Economics: Oligopoly market structure (Research Paper Sample)

Study Group Student ID Assessment Name Introduction Market failure, as a concept, captures the phenomenon of inefficient resource allocation in a free market. Theoretically, supply and demand forces cancel out to clear the market without external intervention. However, market failure occurs when these two forces fail to attain equilibrium. This phenomenon is attributable to a shortfall or excessive supply relative to the market demand level. In this case, market intervention by the government might be necessary to restore the economy to equilibrium through setting price floors. Market failure defines a situation where inefficient resource allocation yields unfair advantages and disadvantages to various stakeholders. Supermarkets: Oligopoly Market Structure This report highlights a phenomenon where colluding supermarkets exploit food manufacturers through setting exploitative supply prices. The supermarket sector exhibits a typical oligopoly market structure. Some of the characteristics include capital intensive barrier of entry, low operator differentiation, interdependence, and non-price competition (Diffen, 2019, p.1). In addition, there is price setting ability which prompts reaction from competitors. Monopsony Situation In an oligopoly, the existing firms could collude to set supply price. All supermarkets agree to purchase from suppliers at a predetermined lower price. In the first instance, the market exhibits information asymmetry. Supermarkets have an advantage in possessing market information concerning prevailing demand. On the other hand, foods manufacturers lack up-to-date information and only rely on forecasts to determine production output. Therefore, such a phenomenon could result in overproduction beyond the prevailing demand. The supermarkets then take the opportunity to execute their plan to force manufacturers to reduce supply prices. In essence, the supermarkets will have transformed into a monopsony. Brooks et al. (2021, p.2) define a monopsony as a market with a single buyer. The manufacturers have no option than to sell to the colluding supermarkets at the predetermined price. It is similar to selling to one buyer. Monopsony Price Setting Powers In Figure 1, MC=MR represents the equilibrium/profit maximization point. This point denotes Q2 quantity of food acquired from the food manufacturers. The marginal price stands at P2. However, due to collusion, the resultant monopsony allows the supermarkets to force food manufacturers to lower prices to P3. This move enables the supermarkets to lower the average curve to AC for all the firms in the market. Figure 1: Monopsony Power to Fix Prices Source: https://www.tutor2u.net/economics/reference/monopsony-power-in-the-labour-market Figure 2 elaborates on the supernormal profits that the supermarkets would make after forcing food manufacturers to lower supply prices. The shaded area represents the supernormal profits for the supermarkets with the assumption that the supply acquired from food manufacturers remains constant at Q2. Figure 2: Monopsony Market Failure Source: https://www.tutor2u.net/economics/reference/monopsony-power-in-the-labour-market The resultant monopsony allows supermarkets to exploit food manufacturers by acquiring supplies at a price lower than the equilibrium marginal price. Discussions and Analysis Marinescu and Posner (2018, p.3) add that Monopsonies are the inverse of monopolies due to the presence of a single buyer. As mentioned, the supermarkets have opted for a monopsony by colluding to set prices. Their primary intent is to reduce oligopoly market weaknesses where competitors retaliate anytime rivals make new moves. Therefore, collusion decreases the need to compete and guarantees supernormal profits for all. In a free market, equilibrium emanates from balancing supply and demand but in this case collusion has triggered market failure due to exploitation. Lavee and Regev (2020, p.2535) explains this phenomenon by stating that monopsony results in market failure due to the inefficient allocation of resources. Food manufacturers remain at the mercy of the supermarkets. With no alternative to off...