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(a) Explain oligopoly and monopoly market structures, and identify the key factors that distinguish them. (6 marks)
(b) Choose two different industries from your home country representing oligopoly and monopoly, and identify their key characteristics in relation to the factors used to differentiate between the market structures.Using the real data from your case studies analyse the market outcome for each case study. (10 marks)
(c) Briefly explain the game theory, apply it to your case study and analyse the behavior of the firms. (6 marks)
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Individual economic units can be widely categorized into 'buyers' and 'sellers' according to their function. Buyers are entities who purchase goods and services, for example, firms buy labor, capital and raw materials. Sellers are entities who sell their goods and services, for example, workers sell their labor services and firms sell their finished products. A market is a 'collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products' (Pindyck & Rubinfeld 2004).
A market structure indicates the kind of market that firms operate in. They can be differentiated by the number of sellers and buyers, type of product, efficiency, profits and control over prices into the following categories (Lipsey & Chrystal 2009):
A monopoly is a market structure where there is only one seller but many buyers of a particular product, or, a single firm produces the whole output of the industry. The product is usually a unique one with no close substitutes (Times 2015). The key features of this market structure are as follows:
1. Under monopoly, there is no basic difference between a firm and the industry. There is only one seller and producer of the good, hence, no competition.
2. The seller has full market power and is the price maker.
3. It has absolute control over the product supply which makes the elasticity of demand for the product zero.
4. Entry of new firms into the market is highly restricted due to the following reasons (WEB*pedia 2015):
5. It has a profit-maximizing motive but can't determine both the quantity and price at the same time.
6. The products are unique and homogeneous, like a particular rice grain or pulse.
7. Price discrimination is present under a monopoly. Buyers or markets can be divided in order to maximize profits (IDAHO 2015).