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Market Structures - 25
Economists usually talk about four major market structures:
perfect competition
monopolistic competition
Oligopoly
monoploy
We will describe each of these in turn. emember than these are models! simplified
representations of reality. "ome markets may contain characteristics of two of these
market types. #he boundaries between the types can be $$blurred$$.
%n oligopolistic market is one where the market is dominated by a small number of firms
&usually under ten'. #hese firms gain the majority of total sales re(enue. %s in
monopolistic competition! firms in an oligopolistic market sell similar goods and ser(ices
which are close substitutes! and thus price sensitive.
)owe(er! the barriers to entry in an oligopolistic market are higher than in the two
market forms pre(iously discussed. *any %ustralian markets are dominated by a few!
large firms.
#he grocery market in %ustralia is an oligopoly. #his market is dominated by Woolworths
and +oles! nationally. #hese companies ha(e e,tensi(e distribution systems! with stores
in most urban and regional areas across %ustralia. #o compete with these firms would
re-uire a large in(estment. in the billions of dollars! conser(ati(ely. #he automobile and
petrol markets are also oligopolies.
Economists measure the seller concentration ratio of an industry to determine whether
it is an oligopoly. "eller concentration ratios are based on the percentage of sales of the
four largest firms in the market! as a percentage of all sales in the market. #his ratio is
then compared to the total sales of the twenty largest firms in the market.
#he seller concentration ratio in the grocery market is about /01. the four largest firms
&Woolworths! +oles! 2ranklin$s! 3a(ids' account for /01 of all grocery sales in %ustralia.
+ompetition in an oligopolistic market is intense. 4oth price and non5price methods of
competition are used. 6ou ha(e probably seen! read or heard ad(ertisements along these
lines ... $$We will not be beaten on price. 7f our competitor is selling item 8 for less! we
will match their prices! whether the item$s price has been reduced for a special sale or
not$$.
2irms in oligopolies compete by offering warranties &$$We will replace the item without
cost if it is found to be defecti(e in any way$$'! and through $$customer ser(ice &$$friendly!
helpful staff$$ and $$free home deli(ery$$ are two'. Woolworth$s has been particularly
successful in it$s $$We$re the fresh food people$$ ad(ertising campaign.
#he telecommunications market in %ustralia was once a monopoly. all
telecommunications ser(ices were pro(ided by #elecom %ustralia. 7n the 9::0$s! the
federal go(ernment allowed Optus to commence trading in the market! which was then
called a duopoly. #elecom was partially pri(atised. one third of the company is now
owned by pri(ate in(estors. ;ew telecommunications ser(ice pro(iders ha(e also started
operating in the market as well. %%<# and many others now compete against the industry
$$hea(y weights$$.
2irms in oligopies are said to be mutually interdependent. 7f one firm changes its
prices! this will ha(e an effect on the sales of all other firms in the market.