Perfect Competition and Monopoly (a) I. Explain perfect competition and monopoly market structures, and identify the key factors that distinguish them. Perfect Competition Market In economic theory, the perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. According to the website wordIQ. com, in order to classify the market is a perfect competition market, the market must match below criteria: 1. There are a large number of small producers and consumers on a given market 2.
None of the producers or consumers can influence the price on their own (ie. Price takers) 3. Goods and services are perfect substitute (ie. The goods or services is homogeneous) 4. All resources are perfectly mobile 5. There is no transaction cost 6. The price is determined at the level that equates supply and demand, and moves instantaneously to equilibrium Monopoly Market Structure A monopoly market structure is completely different from the perfect market structure. It is a persistent market, with one and only supplier of the particular product or service.
Since there is only one supplier, it can control the supply level, and therefore, it has the power to influence prices in the market. Key factors that distinguish Perfect Competition Market and Monopoly Market Structure There are three main factors to distinguish a Perfect Competition Market and a Monopoly Market structures, which are seller entry barriers, number of sellers, and the nature of the products. Seller entry barrier is one of the key factors. For Perfect Competition market, there is no or little barrier.
For seller entry barriers, they include government regulations, patents, import/export restrictions or large investment and start up costs. According to Sloman and Norris (1997), there is complete freedom of entry for firms and established firms are unable to stop new firms entering the market. Number of seller is also a factor to determine whether the market is a perfect competition market or a monopoly market. For a perfect competition market, the number of seller in the market is one, and there is no other competitors in the market.
On the other hand, there are many sellers in the market, and each seller is competing against each other. Also, since there is a great competition in the market, it is more difficult to gain market share than it is in the monopoly market. The nature of the product/service is another factor to distinguish between these two market structures. According to Duffy (1993), in the perfect competition market, the products sold as homogeneous since there is no differentiation between what the firms sell, and consumers are able to buy same product from many different sellers, at a similar price.
However, in the monopoly market, the product is only available from a particular seller, and buyer cannot buy the product from other sellers. II. Choose two different industries from your home country representing perfect competition and monopoly, and identify their key characteristics in relation to the factors used to differentiate between the market structures. “Yum Cha” Market in Hong Kong Food and Beverage market is one of the examples of Perfect Competition markets in Hong Kong, and there are many businesses in this market. The businesses in this market include restaurants, fast food stores, pubs, etc. Yum Cha” is synonymous with eating Dim Sum, and it is a Cantonese Cuisine, which is very popular in Hong Kong, therefore, the “Yum Cha” market is very large in Hong Kong. To prove that the “Yum Cha” market is a perfect competition market, three factors will be used, which are seller entry barriers, number of sellers, and the nature of the products. For “Yum Cha” Market, seller entry barrier is very little. To setup a restaurant in Hong Kong, entrepreneur need to ensure the business meets the hygiene and fire safety requirements, and apply the license from the government.
Apart from the required government license, there is no other license required. There is a large number of Cantonese Cuisine restaurants in Hong Kong, and it is another factor to identify that this is a perfect competition market. The nature of product in this market can also prove that this is a perfect competition market. The product is this market is homogeneous, and the dim sum served by each restaurant is similar. Consumers can eat similar dim sum at different restaurants, at similar price. Public Buses Market in Hong Kong
Unlike Australia, most people in Hong Kong use public transport for their daily life, since Hong Kong is a small place, and driving in this place involves many obstacles, such as traffic jam problem, difficult to find parking spaces, etc. Public buses are one of the most common public transport in Hong Kong, and public buses market is an example of monopoly markets in Hong Kong. To prove this is a monopoly market, previously identified key factors will be used. There is a big entry barrier for this industry, and it is almost impossible for new entrant to this market.
There are three bus service providers in Hong Kong, and each of them serves different territory. For example, Kowloon Motor Bus (KMB) Company serves Kowloon and New Territories. KMB has the exclusive license from the Hong Kong Government, and it has rights to provide bus services, subject to approval from the government. Although KMB has the right to operate and provide services, it is monitored by the government, and government applied many restriction to them, such as routes, fares, service hours, fleets, etc. With the exclusive licenses and many government restrictions, it makes a big barrier for the new entrant to this market.
As mention, KMB is the only bus service provider in Kowloon and New Territories, therefore, the number of service provider is one, and this meets the requirement of being a monopoly market. For the nature of product, there is no buses allowed to be operated in Kowloon and the New Territories, therefore, this service is unique in the area, and bus users cannot choose the service from other providers. III. Discuss (with examples) how the monopolist can practice price discrimination Price discrimination is a pricing technique that is used by monopolist, used to maintain an economic profit.
With this technique, seller charges different customers different prices for the same product, not justified by cost differences. For example, mobile phone service provider, “Three Hong Kong”, is the exclusive official supplier of Apple iPhone 4 in Hong Kong. In other words, the market for iPhone 4 is a monopoly market. “Three Hong Kong” is applying price discrimination technique in the price setting of iPhone 4. For example, for the mobile phone users with high volume usage, the price of the handset is lower than the users with low volume of usage. IV.
Using your case study of monopoly provide an argument for and against monopoly. Argument for monopoly In the monopoly market, there is no competition in the market, and businesses do not need to lower their prices to compete with competitors, and this can ensure that the businesses would able to make an acceptable profit and to provide reasonable level of service to their customers. Many monopoly market is monitored by the government or other government agencies, and this can ensure the services or goods are of reasonable level of quality. Also, there would be a way for the customers to make complaint against the company.
Argument against monopoly One of the argument against monopoly is the market is lack of competition, and the monopoly business does not have motivation to make any innovation to improve its product or service. Also, in the monopoly market, business has power to influence the supply level and have great influence to affect the price level. In this structure of market, consumers cannot choose their preferred suppliers and have no power to influence the price level. (b) I. Choose a case study from your home country where an externality exists in a current market.
Illustrate the situation and the resulting deadweight loss in a diagram and discuss ways that your government has addressed the presence of negative externalities in the market. Petroleum industry is an example of industry with externality in the market. There are many petrol stations in Hong Kong, with different brand names, and we assume that this is a perfect competition market. If there is no externality in this market, we would conclude that the private cost that customers pay is same as social cost, and the private benefit is same as the social benefit gained.
However, there is social cost in this market, which is the air pollution. Air pollution is a serious problem in Hong Kong today, and government is trying very hard to improve this problem. There are many sources of the air pollution problem, and the use of private car is one of the sources. Air pollution also indirectly increase other social costs, such as health problem. If we take into account of the social cost, the market is inefficient. The diagram below illustrate the problem. In the diagram below, if we do not take into account of social cost, the price would be at Pp and quanityt would be at Qp.
However, if we take into account of social cost, the price would be at Ps at quantity of Qs. For gas station to sell, the marginal social benefit must exceed the marginal social cost. The government has addressed to this externality by applying taxes on each litre of petrol sold. With this petrol tax, people are discouraged to drive their own car as transport, and this would help to minimize the pollution problem. II. Suggest other options for dealing with negative externalities in your case studies (relate this back to your answer in part (i)).
Other options for dealing with air pollution can be enforce car owners to send the cars to have regular inspection on the emission control system, and this can ensure all vehicles on the road would not cause great problem to air quality. Also, the government can impose toll on some main roads or highways, and this can discourage people to drive their own cars. And this would help to lower the air pollution problem. WordIQ website 2010, Perfect Competition – Definition, accessed 16 August 2010, . Duffy, J. , (1993), Economics, Cliffs Notes Inc, USA. Sloman, J & Norris, K. , (1999), Economics, Prentice Hall, Australia.