With marginal cost. By each competitor maximising its

With each competitor that enters the market,
there is ‘less space’ available in the marketplace. When competing supply is
present, each competitor needs to sell ‘half of the remaining market’ (Myatt,
2017). Specifically, the room remaining (‘room left for me’) for a supplier is
Qopponent ?
Qmax. (Myatt,
2017 p.6)

 

Performance as a percentage of the gross market value (Smax) shows
that the more competitors, the less profit between competitors, however
consumer surplus increases (assuming fixed costs are equal). The Bertrand model
structure would see competitors, due to being homogenous, focus on similar
price setting, with the outcome being that they will share half of the demand. It
is also noted that that the product is likely to be homogenous (Besanko &
Braeutigam (2011, 553).  If the competitors
have a bigger focus on price, this would drive the price down to marginal cost.

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By each competitor maximising its own profit and not responding to competitor output,
the industry profit may not be maximised.

 

In comparison, in a Cournot equilibrium, as the number of competitors
increase, the elasticity of demand increases and price falls. However Besanko
& Braeutigam (2011) notes that ‘the competitor price is reached only a to
specific limit before profits contract and consumer surplus has reached its
peak’.

 

How the number of players are determined in a
market can also be related to Cournot equilibrium
where each competitors output is a best response to the other competitors output.

That is, ‘as more competitors are introduced into the market, the
demand curve for all competitors would shift inwards, due to the extra supply
offered by the new competitors’ (Chui, 2016).

 

This can also be seen as a central feature of oligopoly markets, where
there is competitive interdependence. Therefore the decisions of every
competitor significantly affect the profits of other competitors (Besanko &
Braeutigam, 2011 p.533). 

 

To determine the
likelihood of too many or too little competition, it really depends on if the market
is not at equilibrium. In Adam’s Smith (1759) concept of the ‘invisible hand’ that
no matter the number of competitors that may enter the maket, market forces
will move the quantity supplied back to equilibrium (Economic Times, 2018).  Welker (2018) notes that ‘the consumer would
be better off if more of the product was available so the potential is to have
more competitors (suppliers) enter the market so that consumers demand more, bringing
the market back to equilibrium’ (Welker, 2018).

 

At
equilibrium, the quantity supplied matches the quantity demanded, minimising
excesses and shortages in the competition. When this is
achieved, efficiency of the market is at its peak.

 

One of the best examples of
changing intensity in competition is a product synonymous with the Dubai
economy – The Shopping Mall. In the year 2000 only four malls existed to meet
the demand of the population. By 2017, US $4 billion in mall projects have been
awarded and retail sales exceeded US $73 billion, leading to media
reporting an over saturation of malls in Dubai, ‘UAE may already be oversaturated…. with sales
stagnating or declining at 64 per cent of businesses surveyed last fall by
KPMG’ (Norwak, 2017).

 

Retail and
wholesale trade in the UAE is an important sector, accounting for more than 11%
of the country’s Gross Domestic Product (GDP) and close to 30% of Dubai’s GDP.

 

There has been significant intensity of
competition in this market, it can be seen that when more malls were developed (increased
competition) the demand curve became steeper, leading to increased consumer
surplus. However the question then lies whether the increased number of malls
is affecting profit and consumer surplus.

 

For the
purposes of this case study the Dubai market of Retail Malls is defined as an
oligopoly as there is high barriers to entry, with strong pricing power. Malls
are also a good example where each competitor is interdependent (Besanko & Braeutigam, 2011 p.533). Good
examples of this can be seen in retail price wars that take place heavily in
the Dubai market. Malls also rely on both identical but differentiated product,
where ‘anchor tenants’ such as supermarkets, fast-fashion and food courts are
identical across competitors however in comparison, malls offer ski slopes,
laser shows and ice rinks are part of the make-up and are highly differentiated
(Chui, 2016).

 

The number of players in the mall market also
mirrors Cournot’s Theory of Equilibrium, where malls have built their model on the
same scales as other competitor malls offer. For example, the number of
retailers are scaled similarly where the five super regional malls in Dubai
average over 400 retailers and equally receive an average of >20M customers
annually (Mastercard, 2017). It can be seen that the ‘total (mall) industry
capacity expansion that resulted from these choices matched the expectations on
which each competitor based their decision’ (Besanko & Braeutigam, 2011 p.538).

The number of players in the Dubai market
would be determined firstly by the expectation of profit (based on
macroeconomic factors such high tourist trade, strong consumer demand,
government subsidies such as no tax*). Therefore supply moves to the right,
leading to consumers demanding more which may push up prices. This may incentivise
existing malls to supply more (through redevelopment, adding more retailers)
which will increase consumer surplus (Economics Online, 2016).

 

Whilst industry
media report that the retail market that Dubai has been resilient to the number
of malls opening, this could also be explained as reaching equilibrium. The mall
market in Dubai can be seen as interdependent, where even as the number of
competitors grow and consumer surplus increases, the output of each competitor
continues to drive the rival to ‘maximise their output choice’ (Besanko & Braeutigam, 2011 p.535) in order to
capture bigger share of residual demand.