. A patent is an absolute right to market, sell or use of design within a specified time. A copyright is an absolute right to copy, reproduces, and sells already written materials (Weber1975). Patents and copyrights are normally awarded for a given number months or years. Government Restrictions Government is the kind of barriers to entry into the market that are generated by patents and copyrights. Government is, in any case, is the entity that comes up with the rules of the game. It factually has the power to decide who can or cannot take part in a given industry. Governments frequently create barriers to entry by lawfully limiting the number of accomplices in a market situation (Weber 1975). Externalities in a Cement Factory Externalities in economics are factors that affect third parties in the production process. Third parties are primarily consumers who buy goods and services from industry or society at large. Externalities affect the third parties negatively or positively. A cement factory is among heavy industries that extract raw materials to produce cement for construction. Positive Externalities in a Cement Factory Positive externalities are in existence when firms or individuals who are decision makers often fail to benefit from decisions made. Society benefits more than the decision makers or providers of the decisions. The marginal benefits of both the society and the firms making decisions differ in the cement industry. The positive externalities like education of workers of a cement factory are beneficial to the employee of the cement factory. The workers undergo intense Education to ensure that they enhance the skills. A better educated workforce earns more as they use their skills in the production process to grow the factory and produce quality cement. A cement factory invests heavily in R&D to ensure future products are better and diversification of products. Scientific research is important as it benefits society in identifying ways of producing better products. Limestone used is the main raw material in the cement production process, R&D can enhance the methods used in extraction hence benefit the society. CSR (community social responsibility) by cement companies especially by investing in the communities who own the natural resources it uses for cement production is necessary. CSR in provision of social amenities like clean water, job opportunities and sponsorship of sports events hugely benefits the communities and the society at large. Negative Externalities in a Cement Factory Negative externalities happen when firms and individuals who are decision makers often do not pay the entire cost of decisions they make. Good things with negative externalities mean that the society benefits more than the cost consumers pay for the good. Consumer’s choices are mainly based on the relationship between marginal benefit and marginal cost. Consumers often do not consider cost of negative externalities which then result in inefficiencies. Negative externalities are then passed to society if they exist in an unregulated market. An example of negative externalities is pollution. Pollution is the most common negative externality in most industrial production sectors. Pollution mainly involves poor waste disposal methods, resulting to environmental pollution. Solid waste is dumped in unrestricted areas hence affecting communities. Air pollution affects the entire society as air quality is compromised. Pollution directly affects society but the cement factory does not pay of the pollution. Cement factory extracts raw materials; mainly limestone, by excavation. Excavation leaves open ground that directly affects society. The open excavated areas become pitfalls that may be a danger to the communities who own the resources. Other negative externalities are poor road usage and congestion. Poor road usage occurs when heavy trucks use the road hence reducing the lifetime of roads as the weight may destroy roads. Congestion affects all road users as heavy trucks often use the same roads as other users. A heavy cement transportation truck can be a major cause of traffic snarl-ups References Albano, G, L & Lizzeri, A 1997, A Monopolistic Market for Certification, Center for Operations Research & Econometrics, Louvain-la-Neuve, Belgium. Pindyck, R, S & Rubinfeld, D, L 2001, Microeconomics, Prentice Hall, Upper Saddle River, New Jersey. Spanjers, W 1994, Arbitrage and Monopolistic Market Structures, IMW, University of Bielefeld, Bielefeld, Germany. Weber, D, W 1975, Advertising Behavior in Oligopolistic Market Structures, Thesis (Ph. D.), Brown University. Zhang, J & Zhang, Z 1995, Asymptotic Efficiency in an Oligopolistic Market, WZB, University of Michigan, Berlin. Read More