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Question:

Choose two different Australian industries that represent monopoly and monopolistic competition. What characteristics of these industries and their products can be used to explain the differences between the two market structures? Using real data from your case studies, analyse the market outcome for each case study.

Answer:

Introduction:

Market study is one of the crucial parts of developing marketing strategy. Understanding of different types of markets along with respective characteristics, advantages and limitations are important for developing appropriate strategies related to products, place, pricing and promotion. In fact, development of future strategies based on forecasting of demand and supply depends highly on the key traits of a particular market. The current study focuses on critically evaluating two major market structures namely perfect competition and Monopolistic markets. The study starts with a critical discussion on perfectly competitive market and monopolistic markets. This is followed by a comparison of these two markets based on respective characteristics. The study further explores one monopoly and one monopolistic market of Australia and differentiates these two. In addition, the study presents a critical evaluation of different price discrimination strategies available to firms with special emphasis on the price discrimination strategies used by the selected markets of Australia.

1.1 Perfectly competitive market structure:

A perfectly competitive market is characterised by the highest degree of market competition among the existing rivals in the market. It is the view of the neo-classical economists that perfect competitive markets are beneficial for the consumers as intense market competition makes the companies focused on customer satisfaction as none of the companies can afford to lose its customers. In the view of Baye (2000), firms operating in a perfect competition market are usually price takers as the bargaining power of consumers are usually high in such market. Thus, in a perfectly competitive market, sellers are forced to adopt existing price in the market. This can be explained by the fact that if sellers set higher prices than the market price then the consumers would not buy the products and shift to other sellers. On the other hand, setting a selling price below the existing market is of no use as it results in the loss of potential sales revenues and profitability for the firms.

A condition of perfect competition can occur if the following conditions are satisfied:

Low degree of entry and exit barriers
Homogeneity of products
Perfect knowledge on price, cost and quality of concerned products
No single seller or buyer can influence the market
In a perfect competition, the total revenue of the firm is obtained by multiplying the selling
price of a product with the quantity of products sold during a concerned period. On the other
hand, marginal revenue indicates the additional increase in revenue due to additional increase
in the production level. However, marginal costs can vary depending upon the production
level. 

Key features of perfect competition:
Number of suppliers:
The number of suppliers prevailing in a perfect competition is considerably higher than other
market forms like oligopoly. Such high number of suppliers in the market results in tough
market competition where price bases war is common.

Freedom of market entry and exit:
The barrier to market entry and exist in a perfectly competitive market is almost zero or
negligible. Hence, firms are free to enter and exit from a market as and when the firms wish.

Pricing decisions:
Firms operating in a perfect competition market are not the price makers rather the firms are
price takers. In other words, these firms are forced to set price in accordance to the existing
market price.

Other characteristics:
Perfect knowledge:
Perfect knowledge about the products, costs, selling price and quality is one of the key
features of a perfectly competitive market. As mentioned by Dransfield (2014), a perfectly
competitive market does not involve any time lag in the flow of information. All the market
participants have adequate knowledge and thus the role of an entrepreneur is quite low and
the risk level is low as well.

Rationality of decisions:
Rational decision is yet another major feature of a perfect competition. In other words, free
availability of information allows both firms and consumers to take rational decision in
respect of production and consumption respectively. The principle focus of producers and
consumers are on profit maximisation and utility maximisation e espectively.

Nature of product:
Firm produce homogeneous products in a perfectly competitive market. In other words,
products are usually not branded.

Labour:
It is important to note here that the unit of labour is homogeneous in a perfectly competitive
market (Chen et al. 2014).

Barriers to market entry:
In the view of Dransfield (2014), the barrier to market entry is quite low or absent in a
perfectly competitive market. This also increases the threat from new entrants for the existing
firms in the market.

Profit factor:
Hill (2013) stated that firms operating in a perfectly competitive market cannot make any
abnormal gains. Put it differently, firms in a perfectly competitive market can make only
normal profits in the long-run. However, abnormal profits can be made in the short-run.

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