Characteristics of Pure Competition

Characteristics of Pure Competition 1.0 Introduction Basic microeconomic theory states that firms should seek to maximize profits and that this is achieved where marginal revenue is equal to marginal cost. A number of assumptions underpin this theory, including the assumptions that firms clearly understand the nature of the demand for their products, and why people buy, and that they are willing and able to control production and sales as the model demands. In reality, decision makers do not have perfect knowledge and production and sales are affected by suppliers and distributors. However, this basic theory has resulted in the development of market models and characteristics of these in respect of barriers to entry into the industry, the number of firms in the industry, whether those firms produce a standardized product or try to differentiate their products from those of other firm. At the early 1920s, only two distinct market models are present in the economic studies which are Pure Competition and Pure Monopoly. However, economist found out that most firms operate in markets that fall between the extremes of pure competition and pure monopoly. These firms do not face competition from numerous rival producers all selling a homogeneous product at a single price. Instead, most firms in the real commercial world face varying degrees of competition. In some cases, there are competitions offering more or less identical products; in other instances, firms produce and sell differentiated products. In the latter case, a competitors product is merely an attractive su bstitute. In the real commercial world, there may be numerous competitor, or there may be only a few other sellers in a given market. The need of for a more accurate world for markets of this type of this type led to the development of imperfect market to refer to such markets. Imperfect competition refers to markets lying in between the two extreme forms of markets, pure competition and pure monopoly. In order to bridge the gap of these extreme forms of market structure, two economists, Joan Robinson of Cambridge University of England and Edward Chamberlin of Harvard University in the U.S.A., introduced independently a third market world to explain and illustrate the theory of imperfect competition in the year of 1993. In other words, their model of market organization is what as refer as monopolistic competition. As a result of the variations between the markets present, four distinct market structures are introduced: Pure Competition, Pure Monopoly, Monopolistic competition, and Oligopoly. Pure Competiton Pure Competition is a rarity as such as a theoretical market model. Pure competition involves a very large number of firms producing a standardized, non differentiated product that is exactly identical to that of other firms as perfectly competitive. Pure Competition is a market which firms will only make normal profits, the amount required for them to stay in the industry. In Pure Competition market there are no major barriers to entry into the industry so new firms can enter or exit the industry very easily. If a Pure Competition market reaches a situation which supply exceeds demand then the ruling market price is forced down and only the efficient firms survive. Monopolistic competition Monopolistic competition is characterized by a relatively large number of sellers producing differentiated products such as clothing, furniture and books. However, as there are once more no major barriers to entry the above situation concerning profits applies in terms of long run. Newcomers increase supply and although those firms with distinctive products can charge some premium they will still have to move in line with market prices generally, which made the price takers. This will have a dampening effect on profits the firms gained. Monopoly Pure monopoly is a market structure in which one firm is the sole seller of a product or service. Only a small number or even one large firm is dominant and constitutes the entire industry. Pure monopoly is a real opportunity for supernatural profits, in excess of what is required to stay in business since the entry of additional firms is blocked or the barrier is high to entry. Monopolist produces a unique product that the firms make no effort to differentiate its product. Only in monopoly, excess profits could be made if government did not act as a restraint but under normal circumstances their actions in terms of supply and pricing are monitored and regulated. Oligopoly Oligopoly involves only a small number of large firms of an identical or similar product. This situation resulted in each of the firms tend to be wary of each other as rivals and the prices are held back to some extent for a fear of losing the market share. Firms are interdependent and fear that a price decrease will be met by competitors and price increases will not. There are two types of oligopoly, depending on whether opportunities exist for significant differentiation. In all of these models competition is a major determinant of profit potential and therefore objectives must be set with competitors in mind. The firms that we have chosen for this assignment are Tesco Astro Kaspersky Lab Weng Yeang Hang Malaysia Nescafe Carlsberg Cavenzi Air Asia Coca-cola Indah Water consortium Bhd Maxis Face To Face Petronas Gas GSCinemas Brands Outlet Nike Casio Tenaga National Bhd Logitech Telekom Malaysia Bhd 2.0. Pure Competition Characteristics of Pure Competition There are few characteristic of pure competition. One of the characteristic is large number of small sellers in this market. Therefore, the action of any single seller does not have a significant effect on other sellers in the market. Also, it is assumed that many buyers and resources (particularly capital) can easily be transferred into and out of the industry. Secondly, there is no product differentiation in pure competition concept. All firm sell identical products. In other words, all products are completely standardized product in this concept. There are numerous firms in pure competition; each one is so small a part of the market that it cannot alter the market price by selling a little more or little less of its own output. Thirdly, pure competition has been used to refer to markets in which firms are price takers historically. Any firm in a market will be price takers accordance to four conditions; 1. All of firm in the market are producing an identical produce; 2. There a la rge number of firms exist in the market; 3. Each firm supplies only a very small portion of the total amount supplied to the market; 4. No barriers limit in the entry or exit in the market. Weng Yeang Hang Malaysia Sdn Bhd Products Weng Yeang Hang Malaysia Sdn Bhd supplies agricultural goods and food products. Justification After I studied market model of pure competition, I have realized pure competition is relatively rare in the real world market; this market model is highly relevant. I founded that Weng Yeong Hang Malaysia Sdn Bhd has the characteristic of the closest firm to a pure competition market structure. One of the factors Wenf Yeong Hang Malaysia Sdn Bhd belonged to Pure Competition market is that there is a very large number of independently acting sellers who also sells agricultural goods and food product, often proposing their products in international markets. The product supplied by this firm is standardized or identical. If the price is the same, consumers will be unconcerned about which seller to buy the product from. Besides that, new firms can freely entry and existing firms can freely leave purely competitive industries. Lastly, this firm may is a price taker due to this firm exerts no major control over product price. Each firm produces such a minor portion of total output that gr owing or diminishing its output will not clearly influence total supply or, therefore, produce price. 3.0 Monopolistic Competition Characteristics of Monopolistic Competition One of the characteristic of Monopolistic Competition is that there are many numbers of firms in the industry producing and selling a slightly but yet differentiated product in terms of brand, quality, location, services and other factors. Firms which operate under Monopolistic Competition normally have no control over the price of the product. In a Monopolistic Competition market, the barriers to entry to industry are easy and non price competition with advertising, brand names, trademarks etc to boost their respective ruling over a certain market. Many producers in Monopolistic Competition sell products that areÂÂ  differentiatedÂÂ  from one another as goods but they are not perfectÂÂ  substitutes for that certain product which is similar to it.ÂÂ   Kaspersky Lab Products Kaspersky Labs products for home and home office are specifically designed software to provide hassle-free and quality protection against viruses, worms and other malicious programs, as well as hacker attacks, spam and spyware Justification Kaspersky Lab is considered as a firm operating in the monopolistic competition market structure because there are many firms providing different types of antivirus software in Malaysia. From a roughly estimated report on the internet regarding the numbers of antivirus software present in the current market, there are 10 to 15 antivirus software firms which are selling antivirus software. Even though each of these products shared the same purpose of defending against malwares, but there is still an element of differentiation in each of the products itself. Kaspersky Lab is selling many differentiated products which is claimed to be substitutable products but not perfectly substitutable with antivirus firm by other competitors. For example, customers will choose different brand of antivirus as they please. The antivirus industry is easy to entry and exit because the antivirus software that are easy to be replaced by another substitutes and the cost production are lesser compare to the products produced in the monopoly and oligopoly market structures. Nescafe Products Nescafe produces a combination of freeze-dried coffee granules, coffee bean and instant coffee all in one powder. Justification Nescafe is considered as a firm operating in the monopolistic competition market structure because there are many brand of firms is selling instant coffee powder in Malaysia like Power Root and Ah Huat White Coffee. Nescafe is selling a varieties of differentiated products which is claimed to be substitutable products but not perfectly substitutable with coffee drink by other competitors. For examples, there are many brands of instant coffee powder with different packaging, ingredient of the product and price. There are independent action means with numerous of coffee firms in an industry, and each firm can determine its own pricing policy without considering the possible reactions of rival firms. Nescafe are no personal selling because the product is of low unit value and do not have they own chain of retail stores. Cavenzi Products Cavenzi is a company to sell low price and many type of furniture Justification Cavenzi is considered operating in the monopolistic competition market structure because there are many brand of firm also selling furniture in Malaysia. Cavenzi is selling many differentiated products which is claimed to be substitutable products but not perfectly substitutable with furniture by other competitors. For examples, it had many brand of furniture just different package, design, ingredient of product and price. There are Independent action means with numerous of furniture firm in an industry, and each firm can determine its own pricing policy without considering the possible reactions of rival firms. Coca-cola Company Products Coca-Cola produces a variety of soft drinks and refreshment beverages. Justification Coca-cola Company is considered operating in the monopolistic competition market structure because there are large numbers of soft drink dealer in Asia. Based on the current Asia market, it is roughly estimated that there are 10 or more firms are selling soft drinks. Coca-cola is selling many differentiate products which is claimed to be respond to customer requirements. However, among all the soft drink, each of them may have some differentiated attributes to their product. For example, the soft drinks are differentiated by different packaging or creativity advertising. There are some but within rather narrow limits due to the changes of price are no cause big effects to their consumer. Moreover, the condition of entry the market those are relatively easy because the cost of production quit lower and that can product many at same time. Coca-Cola Company considerable emphasis on advertising, brand names trademarks as the creative advertising released by Coca-Cola Company profound att ention to the public. Compare with another soft drink their different of taste and ingredient to making price competition in the market. Face To Face Products Face To Face provided noodle as its main product and there also got sell drinks, fried rice and snacks as like restaurant. Justification Face To Face is considered operating in the monopolistic competition market structure because there are large numbers of restaurant selling in Asia. Fact To Face is selling differentiated products to be perfectly substitutable with restaurants sold by other competitors. For example, if restaurant are full slot and customer has choice go to Face To Face and older food as their like. However, among all the restaurants, each of them may have some differentiated attributes to their product. For example, restaurants have different packaging or some has delivery services. There is some but within rather narrow limits due to the changes of price are no cause big effects to their consumer. Moreover, the condition of entry the market those are relatively easy because the cost of production quit lower and that can product many at same time. Face To Face have its own pricing policy and it considerable emphasis on advertising, brand names trademarks as they are promote many economic food to attr act their product from public. It will consider price competition with other restaurant. Brands Outlet Products Brands Outlet is one of a brand under Padini Holdings Bhd. They offer a variety of brands, styles and items for men, women and children. Another feature of Brands Outlet is that the store layout is designed to make the shopping experience easy and fun. Justification Brands outlet considered as market model of monopolistic competition because there have many other band tee in the market we know, so it consider as relatively large number of sellers. Each of band tee firm own market shares that have a comparatively small percentage of the total market and consequently has limited control over market price. They are no collusion to each firm due to restrict output and set prices are unlikely. Besides that, they always do promotion like graphic tee RM50/ 3 pieces due to product differentiation to do some control over price. The consumers will pay for it to satisfy their preferences. Nike Products Nike is known by every teenager or sporty guy. We mostly recognize this brand though to the sport shoes. They also developed some accessories for sport and tee. Justification Nike considered as a market model of monopolistic competition due to few factors. The first factor is that the Nike shoes industry (Nikes product mainly on sport shoes) has many competitors like Adidas and Puma which is selling similar products. Nike has its own unique design, quality of work to create a sense of differentiation in their products in order to gain the upper hand in the industry. Nike retailing store often compete mainly on the basis of location. Locations which are close to consumers like a busy street or mall. In additionally, they may advertise their produces that differs from rivals product with famous football players. Casio Products Casio produces projector, cash registers, label printer and other product that benefit to businessman. Justification Casio considered as market model of monopolistic competition because either one of product that them selling has a lot of competitors. Like categorises of watches, the rival present are Rolex, Citizen, Seiko and Skagen. Casio has small market shares in each of firm has a comparatively small percentage of the total market and consequently has limited control over market. They have its own independent action each other, with numerous firms in an industry, there is no feeling of interdependence among them. Each of they can determine its own pricing policy without considering the possible reactions of rival firms. Logitech Products Logitech provide computer peripherals that are essential to our laptop and desktop such as mouse, keyboard, speaker and microphone. Justification Logitech considered as market model of monopolistic competition because them have relatively large of number of sellers in the market. There is no collusion between Logitech to other computer peripherals firm. The presence of relatively large number of firms to restrict output and set prices us unlikely. Logitech is selling a bunch of differentiated products to be perfectly substitutable with other computer peripherals sold by other competitors. For example, if one of Logitechs mice sold out, the consumers also can choice other Logitechs mice provided in the shop. However, among all the computer peripherals, each of them may have some differentiated attributes to their product. Different packaging and performance are to be expected on other computer peripherals. There is some but within rather narrow limits due to the changes of price are no cause big effects to their consumer. Moreover, the condition of entry the market those are relatively easy because the cost of production quit l ower and that can product many at same time. Logitechs computer peripherals considerable emphasis on advertising, brand names trademarks as they are promote many computer peripherals to attract their product from public. 4.0 Pure Monopoly Characteristic of Monopoly Monopoly has extensive market control. It controls the selling side of the market. They must pay the monopoly firm if anyone wants to get the production sold by the monopoly firm. This means that the demand curve facing the monopoly is the market demand curve, they are one and the same. There is only one firm but not a lot of small firms in a monopolized industry because there are no close substitutes in the market. A monopoly often owes its monopoly status to the fact that other potential producers are prevented from entering the market. No freedom of entry here. Neither is there perfect information. A monopoly firm often has specialized information, such as patents or copyright which are not available to other potential producers. The most important aspect of being a single seller is that the monopoly seller is the market. The market demand for a good is the demand for the output produced by the monopoly. This makes monopoly a price maker, rather than a price taker. And of course, a Monopoly market structure must have a unique product with no close substitutes to be the only seller of a product. Hence, seller has full control over the market price, and also there is no need to advertise for his goods. ASTRO Products The Malaysian direct broadcast satellite (DBS) Paid TV service. It transmits digital satellite television, movie and radio to Malaysia Bruneis households. The name Astro is an acronym for All-Asian Satellite Television and Radio Operator. Since 2008, a video streaming service to mobile phone users throughout the country (Astro Mobile TV) has been offering by ASTRO and subsequently Astro B.yond Mobile. Justification ASTRO is considered as operating in the pure monopoly market structure because there are only one number of firm which provide broadcast satellite Pay TV service in Malaysia. They control the market for pay TV equipment and accessories. ASTRO has sole control over price. Besides, ASTRO is selling unique products which is claimed to be non substitutable by other firms products. For example: No other firms give services like ASTRO did, so if costumers want to get the services from ASTRO, they just have to pay them. For ASTRO subscribers, it is nothing but pay, pay and pay for everything from the day of installation and even when they decide for early termination. Late payment charges, reinstallation charges and servicing charges add on. TENAGA NASIONAL BERHAD (TNB) Products TENAGE NASIONAL BERHAD (TNB), the sole provider for electricity in Malaysia. TNB has a monopoly over the transmission and distribution of electricity in Peninsular Malaysia. TNB is responsible for electricity generation, transmission and distribution and retail supply in Peninsula Malaysia. Justification TENAGE NASIONAL BERHAD (TNB) is as considered as operating in the pure monopoly market structure because it is the only provider of electricity in Malaysia. TNB has a monopoly over the transmission and distribution of electricity in Peninsular Malaysia and it has sole control over the price. Besides, TNB is selling unique products electricity generation, transmission and distribution and retail supply in Peninsula Malaysia which is claimed to be non-substitutable by other firms products. For example: TENAGA NASIONAL BERHAD (TNB) is the only firm which provides transmission and distribution of electricity in Peninsular Malaysia. To get the transmission and distribution of electricity from TNB, all the Malaysian must pay TNB for the respective electricity supply. Telekom Malaysia Bhd (TM) Products The largest telecommunications provider in Malaysia which offers a comprehensive range of communication services and solutions in broadband, data and fixed-line. Justification Telekom Malaysia Bhd (TM) is as considered operating in the pure monopoly market structure because according to UK definition of monopoly, it says that any company holds more than 25% of the market share is consider as monopoly and Telekom Malaysia Bhd (TM) is the largest telecommunications provider in Malaysia which holds more than 25% of the market. Telekom has set up the fibre optic backbone in the westerm Malaysia, this allowed Telekom Malaysia to set a slighty hight than the normal price, along with the governments consent, this made Telekom Malaysia Bhd (TM) a price maker instead than a price taker. Indah Water Konsortium Sdn Bhd Products Indah Water Konsortium Sdn Bhd, a national sewerage company, owned by Minister of Finance Incorporated, is responsible for providing sewerage services, operating and maintaining over 5,750 public sewage treatment plants and 13,000km networks of sewerage pipelines. Justification Indah Water Konsortium Sdn Bhd is as considered operating in the pure monopoly market structure because it is the only supplier of sewerage services, operating and maintaining on sewage treatment plants and pipelines in Malaysia. Indah Water Konsortium Sdn Bhd has a monopoly over the sewerage services, operating and maintaining on sewage treatment plants and pipelines in Malaysia and it has sole control over the price. Besides, Indah Water Konsortium Sdn Bhd is selling unique services which is claimed to be non substitutable. For example: Indah Water Konsortium Sdn Bhd provides sewerage service like no other firm did, so if costumers want to get the services from Indah Water Konsortium Sdn Bhd, they must pay them. PETRONAS Gas Bhd Products Petronas Gas Bhd supplied petroleum, natural gas, liquidated petroleum gas and other types of fossil fuels to automobiles and household. Justification PETRONAS Gas Bhd is considered as operating in the pure monopoly market structure because there is only one price in market which control by government. Government control the price of the product for there is no close substitute. Government attempted to set the price into the same, so that the price would not has large difference. By this, Government regulates in the public interest. For example: when the price of the petrol are same everywhere in Malaysia, consolidation of smaller companies into bigger ones enabled some very large corporations to escape market discipline by fixing prices or undercutting competitors. 5.0 Oligopoly Characteristics of Oligopoly An oligopoly are maximizes profits by producing where the marginal revenue equals to marginal costs and oligopolies are price setters rather than price takers. The barriers to entry are high but there only so few firms that actions of one firm can influence the actions of the other firms. They can retain long run abnormal profits and their product may be homogeneous or differentiated. They also have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete but buyer have only imperfect knowledge as to price, cost and product quality only. The distinctive feature of an oligopoly is interdependence, typically composed of a few large firms. Each firm is so large that its actions affect market conditions therefore the competing firms will be aware of a firms market actions and will respond appropriately. Tesco Products Tesco is a supermarket, it offering a wide variety of food and household products such as meats, vegetables, soft drink, television, air conditioner and etc. Justification Tesco is considered operating in the oligopoly market structure because Malaysia has many other supermarkets such as Jusco, Giant and Carrefour so they always have price war between each other and we as a consumer will get more benefit about this. Let say if Tescos soft drinks price drops then another supermarket soft drinks will also drop because they are interdependent. Tescos price strategy is more focus on Tescos Low Price Guarantee and Every Day Low Price strategy so Tesco is performing long run abnormal profit. Carlsberg lager beer Products Carlsberg lager beer is the flagship in the Carlsberg Groups portfolio of beers. It contains 5% alcohol by volume (ABV). Justification Carlsberg beer is considered operating in the oligopoly market structure because Malaysia has many other beers such as Tiger beer, Heineken beer and etc. They have price war between each other like price of the Carlsberg beer drop then Tiger beer will use some reward to retain their sales. Taste of the beers have some different, it mean differentiated and many beers pop out from the market but they cant survive in this market because of the start-up cost are high. Carlsberg has put forward a new marketing strategy for Carlsberg Sport, the energy drink so they already created a new field of the market and this is a long term strategy. Air Asia Products Air Asia is Asia largest low-fare, no frills airline and pioneer of low-cost travel in Asia. AirAsia group operates scheduled domestic and international flights to over 400 destination spanning 25 countries. Justification Air Asia is considered operating in the oligopoly market structure because our country has other air travels such as Malaysia Airlines and Firefly. They are provide the same services for customer but they all still have some different. Let say AirAsia offers free seating but the Malaysia Airlines offers assigned seats and the price between each of them also different. This is the product differentiation of both products. The strategy of AirAsia playing is safety, low fare, good services and simplicity so their market can be strong in the economy market of the air travel. Maxis Products Maxis provide a variety of mobile communication products and services. They offer prepaid call plans, monthly subscription plans, international roaming, MMS and WAP. Justification Maxis is considered operating in the oligopoly market structure because here have other communication company like digi, celcom, and Umobile. Maxis and digi provide the postpaid service to customers but the price of both are different like maxis is RM28 free 200min voice call and 100 SMS, digi is RM43 free 200min and 200 SMS. They can set the price as low as possible but still have minimum profit to earn so they are retain long run. Strategy of Maxis playing are good network coverage around Malaysia, good deal and special offers for different age groups and also target group and always the first to introduce new mobile plans that why Maxis stand at the first of the telecommunication market. Golden Screen Cinema (GSC) Products GSC is a cinema in Malaysia which is operates Malaysias first-ever boutique cinema with only Gold Class and Premiere Class Halls in The Gardens Mall, KL. Justification GSC is considered operating in the oligopoly market structure because Malaysia has many other cinemas like MBO, TGV and BigCinema. Most of the services provided by them are the same but the feeling give to the customers are different like some people feel that GSC more comfortable than other cinema. They still set the price at RM11 per ticket on the weekdays and weekends even though some cinema was increases the price of the but GSC still maintain the price of the ticket which meant GSC are playing long run profit. GSC offers Special Wednesday Rates, selling ticket for only RM6. Children and senior citizens are offered at a price of RM5 per ticket while student will be charged at RM7 before night on the weekdays by flashing their student cards so now Malaysia already have 23 GSC cinema including East Malaysia. 6.0 Conclusion To conclude this assignment it is useful to emphasize the market structure that each firm is operating, in establishing the main strategies and direction in which each firm should take to maximize its profit or to reduce loss as lower as possible. By using the characteristics of each of the four market models, we are able to sort out the market structure of each firm and figure out the advantages and disadvantages of each of the market model. The table below has shows the major characteristics of each market structures. With the help of the table above and the studies done on each firm mentioned in this assignment, we may sort out the firms that weve selected into their respective market model in terms of activities, products and strategies. The table below shows the firms sorted to their respective market model according to their characteristics.