MARKET STRUCTURE IN BANGLADESH

QUESTION

Question 3 (44 marks)

Please note that this question requires substantial research

Part A (8 marks) Explain monopoly and monopolistic competition market

structures, and identify the key factors that distinguish them

Part B (18 marks) Choose two different industries from your home country
representing monopoly and monopolistic competition market structures. Identify
their key characteristics in relation to the factors used to differentiate between the
market structures. Using the real 5/5 data from your case studies analyse how well
each case study fits with the different market structures.

Part C (6 marks) For the monopoly firm in your case study, identify the potential
market power that it has and the types of controls (if any) that are in place to limit
this.

Part D (6 marks) For the monopoly firm in your case study, identify if there are
other benefits generated by the monopoly that would be difficult to gain from a
monopolistic competition market structure.

Part E (6 marks) For the monopolistic competition industry, identify the extent to
which firms are able to differentiate their products, and whether this allows them to
gain some price advantages.

SOLUTION

Monopoly and monopolistic competition market structures

Monopoly Market Structure

The monopoly is understood to be the market structure associated with single seller
of a product which has huge demand either as a result of necessity or because of
the huge customer base (Gillespie,2011). However this may not be correct that in
case of monopoly there is single seller. But the essence of monopoly in todays
world is that the seller which attribute to majority of the needs of the customer and
is very difficult and almost impossible to have competitive edge.

The major characteristics of monopoly are:

Monopoly in most of the cases is characterized by single seller.

The one in monopoly has no close substitutes. For example in case of Bangladesh
Electricity supply is monopolized, which has no substitute. The public ha to depend
and buy the product (electricity) from single centralized seller (government)
The one in monopoly is the price maker. The price of the commodity is decided by
the monopolist. However the general perception is that the marginal revenue is
equal to the marginal cost.
Barrier to entry is there in case of monopoly. The new entrant in the market is either
not allowed or the entry of new entrant is made difficult or almost impossible. The
entry to the new entrant is restricted either by economies to scale for the
monopolist or the legal bindings that have been imposed b the government. This is
some times referred to as natural monopoly.
The monopoly market does have some pros and cons. The monopoly market is in
better position to pursue research and development activities this is at the same
time the disadvantage as the efforts been put are limited because there is no
incentive in the sense that there is no competition being offered to the monopolist.
Another major point is that of economies of scale. At the same time is not favorable
as the consumers face the issue of high prices in the monopolistic markets.

There are a large number of sectors that enjoy monopoly; this is because the
investments required in such sectors are huge. Thus it may lead to pressure on the
sector and may lead to effects which are not desirable and may become difficult to
handle and put pressure on growing economies.

Monopolistic Competition

In perfectly competitive market there are a large number of firms competing in the
same market. There is huge competition in such markets. In case of monopoly there

is single seller, generally(Gillespie,2011). The monopolistic competition lies in

between the two types of market.

In the monopolistic competition market structure there are a large number of firms
that are selling differentiated products to the consumers. There are a few barriers to
entry for the new entrants in the market which distinguishes it from monopoly.

Below are the characteristics of the monopolistic competition market structure

There are many sellers in the market but these do not take into account the rivals
activities as these are having differentiated products.
Product differentiation is there in this market structure, this is to say that the
products being produced are not homogenous and thus are different based on the
seller in the market.
There are multiple dimensions to competition and thus it becomes difficult to
analyze the specific industry as the products are not homogenous and there are
other dimensions that govern the competitive nature of the market structure.
There are no significant barriers to entry thus the barriers to entry are significantly
lower than the monopoly market.

Thus with the similarity of the monopoly and monopolistic competition it can be said
that the marginal cost is set to be marginal revenue.

Examples of Monopoly and Monopolistic Competition Market Structure from

Bangladesh

In the context of Bangladesh there are a large number of sectors which can be
characterized as monopoly market structure. These are water supply, Railways,
Infrastructure, Electricity supply etc. For the purpose of this paper the railways will
be discussed. The example of monopolistic competition market structure in the
context of Bangladesh, the best example is that of banking industry. The
characteristics of both the market structures discussed above can be related to the
two industries of Bangladesh. Firstly railway in Bangladesh has the monopoly in the
market because of the support of the government. Thus there is single seller in the
market for the services. Secondly the price maker for the railways is the
government. Thus the government decides what the prices are to be set. Railways
have their own segment in the transportation thus it does not have any close
substitutes when the prices and facilities are to be considered. Thus the railways are
not having any close substitutes. Lastly the entry is restricted. There can be no
competition to the railways in Bangladesh. The new entrants are not allowed. This
is because if the government loses control over this segment the public might be
exploited. Thus to protect the public from increased burden of fares the government
has maintained monopoly of railways by having full control over it and not allowing
new entrants in the market

The example discussed for monopolistic competition the banking industry will be
discussed. The banking sector in Bangladesh suffers due to high Interest Rate
Spread. This puts pressure on the banking industry to increase the profits because
of higher interest rate spread. In the financial and economic environment of
Bangladesh this could not be possible, thus resulting in reduced competitive nature
of the market. This is one of the characteristic of the monopolistic competition
(Monzur Hossain, 2010).

Secondly the banking industry of the Bangladesh I quite open and offer little
barriers to entry. The foreign banks are also allowed to operate with the advantage
that in their base country the interest rate spread is on the lower side.

It has been argued that the steps should be taken to improve the competition in the
market but the steps have not been fruitful looking at the market structure wherein
the banking facilities will have to be provided to the masse who will be dependent
on the banks.

Thus the banking industry in Bangladesh possess the characteristics of monopolistic

competition of which two most important is the little barriers to entr and reduced
competition between the sellers. The other aspect is that the similar et different
products are being provided by the banks in Bangladesh which is the most
important characteristicof the monopolistic competition.

Monopoly: Control and Power

The railways of Bangladesh enjoy all the powers that has to be provided or that are
there with the seller in the monopoly. In case of railways in Bangladesh they have
the full control over the fare, services and on the level of restrictions. Firstly the
fares are set as per the requirement of the public and not as per the targets of the
firms which is the case in perfect competition. There is no need for the railways to
reduce the margin as there is no competition in the market.

Secondly the entry to the new entrant is restricted, this is in order that the
government has the full control over the railways and does not have to take steps to
handle the competition in the market thus it will become price maker and the
decision maker in the industry. Thus the barrier to entry is that no one can enter in
this sector and thus maintaining the full control of the government.

Thirdly since government is having full control, it exercises the power of setting the
rules in this sector, which is related to pricing and the service being provided.

However the government can take innovative step in order that the satisfaction of
the public is achieved, but this has been restricted in order to reduce the cost.
Government also controls the investments that have to be made in this sector,
thereby controlling the cash flow in the railways and restricting the changes as per
the requirement of the railways and the need of the public.

The railways is monopolistic also because huge investments are required which is
very difficult for private firms to raise funds. In such a case the railways project will
not remain viable and thus will lead to the government intervention. In order to
avoid such situations also the monopoly in railways is maintained.

Lastly no substitutes being present increase the dependency on the railways

thereby putting the pressure on the railways to deliver. Thus the absence of
substitutes is beneficial as it will help in taking the advantage of economies of scale
and at the same time impact the services being provided because of the pressure of
delivering to masses.

Monopoly: Benefits to Railways in Bangladesh

The government or the railways enjoy a lot of benefits from the monopoly they enjoy in Bangladesh.
Firstly control over the prices. With the control over the prices in the railways and not considering the
prices as per the demand the government has been able to take step to fulfill the requirements of the
public. In case the funds are not available suitable bail out has been done by the government. Also the
government has been able to assign separate funds for this.
Secondly due to monopoly the government does not have to worry about the competition. Thus this
provides comfort to the government to act freely. There are no threats to the share in the market as there is
no competition. Thus the government can have low prices and at the same time there wont be issue as
they would be enjoying the economies of scale thereby keeping lower costs in the interest of the public.
However there have been a few issues, firstly in the level of service. However it was expected that with
the role of government in the management the service would be of highest quality but the monopoly has

resulted in wastage of resources and thus lower level of services. If the sector would have been
competitive such wastages could have been reduced and the service level might have been improved. But
this is due to the corruption in the sector and not in the characteristic of the monopoly that the railways is
having.

Monopolistic Competition Market Structure in Bangladesh

The firms in Bangladesh are not able to exactly differentiate their product but the pressure of various
aspects such as interest rate spread and the presence of international banks make them provide the
services to the customers. In this effort the banks in Bangladesh are able to create differentiated products.
The basis for the differentiated products is different which another reason for is differentiated products.
These are market size in the region, returns for the banks and the risks that are associated. Based on this
the banks are differing their costing and in different manner. For example some banks are offering flexible
rates and others are offering fixed rates for interest. The banks also vary there services based on the tenure
of loans. Few banks are providing short term loans and other are providing medium and some of them
come with long term loans. With different treatment being done to the non performing assets, banks are
also differing on the kind of services being offered
However in order to make the market more competitive as the target of the government I here need to be
some changes made so that the market shifts from being monopolistic competitive to perfectly
competitive (Monzur Hossain, 2010). These efforts include increasing the liquidity in the market and
some other factors along with this are also there.
Although the banking sector in Bangladesh is open with little entry barriers even for the international
players the operational efficiency is on the lower side. With the improvement in operational efficiency of
the banks the profits of the banks will improve thereby improving the competition in the market.
A developing country, Bangladesh was the worlds 48th largest economy as of 2008, as graded by the
International Monetary Fund. At US$1,500, the per capita income of the country is much lower than its
neighbors India and Pakistan. During the first decade of the 21st century, Bangladeshs economy grew at
a rate of 6%-7% annually.

Bangladesh Economic Structure: Main Sectors

The economic structure of Bangladesh can be divided into the following three sectors:
Primary Sector: With 45% of the workforce engaged in the primary sector (est. 2008), Bangladesh can be
called an agrarian economy. Agriculture contributes 30% of the country's GDP and enables Bangladesh to
achieve its macroeconomic objectives, including food security, poverty alleviation, human resources
development and employment generation. Cooperatives are increasingly motivating farmers to employ
modern machinery. Bangladesh primarily produces jute, rice, tobacco, tea, sugarcane, pulses and wheat.
According to the composition of sub sectors, the crop sector contributes 72% of the production, followed
by Fisheries at 10.33%, livestock at 10.11% and forestry at 7.33%. The unpredictable weather and natural
calamities disrupt the countrys economy frequently. To overcome this problem, the government has
constructed several irrigation projects to conserve rainwater and control floods. The projects also include
controlling pests and using high quality seeds.

Secondary Sector: This sector mainly comprises of small and medium enterprises that give employment
to 30% of the countrys workforce (est. 2008). It generates 25% of the GDP and 40% of the gross
manufacturing output. Bangladeshs light engineering sector is one of the largest and most diverse,
producing a wide variety of machinery and spare parts. There are several mills and factories, producing
jute, garments, cotton, paper, textile, pharmaceuticals and fertilizers, among other things. Some major
manufacturing industries are railways, tea plantation & processing industries, construction sector, ferry
and transport. Infrastructure is developing swiftly in terms of water distribution, power supply,
communications and transportation. Bangladesh features a prominent wealth of coal mines.

Tertiary Sector: In the last two decades, Bangladesh has seen incredible growth in its service sector. As of
2008, 25% (2008 est.) of the countrys workforce was employed in this sector. Although this percentage is
lesser than the primary and secondary sectors, a large part of the countrys GDP comes from service
sector. The hospitality industry, in particular, has shown considerable growth.

1. Perfect Competition
It is the most competitive of the four different types of market structures. The following give the
conditions for a perfectly competitive market:
Large number of buyers and sellers. There are many buyers and sellers in the market in which the
quantity of output bought by each buyer and the quantity of output sold by each seller represent an
insignificant portion of the total output of the market. Therefore, no buyer or seller can influence the
market price or quantity. Also each buyer and seller makes decisions independently of one another;
Firms operating in a perfectly competitive market are considered as
price takers
(no market power), meaning, they take the market price as it is. Furthermore, there is no reason for a firm
to lower the price since it can sell any level of quantity of output at that given price. It can also be
explained by the idea that the total revenue of a single firm will have no effect on the market price mainly
because of two reasons: first, a single firm just represents a small fraction of the total sellers in a perfectly
competitive market and hence will have no significant effect on the market price; and second, market
price is determined based on the interactions of all the buyers and sellers and not just determined based on
the action of a single firm. Therefore, all firms in the market sell the product at the market price, making
them as price takers;

Homogeneous product.
It means that firms are selling identical products (products are not differentiated; that is, the product that
seller 1 sells is a perfect substitute for the product sold by seller 2, 3, 4, and so on. Since all sellers are
selling the same product, it implies that a market cannot be divided into small portions which will violate
the first condition above;
Free entry and exit.
Any firm is free to enter the market because there are no barriers present: may be legal, technical, or
financial barriers. In addition, existing firms cannot bar the entry of the new firms. Also, a firm is free to
cease production and leave the market;

Perfect mobility of resources.

Factors of production or resources (land, labor, capital, entrepreneurial ability) flow easily from one
sector to another in the market; and Perfect information among buyers and sellers. All buyers and sellers
are perfectly informed regarding present and future production costs and prices. Buyers know if a seller
is offering a particular good at a lower or higher price than other sellers. Perfect competition cannot be
found in the real world. For such to exist, the above conditions must be met. But if the last two
assumptions will be relaxed, then we will call that as a Purely Competitive Market Structure.

2. Monopoly
Monopoly is at the other end of the scale from perfect competition; Pure monopoly is a market condition
where there is only a single seller dominating a particular market. Because of this sole supplier, the
monopolist faces the market demand curve for its product and thus, he is considered as the
price maker
because he can actually influence the market price of the product. A market in which there is only one
seller (producer) of products within an area is public utilities. In a specific market, usually there is only
one firm that provides electricity or water services. Furthermore, the government itself supply many
services for which other (private) firms do not usually provide such as fire, police, and military
protections. Most of these situations are similar to a pure monopoly. But for most of these products,
substitutes are available; people using LPG can switch to electric oven (or vice versa). In some areas,
residents can even substitute deep well water for what the local water company provides. The following
are sources of monopoly:

There is only one producer or seller of goods and only one provider of services in the market; New firms
find extreme difficulty in entering the market. The existing monopolist is considered giant in its field or
industry since it invested heavily in capital;
There are no available substitute goods or services so that it is considered unique;
It controls the total supply of raw materials in the industry and has control over price;
It owns a patent or copyright; and
A single firm can operate more efficiently in a market instead of having competitor(s) due to cost
advantage (lower average total cost) is referred to as economies of scale
.

Classifications of Monopoly
Monopolies are classified according to circumstances they arise from, that is, cost structure of the
industry, possibly the result of law, or by other means.
1.Natural Monopoly
It is a market situation where a single firm can supply the entire market due to the fundamental cost
structure of the industry. It arises whenever capital cost is large enough as compared to variable cost, and
they have cost advantage over competitors. This classification is common to the distribution of electricity
(MERALCO), water services (Maynilad and Manila Water), and other public utilities.
2 Legal Monopoly
This is sometimes called as de jure monopoly, a form of monopoly which the government grants to a
private individual or firm over the product or services. Most of the utilities granted with an exclusive
franchise by the government such as water and electricity services enjoy legal monopolies.
3 Coercive Monopoly
.It is a form of monopoly whose existence as the sole producer and distributor of goods and services is by
means of coercion (legal or illegal), so that most of the time it violates the principle of free market just to
avoid competition. Examples of this are Philippine Postal Corporation (PHILPOST) and Philippine
Amusement and Gaming Corporation (PAGCOR).

3. Oligopoly
The word comes from a Greek words oligo means few sellers and poly from monopoly. It is a market
situation in which there is a small number of sellers each aware of the action of the others. All decisions
depend on how the firms behave in relation to each other. Changing output or price has an immediate
effect on the output and price of others. Each firm knows and expects a reaction to its own actions. A
firm would not normally change the price and quality of its product without considering how the other
firms would respond. In oligopoly, conjectural interdependence is present, that is, the decision of one firm

influences and are influenced by the decision of other firms in the market. Automobile and steel industries
are some examples of oligopoly. The characteristics of an oligopoly include:

Few sellers in the market selling homogenous or heterogeneous products;

A firm can manipulate the price due to the fact that there is a small number of competitors supplying
market of a certain product; and It is very tough for new sellers to enter the market.

Types of Oligopoly
Oligopolies are often distinguished based on the products they sell in the market. The first category is
those few sellers that produce identical products known as pure oligopolyThis type of oligopoly is
common in a market situation where the products sold are fairly homogeneous. Examples, of the
products they sell include cement, sugar and other raw materials. The second type refers to a few sellers
of differentiated products commonly known as differentiated oligopoly that is, value characteristics or a
quality of goods varies. Classic examples of these types are airline and shipping industries because of the
numerous characteristics of their services. Some instances give rise to cause a situation where only two
producers exist in a given market. This is commonly known as duopoly
This type of oligopoly market is seen in the telecommunications industry where Globe and Smart
dominate the market. Maynilad and Manila water are providers of water services in Metro Manila, where
Maynilad operates in the north while Manila Water in the south.

Types of Organization of Oligopoly

Cartel is
a formal agreement among oligopolists to set-up a monopoly price, allocate output and share profit
among members. A good example of this type of oligopoly is the Organization of Petroleum
Exporting Countries (OPEC). OPEC is an international cartel made up of twelve countries having
the richest reservoir of crude oil in the world. Central to this organization is the establishment of
unified price policies for their petroleum products in order to assure fair and stable prices for each
member. As well as efficient, economic and stable supply of petroleum to other nations and a fair
return on capital to those investing in the industry.

Collusion
is a formal or an informal agreement among oligopolists to adopt policies that will restrict or reduce
the level of competition in the market. This usually happens in the bidding process for roaddevelopment work in several regions of the country. Bidders (Contractors) will
collude
by simply agreeing whose going to win the
project by backing out at the last minute of the bidding process. The winning contractor will then
pay other bidders afterwards.
4.

Monopolistic Competition
This type of market structure is the closest thing to reality. This is a market situation in which there
are many sellers producing highly differentiated products. Under this condition, there is
competition because many sellers offer products that are close, but not perfect, substitute for each
other. Monopolistic competition is a mixture of perfect competition and monopoly. It has similar
characteristics with perfect competition but in addition to product differentiation. Sellers are
price makers
since

product differentiation creates some degree of market power to monopolistic competitors since
each competitor can somewhat raise price without losing all its customers. Industries producing
personal care products, cars, apparel, gadgets, furniture, medicines, fast-food, private schools, and
the likes are good example of monopolistic competition. Essential characteristics of monopolistic
competition are:

A large number of buyers and sellers in a given market act independently;

There is a limited control of price because of product differentiation;

Sellers offer differentiated products or similar but not identical products;

New firms can enter the market easily. However, there is a greater competition in the sense that
new firms have to offer better features of their products;

Competition in the market focuses not only on price but also on product variation and promotion;
and

Perfect information among buyers and sellers. All buyers and sellers are perfectly informed
regarding present and future production costs and prices. Buyers know if a seller is offering a
particular good at a lower or higher price than other sellers.
5
.
Monopsony
A monopsony is a market situation where there is only one buyer of goods and services in the
market. It is sometimes considered analogous to monopoly in which there is only one seller of goods
and services in the market. Since only one buyer, this market has the control of supply and it can
reduce the number of input demanded in order to decrease the price of that particular input.
Monopsony power gives them the ability to control their unit cost for an input which is similar to
the way the monopoly controls their price.
6.

Oligopsony
This is a market situation where there are a small number of buyers. This is usually with a small
number of firms competing to obtain the factors of production. Under this market situation, firms
are buyers and not sellers. This is sometimes analogous to oligopoly, where there are few sellers