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TableofContents

Introduction

1

Oligopoly

1

Entrybarriers

1

Non-pricecompetition

1

ExplanationforDiagraminOligopoly

2

PureCompetitiveMarket

3

Lowerprices

3

Lowbarrierstoentry

3

ExplanationforDiagraminPureCompetitiveMarket

3

RolesofProfitinMarketEconomy

4

Demandforfactorresources

4

MarketEntry

5

Theothertwoalternativestoprofitmaximization

5

Satisficingbehaviour

5

Salesrevenuemaximization

5

InfluencesonaFirmintheShortRun

6

References

7

Introduction

MarcoandMicroeconomicknowledgewehadlearnedinthisperiodismainlytodiscussaboutsomemajormarketstructuresintheentiremarketnow.Andtheyareoligopoly,monopolyandpurecompetitivemarketandsoon.Inthiscase,theVirginMobilehadenteredinmobilephonemarketintheUK,whichisanoligopolymarket.Inthismarket,Orange,Vodafone,BTCellnetandOne2Onearetheoligopolists.

Oligopoly

Whenamarketorindustryisdominatedbyasmallnumberofsellers,weusuallybelieveanoligopolyappears.Andtherearetwomainfeaturesofoligopoly:

Entrybarriers:It’sagreatblockforthenewcompanytobealong-runpartofanoligopolymarket.Usually,manysmallerfirmsoperateontheperipheryonsuchsmarket,whichmeansthesecompaniescannotreachthesupernormalprofitsoraffectmuchtomarketpricesandoutput.TakeVirginMobile(VM)asanexample:BeforeVMengagedinthemobilephonemarketintheUK,thereweresomeindustrialgiantsconqueredthemarket-Orange,Vodafone,BTCellnetandOne2One,whichaccountforalargemarketshare.AlthoughVMismakingprofit,themoneyitearnedisfarlessthananyoneoftheseoligopolist.

Non-pricecompetition:Asafewcompanybedominanttoanindustrial,pricingcanbenolongeraneffectivecompetitivenessforthoseoligopolisticfirms.Comparedwithpricing,after-salesservice,extensionofnewmarketandadvertisingseemtobemoreemphasizedbythem.Inthiscase,theVMisbettertopromotethecompetitivenessinsuchways--improvingtheafter-salesquality,expandingintonewmarkets,buildingtheirownbrandandsoon.

ExplanationforDiagraminOligopoly

Intheoligopolisticmarket,theoligopolistsmayreactdiverselytothedifferentpricevariationtrendoftheirrivals.Ifoneoligopolistraisesthepriceandothercompanieswillnotfollowittomaintainthemarketshare,however,ifthecompanyreducethepriceandothercompaniesmustfollow,whichistokeepmoremarketshares.Itcanbeseeninthekinkeddemandcurvebelow.

Price

Output

Q2

qQQQQQ

AR

MR

Q1

MC3

MC2

MC1

G

F

P2

P1

BeforethepriceishigherthanP1,theproductdemandiselasticthatmeansthepriceraisesandthetotalrevenuewillreduce.ButwhenthepriceislowerthanP1,theproductdemandisinelastic--thepricereducesandthetotalrevenuewillalsodo.Thus,thecompanymayabletoreachastableprofit-maximizingequilibriumatthepointG,sothecompaniesintheoligopolisticmarketcannotchangethepriceoptionally.

PureCompetitiveMarket

Inthepurecompetitivemarketstructure,thecompanycancompetewitheachotherperfectly.Therearetwocommoncharacteristicsthatareconsideredtobe“competitive”are:

Lowerprices:Generally,aperfectlycompetitivemarketexistswheneveryparticipantisa"pricetaker"whichmeansthesupplierswillhavenotabletoraisepriceforfacingelasticdemandcurves,andnoparticipantinfluencesthepriceoftheproductitbuysorsells.().

Sosimplyraisingpricewillmakealossofdemandandtotalrevenue.Thecross-priceelasticityofdemandcanreflectthecustomers’attitudetowardssomeparticulargoods.Thedemandofsubstitutegoodsisholdingpacewiththepricewhenithasanychange.Conversely,thedemandofcomplementarygoodswoulddecreasewhenthepriceincrease.Inthiscondition,customerswillalwaysfindthemostpropergoodsforthemselves.

Lowbarrierstoentry:Comparedwitholigopoly,thenewfirmswouldbeeasiertoenterinthepurecompetitivemarket.Andtheentryofnewparticipantswillprobablyprovidecompetitionandensurepriceiskeptlowinthelongrun.

ExplanationforDiagraminPureCompetitiveMarket

Itisknowntoallthateachindividualfirmisconsideredasapricetaker.Customersmaynotprefertobuyaproductwithahigherprice.Becauseofthecharacteristic(perfectknowledge)ofpurecompetitivemarket,neitherbuyersnorsellerscangainanadvantageandfirmmayselltheirgoodsatthepointwheretheyhavethemaximizedprofit.

Fromtheshortrunviewofafirminapurecompetitivemarketstructure,theexplanationofthediagramisasfollow:

The

priceinapurecompetitivemarketstructureis

decided

by

demand

and

supply,whichcan

be

seen

inpanelontheright.WhendemandrisesfromD1toD2,theequilibriumpointgoesfromAtoBand

P2

is

the

established

price.

Becauseof

the

price

which

a

firm

use

stays

at

P2,

marginal

revenue

is

equal

to

P2

at

last

average

revenue

is

equal

to

P2

as

well.

When

MC=MR,

profit

maximization

is

achieved,

so

the

point

which

firms

will

stop

producing

should

be

C

which

ordinate

is

P2

and

abscissa

is

Q2.

According

to

the

diagram

above,

when

quantity

is

Q2,

ATC

is

equal

to

P1.

So

P2

subtract

P1

is

average

profit

and

then

multiply

by

Q2

can

obtain

total

profit.

RolesofProfitinMarketEconomy

Demandforfactorresources

Scarcefactorresourcestoflowwheretheexpectedrateofreturnorprofitishighest.Inthemobilephonemarket,whenRichardBransonstartedtogetprofitin2002,VMhas1,445,492customers,whichmeansstrongerdemands,morelabourandcapitalarecommitted.Withmorescarcefactorresources,VMmayabletoearnmoreprofit.However,inarecession,theoutput,incomesandinvestmentforVMmustallfall,whichmaycausetheprofitloss.Thusthecompanyshouldtakeaction(forexamplecuttingcosts)topreserveitsmarketposition.

MarketEntry

Ifanindividualcompanygetsmoreprofitthanothers,itmustbeasignaltootherproducerswithinamarketthatprofitableentrymaypossible.Afterthree-yearefforts,RichardBransonmadeVMprofiting.Whenitcomes,manyotherfirmswouldbeattractedtoentertheindustry.Thus,thecompetitionwouldbeincreasedandnewproducts,technologieswouldbealsoupdatedinahigherspeed.

Theothertwoalternativestoprofitmaximization

Satisficingbehaviour

Satisficingbehaviourcanbethesubstitutetoprofitmaximizationbehaviour.Thisbehaviouralmethodlaysstressonhowdecisionsaretakenwithinthefirm.Whenadecisionismaking,satisficingexplainsthatindividualsandgroupsshouldchoosethefirstoptionthatisgoodenoughtoaddressmostneedsratherall.BasedonHerbertSimon’sworkconcerningbehaviour--“peoplepossesslimitedcognitiveabilityandcanexerciseonly‘boundedrationality’whenmakingdecisionincomplex,uncertainsituations”,satisficingbehaviourencouragesindividualsandgroupstoattainamorerealisticgoal.

IfVMsetagoalthatexpendingtheircustomersto2millioninayear,finallyitreachesmillion.Thuswisewecantakethegoalforareceivable.

Salesrevenuemaximization

Thegoalofsalesrevenuemaximizationistomaximizethesalesotherthanprofits.Themanagersdecisionpriceandstrategyofproducts.Inthispatternofmanagement,businesscangroworsustainmarketshare,ensuresurvival,discouragecompetitors,achievebonusesandbuildtheprestigeoftheseniormanagement.

FortheVM,whenitinitiallyenteredthemobilephonemarket,itisagreatapproachthatsellingtheirproductsasmanyaspossiblewiththelowestprofittoenlargetheirmarketshare.

InfluencesonaFirmintheShortRun

C

0

TC

TVC

TFC

Q

Fromthediagramabove,whichcanbeseenaretotalcost(TC)isthesumoffixed(TFC)andvariablecosts(TFC).Inthebeginning,w