Question

Find a market in Singapore that differs from the perfect competition benchmark in an interesting or important way, and report on how and why that market differs from the benchmark. Markets which differ from the benchmark generally do so because of strategic behaviour or problems of imperfect markets ; apply one of these theories to analyse the market in question. Then, suggest a method of increasing competition in the market.

The total word limit of the written report is 1,500 words, not counting tables, figures and references. You may allocate words as desired among sub-questions, subject to the total limit. A good report may be considerably shorter. Avoid copying or rephrasing text from the study guide or textbook, as absolutely no marks will be awarded for explaining economic theory using the textbook. The idea is to apply the theory to the problem at hand. You should segment your report into the following sections:

(a) Summarize the key details of the market in question, explaining the main product, the market players, and the prevailing market clearing mechanism or trading arrangement (e.g. how do buyers and sellers interact).
(b) Explain how the market differs from the assumptions of perfect competition. Apply a theory from strategic behaviour or imperfect markets to illustrate and examine the market’s departure from perfect competition.

(c) Suggest a mechanism to resolve the problem you have identified that affects competition in the market. The mechanism could be a business innovation, a public policy, or government regulation. Explain why the mechanism would be effective. It may also be the case that no market correction is required; if so, explain why.

Answer 1

Different market structures in various industries can be identified based on the number of firms present in the industry, and how they compete.

In the petrol retailer industry, there are moderately high barriers to entry, such as the costs of purchasing the fuel for sale and for inventory, rent and wages. Rules and regulations make it even harder to set up. As such, there are relatively few firms present with a large market concentration ratio. Shell, Exxon, Singapore Petroleum Company already make up most of the industry. As such it can be inferred that they are firms in an oligopoly. This is further reinforced by the fact that they behave in ways typical of an oligopoly. For one thing, the prices of fuel sold by the different firms are largely similar and rigid. This can be explained via the kinked-demand curve diagram, which shows that when prices increase past Pe [price equilibrium], the firm will make lower levels of revenue, as quantity sold will decrease more than proportionally, as consumers switch to the other firms. Similarly, when prices decrease past Pe, the revenue enjoyed by the firm will increase significantly as quantity increases more than proportionately. As each firm already has substantial market share, this will also mean the market share of competitors will decrease, as will their profits. In order to prevent this from happening competitors will also reduce their price. This could precipitate a disastrous price war. As such prices are normally rigid. That said, firms sometimes practice a form of tacit collusion in the form of price leadership, such that when one firm increases the price, competitors will follow suit. Because of their unwillingness to resort to price competition, firms in an oligopoly will also practice non-price competition. This can be seen from how each firm tries to innovate to find new value-added services to offer, for example, a wider range of goods at the convenience store, car wash and polishing services. Additionally, they also make an attempt at minimal product differentiation through branding such as Shell V-power and Exxon Synergy Fuel.

In addition to petrol retailers, the taxi companies in Singapore are also oligopolistic, with only a few numbers of taxi operators, including comfortdelgro and citycab. These two taxi operators make up more than 50% of the cabs in Singapore, and showcase behaviour typical of firms in an oligopoly, as mentioned above. As in the case of the petrol retailers, they also constantly revise their rates, typically together. They attempt to differentiate themselves from their competitors by offering more services such as dialing, the comfort of their vehicles etc.

Moving on the monopolistic competition, this sort of market structure is evident in online clothes boutiques, which require minimal set up costs, and have many many producers. As such they have a negligible market share, and do not have to consider the actions or reactions of other firms when making pricing decisions. However, they also have relatively varied products, in that most of them are custom designed and made by the firms. Due to imperfect information however, consumers are likely to view the dress of one firm as less substitutable when compared to a dress by another. As such they have a limited amount of market power, and can price at P>MC, the profit maximising output. As such, there is generally a lack of a need to practice aggressive price competition or non-price competition. Typically, such firms make normal profit in the long run, limiting their capabilities for expansion or innovation.

Monopolies also exist in Singapore. For example, Singapore Power and Mediacorp, which own a monopoly on electrical power and radio and television media respectively. This means that the entire consumer population is supplied by only one firm with extremely significant market power.This also means that the firms can make pricing decisions independently, subject to government regulation. The former is a form of natural monopoly, a case in which the barriers to entry are so significant that it is impossible for the same industry to be shared by two firms.

In conclusion, in some industries smaller enterprises co-exist with larger establishments. For example, breadtalk and fourleaves with other smaller bakeries, starbucks with other smaller cafes. With internal expansion, and possibly mergers and acquisitions, it is possible that more traditionally monopolistic competitive industries become more like an oligopoly. And monopolies that may be broken up by legislation become an oligopoly.

It is still more relevant and meaningful however to decide that the different types of market structure depend on the nature of the industry. An industry with high barriers to entry with extensive economies of scale, and mutual interdependence are likely to be oligopolistic in nature. Whereas monopolistic competition will be more prevalent in industries with lower barriers to entry, and independent pricing behaviours.