Market Structures
There are different forms of market structures, they include; the perfect completion, the monopolistic competition, oligopoly and monopoly. In the perfect market competition, this is an ideal market where we will find few markets which are similarly perfectly competitive. Another characteristic of this market is that it is composed of many buyers and sellers, where each of the individual seller or buyer can not solely influence the whole market. The firms or enterprises involved in such, markets are ‘price takers’. The products normally involved in such market as from the consumers point of view is “homogeneous”; this means that the products are the same in irrespective of their quality, or where it is bought from. There are no barriers in the enterprises that may desire to enter or leave the market. In relation to the price competition, it is nonexistent; this is things like advertising. The customers are well aware of the market and hence advertising or any form of sell promotion is not needed.
In monopolistic competition, it is quite different from the perfect market as there are barriers which hinder any form of entry or exit, but they are quite minimal. The organizations that play part in this market organization are large and possess a reduced market share. The smaller firms are not in any ability to influence the prices. The products are not homogeneous, as the products from the different suppliers can be contrasted.
In oligopoly market, there is a domination of the market by a smaller number of organizations. They hence are hence able to gain high sales revenue. Goods and sellers sold here are similar and can be easily substituted for one another, they thus price sensitive. The barriers involved in the entry to such a market are high. The application of the seller concentration ratio is applied to determine the oligopoly market. The sales of the firms in comparison to the total sales. Based on the reasons above the ACCC Chairman Graeme Samuel is right. Caltex and Mobiles sales will be more than the total market share.
The ACCC is a commission based in Australia that is mandated with the role of promoting competition and fair trade in the market arena so as to be an advantage to the customers, the organizations as well as the community at large. It is additionally charged with the responsibility of control of the national infrastructure more so on the services it provides. It is basically a commission rendered with the task of ensuring that the players in the business arenas as well as the organizations themselves are able to fully follow the rules set down under the commonwealth competition, the assurance of a fair trade amongst the competitors and finally it aims to protect the consumer from exploitation by the various businesses established.
According to the investigations carried out by the ACCC, it was able to identify 53 Mobil sites, which on acquisition by Caltex would attribute to a hike in cost of fuel prices for the vulnerable consumers. According to the Trade of Practices Act 1974 the ACCC is mandated to monitor the prices, costs and profits which is correlated to the aeronautical services. The monitoring of the prices is not regulated in any form; it was previously deregulated in 1991 and 1998. The prices are not regulated ever since, such measures are meant to protect the consumers and also to safe guard the fair competition over the over the whole country. With the joining of Caltex and Mobil, they are bound to regulate their own prices through hiking it, which is against ACCC’s mandate. This will result to the two companies gaining an unfair advantage over other organizations and oppressing the consumers, consequently obtaining an unfair market share gain.
The prisoner’s dilemma is a model of oligopolies which presents the complexity of cooperative behavior in certain instances. A sense of mutual trust makes it possible to outdo the dilemma as well as confessing. It is applicable to two firms known as duopoly. The strategies applied by the two firms are analyzed and are placed in pay off matrix, which is box of outcomes of a strategic game in certain instances. The two markets in our cases are the Caltex and Mobil. Due to their inability to correlate in the market, taking into consideration that they are the two players in the fuel industry, they decide to bury their interests and allow the acquisition of the Caltex market share by the Mobil fuel company. Caltex had suffered a drop in its share price as from September 2. Caltex additionally suffered from a surge of pressure on the refining business this led to expansion of the business operations through its merger with Mobil to make it a big player in the Australian market.
By the application of the prisoner’s dilemma, there are two markets that are involved in this process; Caltex whose share price is rapidly declining and as a result might lose its position in the market arena and on the other hand, there is Mobil whose desire is to exit the small scale market operations in the Australian market. The game is played in a manner where one player has to lie while the other has to confess, they additionally there has to be a certain benefit that each has to get, called payoff. Exxon Mobil had to give up its desire to solely move out of the small-scale market and join Caltex in the merger. While Caltex confessed of its declining market share, both their desires are hence achieved. They then had to agree on the modalities of a dominant strategy; this involved a cooperative equilibrium which would sustain the equilibrium established. This would be done through different pay off structures they would establish and a repeated play and trigger strategies.
The profit maximizing markup for an oligopolistic market is same as the marginal cost or higher than the marginal cost, which is meant to be charged on the own-price elasticity of the product (Baye 2006). The method applied in the maximizing of profit the markup factor multiplied by the marginal cost (MC). Mark up factor is the product own-price elasticity (E) divided by one added to the products own-price elasticity (1 + E). It is thus
P = [N E / 1 + E] MC
Note: the identical firms are also considered as N
By application of the kinked demand curve developed by Paul Sweezy, the fuel business may come across a dual demand curve for the fuel products which is based on some reactions of the other players of the market to a change in the price or another variable like quantity. The oligopoly market is looking to protect the oligopoly market share, according to the table the rival firms are unable to match the increase in price but can cope with the decrease in price.
The prices vary as with the increase in price of fuel as the other business prices are kept constant we are to get a bigger substitution effect from the fuel firm which will result to a demand relativity price elastic. The business will not get its market share and end up acquiring a fall in revenue. With a decrease in price the relative price change is minimal and demand becomes inelastic with a change in price. Cutting the prices with an inelastic demand results to a fall in revenue with minimal effect on the market share. Non price competition results to better quality of services, longer opening hours, extended warranty, discount on product upgrades and contractual with the suppliers.
References
ACCC, 2011, Australian Competition Consumer Commission, on 29th April 2011 from < http://www.accc.gov.au/content/index.phtml/itemId/142 >
Biz/ed, 2011, Market Structure, on 29th April 2011 from <http://www.bized.co.uk/sites/bized/files/docs/marketstructure.ppt>
Faculty.riohondo, 2011, Oligopoly, acquired on 28th April 2011 from <http://faculty.riohondo.edu/mjavanmard/Booyes%20Micro/12-2Oligopoly.ppt>
Riley Geoff, 2006, A2 Markets & Market Systems: Oligopoly – Overview, acquired on 29th April 2011 from <http://tutor2u.net/economics/revision-notes/a2-micro-oligopoly-overview.html>
