IJC_H2_ECON_Q2

Innova Junior College H2 Question 2 a) Explain the relevance of barriers to entry in determining the key differences between oligopolistic competition and monopolistic competition. [10] Monopolistic Competition Oligopoly Barriers to entry and exit - define - can be natural or artificial Relatively Low or No BTE Example: Low setup costs for hawker stall – Ease of obtaining license; relatively low rental cost, fewer workers and easier to obtain raw materials. High BTE Example: Telecommunication firms require high setup costs as well as licensing requirement from the government. The differences in the ability to prevent entry resu lts in some key differences between the 2 market structures. Difference in terms of Structure : MC has a large number of sellers while Oligopoly dominated by a few large firms mainly due to BTE Why? Example of Oligopoly - Telecommunications industry in Singapore  Dominated by a few large firms mainly due to high barriers to entry in the form of licensing (legal barriers) as well as high fixed cost.  In contrast, hawker stalls (MC firm) faces relati vely low barriers (ease of obtaining license) as well as low start-up cost Number of Sellers Large number of small firms Each firm has an insignificant market share E.g. food and beverage industry with many small restaurants, cafes etc. A few large firms dominating the market. Each firm has a significant market share E.g. telecommunications service industry with 3 dominant firms: SingTel, M1, StarHub. Difference in terms of Conduct Due to relative differences in BTE, there is a difference in the way the firms conduct themselves in terms of their pricing and non-price strategies Why? Example of Oligopoly - Telecommunications industry in Singapore  Due to high barriers to entry in Oligopoly  Dominated by a few large firms  High degree of mutual interdependence which results in price rigidity and therefore conduct of non-price competition  In MC  Low barriers  large number of sellers  try to differentiate themselves in terms of product differentiation but also engage in price competition Price Strategy Independent and Price Setter. Market power depends on degree of product differentiation. E.g. Restaurant owners could set price more independently as they are less mutually interdependent. Mutual interdependence: Price Rigidity Or collude to set monopoly price (usually tacit) E.g. Telecommunication firms may follow the kinked demand model where firms follow a decrease in price but not an increase.

L3 Well-developed explanation on how BTE leads to the key difference between the two market structures. Max 8 marks for 2 well-developed points 7 – 10 L2 Under-developed explanation on how BTE leads to the key differences. 4 – 6 L1 Descriptive understanding on how BTE leads to key differences between the two markets. 1 – 3