Question

Question 2:

The markets in which the economy operates has a large impact on the manner in which economic benefits and resources are allocated. Markets can take on a variety of forms including those characterised by monopolies to ones dictated by perfectly competitive firms. As a senior policy analyst, you have been asked to look at the markets in which many of Canada’s biggest companies operate within. More specifically, you have been asked to look at Canada’s telecommunication industry.

a. In order to get the prime minister up to speed, you will need to outline various market structures that exist within the economy. Be as exhaustive as possible in determining how price and quantity are determined in each market structure. Be sure to explain how price and quantity is determined in each and under which industry consumers are generally better off in and why. Do you generally prefer one industry over an other? Why or why not? Would your answer differ if you looked at this from the view point of consumers versus owners? Why or why not?

Answer 1

Market Structure broadly of 4 types :

1.Perfect Competition : Where there are large number of buyesrs and sellers. No individual firm has control over prices of goods and services. Optimum price and quantuquis determined based on market forces and hence, the output, thus produced is socially optimum. This type of market structure is very hard to find in real world. Kne close example would be Stock Market.

2. Monopoly : A type of market structure where a single seller controls the entire output being produced and hence have total control over the prices. Hence, the firm can create artificial scarcity by not producing the output at maximum capacity and hence can increase epri es to maximize their profits.

Example : State Grid, China

3. Monopolistic : A type of market structure where there are large number of small firms which compete against each other. The point of differentiation between perfect competition and monopolistic competition is that in perfect competition the output produces is identical with no differentiation unlike monopolistic, where each and every firms sells somewhat differentiated products. Since there is partial differentiation there is some degree of control over the prices by the firm.

Example: FMCG products.

4.Oligopoly : It is a type of market structure, where there are small number of very large producers of goods and services. Since the number is small, competition is limited. One of the problem that arises in such a structure is that of cartelization.

Ex: Soft Drink Industry.

In the context of Canada's telecommunication industry which is guarded against foreign competition, the structure can be that of Oligopoly with a lot of consolidation.As it stands now, foreign ownership of a telecommunications company is limited to no more than 20 per cent of a company’s voting shares and no more than 33.3 per cent of the voting shares of a carrier’s holding company, and an effective total limit of 46.7 per cent (as long as the foreign entity doesn’t have control). On top of that, at least 80 per cent of the board members must be Canadian citizens.

From the point of view of consumers, the best market structure would be that of perfect competition. Since such a structure does'nt exist (if it were to, then it would have not provided much inventive to the producers), monopolistic competition is the best as it provides wide choice and more bargaining power to the consumers.

From the point of view of owners, Monopoly would be the best as it provides the opportunity to have more profits without facing much competition.