Oligopoly

WHAT IS OLIGOPOLY?

          Oligopoly is a market where there are few large sellers competing with each other. Oligopoly exists when the number of firm in an industry is so small that each of the firm must consider the reactions of rivals in formulating its price policy. “Oligopoly is commonly found in heavy industry or in products marketed nationally” (Peterson, 1991). The firms in an oligopoly are able to either use the low-price strategy or high-price strategy in order to maximize profit.

Coca Cola and Pepsi

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In the many years that had passed by, Coca Cola and Pepsi were in an oligopoly market that sells homogeneous products which are similar products. This allows the both firms to be able to control the prices of their product but their actions would have a big impact if they regularly make changes in their prices. This is why the both of them have to be very careful in making decisions. If there is a change in price, normally it would be according to the kinked demand curve. This basically means that in every oligopoly there is a downward sloping demand curve however the reaction of rivals to change in price and output affects the elasticity (Welker, 2012). Among these two firms which are Coca Cola and Pepsi, they both use the same pricing strategy that is by using the low-price strategy in order to attract their potential customers.

            Usually when one of the firms decides to go with the low-price strategy, the other firm will also quickly go with the flow at the same time in order to maximize their profits. For instance, when the hot seasons like summer in America arrives, both the firms will set their product price to the lowest that they can and have competition with each other because they know that when hot seasons are here, people will tend to drink more and these cola drinks would quench their thirst. This enables both the firms to have an increase in sales and which leads to an increase in their profit as well. There is always a game theory applied to be a market share and a game theory basically means that it helps firms to raise profits. High barriers can be clearly seen to be able to come into this market as the Coca Cola Company and the Pepsi Company has privately signed a contract with each other to ensure that each of the firm is a cartel and to restrict other competitions. The definition of cartel is an association of manufacturers or suppliers that maintains prices at a level that the whole association agrees.

Monopoly

WHAT MAKES A MONOPOLY?

     “A monopoly is the only supplier of a good for which there is no close substitute” (Perloff, 2012). This is because the buyers have no other choices to get that particular product or service. A monopoly generally rises when there is a barrier of entry which do not allow other firms to enter that specific market. A monopoly is actually a price maker which means that the firm is allowed to set their prices to gain supernormal profits. They are mainly three types of barriers to entry which are natural, ownership and legal. 

Tenaga Nasional Berhad. 

http://www.malaysiakini.com/letters/91889

         In the country of Malaysia, Tenaga Nasional Berhad (TNB) is known for the one and only electricity utility company. This firm was found in the year 1990 and their role was to regulate electricity throughout the whole Malaysia. They are also the biggest power supplier in the South East Asia having a huge amount worth of assets. Only in certain countries like Malaysian, a firm is able to be a natural monopoly and a legal monopoly at the same time. Therefore, it is obviously seen that TNB is the only electric supply in  Malaysia  and this makes it a natural monopoly because the firm generates electricity and is a public utility and TNB is also a legal monopoly at the same time because the government restricts competition and new entries into this market by the granting of a government license.

          
          Here in this firm, the reason to why their consumers do not have other choices of firms for electricity mainly because the government in Malaysia do not grant licenses or accept other new companies into the market. Even if or when the government accepts fresh new companies into the market, the economies of scale which means that an increase in the firm’s output leads to a decrease in the firm’s average cost will stop other firms to from joining and competing with TNB. For instance, TNB produces a large output of electricity and this enables their average cost of production to be decreased. This is good because firms can be more efficient when they exploit economies of scale (Danberg, 2012). With TNB having a low average cost of production, new firms will be afraid to come into the market because they will have to start their firm from as small as an ant with a very low output because not many people would know the existence of them. This means that for the new firm, their average cost of production would be really high and this will force the company to shut down quit from being in the market. It is also not right for a fresh company to come into this market because they would be endangering themselves by competing with a giant that controls the whole country and this would just cost too much of money.

          Although TNB is a firm that sets their own prices, they do not practice price discrimination but they practice a single price-monopoly in Malaysian. A single-price monopoly is a firm that sells each unit of its output for the same price to all its customers. This monopoly price-setting strategy is practiced in order to maintain equality to all Malaysians.

     
          There are multiple advantages and disadvantages that had been found in a monopoly market like Tenaga Nasional Berhad. 

          When being a monopolist, they are able to make a difference in the demand and supply at any time because they have the power whether to generate electricity or not. Next, a monopoly may have the chance to have a greater supply at lower prices.

However as the saying goes, “when there is good, there is also bad”.

     
          The disadvantages being a monopolist is that they are allowed to make and set their own prices for their own profits of producing electricity. In addition, with “tariff” existing in Malaysia, TNB makes a huge loss from any and every house or company. Moreover, the “tariff” of the usage of electricity would be lower if their consumer does not consume a lot of electric power supple but on the other hand, if their consumer uses more power supply, the “tariff” would be even higher.

Conclusion

          In conclusion, different firms apply different concepts of economics and it becomes more and more interesting as you have researches deeper into these or any firms. Moreover, it can be obviously seen that economical concepts do apply in our daily life and work. Therefore, it is not a waste to know about these concepts and to add them to our knowledge.

References

Danberg, R. (2012) The Economics of Enormity. Available from: http://www.economist.com/blogs/freeexchange/2012/11/economies-scale [Accessed 28 May 2013].

Guglielmo, C. (2012) Apple Says iPhone 5 Demand Outstrips Supply As Pre-Orders”Shatter” Previous Record. Available from: http://www.forbes.com/sites/connieguglielmo/2012/09/17/apple-says-iphone-5-demand-outstrips-supply-as-pre-orders-shatter-previous-record/ [Accessed 26 May 2013].

Perloff, J. (2012) Microeconomics. 6^th ed. United States of America: Pearson Education Limited.

Peterson, W. (1991) Principles of Economics. 8^th ed. United Stated of America: Irwin Inc.

Welker, J. (2012) The Kinked Demand Curve Model of Oligopoly Pricing. Available from: http://www.econclassroom.com/?p=3144 [Accessed 29 May 2013].