Wage determination, in a perfectly competitive labour market. It is entirely dependent on the forces of supply and demand.
Examples of oligopolistic structures are supermarket, banking industry and pharmaceutical industry. The characteristics of the oligopoly are: Oligopolies do not compete on prices.
Price wars tend to lead to lower profits, leaving a little change to market shares. However, Oligopolies firms tend to charge reasonably premium prices but they compete through advertising and other promotional means.
Existing companies are safe from new companies entering the market because barriers to entry to the market are high. For example, if products are heavily promoted and producers have a number of existing successful brands, it will be very costly and difficult for new firms to establish their own new brand in an oligopoly market.
Because there are few firms in an oligopoly industry, each firms output is a large share of the market. As a result, each firm's pricing and output decisions have a substantial effect on the profitability of other firms.
In addition, when making decisions relating to price or output, each firm has to take into consideration the likely reaction of rival firms. Because of this interdependence, oligopoly firms engage in strategic behaviour.
Strategic behaviour means when the best outcome of a firm is determined by the actions of other firms.
Oligopolists are drawn in two different directions, either to compete with each other or to collude with each other. If they collude, they end up acting as monopoly and thereby maximising the industry's profits.
However they are often tempted to compete with each other inorder to gain a bigger share of the profit of the industry. There are two ways in which firms collude in oligopoly. This is an explicit or implicit agreement between existing firms to avoid or limit competition with one another.
Because the actions and profits of oligopolists are controlled by mutual interdependence, there is a great temptation for firms to collude; to get together and agree to act jointly in pricing and other matters.
Firms are tempted to collude because they believe that they can increase their prices by organizing their actions. There are two types of collusive oligopoly. This type of collusion reduces uncertainty they face and increase the potential for monopoly profits.
When this happens the existing businesses decide to engage in price fixing agreements or cartels. The aim of forming cartels, is to maximize joint profits and allows firms to act as if they were in a pure monopoly. Once the cartel price has been set, members may decide to compete against each other using the non-price competition advertising to gain as much share of resulting sales as they can.
Once the profit maximization price is determined, they can agree on how much output each firm in the group will offer for sale.
Each member is given a quota and the sum of all quota must add up to Q1, however if the quota exceeds Q1, there would be unsold output or price will fall. Like monopoly, if the oligopoly is maintained in the long run, it charges a high price, produces less output and fails to maximise social welfare relative to perfect competition.
Cartel is seen by the government as a means of driving up prices and profits which is against the public interest. As a result it is illegal to operate the cartel in many countries. Tacit collusion Tacit Collusion is collusion that is not organized through a formal, open contract between colluding parties.
Tacit collusion is when firms abide to the price that has been set by a recognized leader. The leader is usually the largest firm i. On the other hand, the leader may be the firm that is most reliable to follow, known as barometric firm price leader.
Dominant firm price leadership This is when smaller firm chooses the same price as the price set by the large firms in the industry.
At this stage other firms in the industry will follow the price. Therefore, the market produces at Qt, with other firms producing the output not supplied by the leader i.Profit maximisation can be seen on the graph at point MC=MR (the two curves cross).
This is the point where profits are maximised. However, it is not always the case that a firms main objective is maximising profit. To maximise profit, the firm selects the output for which the difference between revenue and cost is the greatest.
This principle is illustrated in figure below. (Robert & Daniel, ) Objectives of Firm. Firms have two kinds of objective: maximising goals and non-maximising goals. The marginal analysis is particularly important for maximising goals. At price p1, the firm produces where MC = MR, ie Q1.
At this price, the firm makes supernormal profit since price exceeds average cost.
At price p2, the firm produces where MC = MR, ie Q2. At the profit-maximising output price p* must be charged to ensure that this output level is sold. Write My Essay Services. Essay Writing Help. Open Document. Below is an essay on "Discuss Whether the Objective of Firms in the Transport Sector Should Always Be That of Profit Maximisation" from Anti Essays, your source for research papers, essays, and term paper examples.
Profit maximization objective is a little vague in terms of returns achieved by a firm in different time period.
The time value of money is often ignored when measuring profit . Sep 19, · Profit maximising firm, MC=MRP.
Instead of maximising profit, a firm may seek to maximise long-run profit, sales revenue or market share. For example, one of the potential problems of a monopoly maximising profit is that the profit-maximising price may attract potential firms to enter the market. Profit Maximization: Learning how to draw and calculate a demand curve and trip to universal studios essay a cost curve enables managers and entrepreneurs to profit maximization set a price that results in the highest possible profit. This essay therefore aims at defining corporate finance, briefly explaining the concerns of corporate finance and why it is argued in corporate finance that wealth maximisation is a more meaningful objective for financial management function in business enterprises.
Explain why it must be MC=MRP to maximise profit. (b) Discuss whether the marginal revenue productivity theory of wages is useful in explaining wage determination in an imperfect market where there is a trade union.