Discuss about the Competition and Entrepreneurship Monopolistic Competition.
In the opinion of Assenza et al., (2015), it can be stated that there are larger number of producers under the monopolistically competitive market. The seller sale differentiated products under this type of market structure. Hence, it can be mentioned that the products are not identically substitutes to each other. On the other hand, the producers can charge the price and it is charged by the competitors. Therefore, product differentiation is the key factor, which can effectively define the market structure of monopolistic competition.
According to Balistreri & Rutherford (2013), it can be stated that monopolistic competitive market is the grouping of perfect competition and the monopoly. A number of firms can freely enter into the market under this type of market structure. On the other hand, it can be added that each firm is treated like a monopolist in the aggregate market, where the products are differentiated and closely substitutes. The demand curve for the products will be downward sloping. Moreover, this demand curve would reflect the price of the products.
In the words of Baumol & Blinder (2015), each of the organisations under monopolistic competition focused to maximise the profitability statement. In this context, it can be mentioned that each of the organisation would like to set their output level in such a way, for which marginal revenue is equivalent to marginal cost. As a result, the first order condition of profit maximisation can be explained as MR=MC and this condition is equivalent to the monopolistic competitive market. The major difference between these two types of market can be identified as marginal revenue curve relies on the residual demand curve in the place of market demand curve in the monopolisticallycompetitive market structure. On the other hand, Bertoletti & Etro (2015) opined that residual demand curve under the monopolistic competition is nothing but the aggregate market demand of the net productivity of other sellers.
Therefore, it can be inferred that monopolistic competition is a special type of market where there are a large number of producers. They are mainly aimed to sale differentiated products. Nonetheless, the products are these goods are not homogeneous in characteristics. In the points of Calvo & Pérez (2016), the demand curve of these goods is assumed to be elastic in nature. The reason behind the elastic demand curve can be explained as the sellers in the market sale differentiated goods. Moreover, it can be mentioned that the organisations are closely substitute to each other. Hence, it can be inferred that if one organisation increase the price of the goods, then most of the customers will get the opportunity to switch other products for purchasing. On the other hand, it can be stated that the demand elasticity of the products are not perfectly elastic. In this connection, it can be mentioned that there are small number of competitors under the monopolistically competitive market structure.
The above diagram highlighted that the suppliers of the monopolistic competition are acted such as a price makers. This diagram explains that the organisation will produce at the level of Q. In this level, the marginal revenue would be equal to the marginal cost. This price level would be evaluated under a specific circumstance where the average revenue curve touches the estimated quantity. Moreover, Collier & Venables (2014) highlighted that this situation under monopolistic competition would be occurred as the firms have the market power. This would reflect to gain the social dead weight loss of the firm. In the above diagram, the orange coloured shaded region can effectively highlight the amount of profits of the firm, and this is the short run earning of the organisation.
The above figure shows that in the long run, the monopolistically competitive firms would be capable to produce up to a certain level, where the marginal cost curve would be able to touch the marginal revenue curve. On the other hand, the price of the goods can be identified as the quantity produced by the organisations would touch the average revenue curve. As a result,
Collier & Venables (2014) opined that in the long run competitive market, the organisations will break even.
In addition, it can be observed that the monopolistically competitive firms would be efficient to earn profitability statement in the short run market. This would in turn make an impact on the long run. In the long run, the monopolistically competitive firms consider the monopoly like pricing and it can reduce the demand. This can increase the necessities average total cost. As per the statement of Erku?-Öztürk & Terhorst (2016), it can be mentioned that for the decrease in the demand of the goods and the rise in the cost of the products the average cost curve would be tangent at the level of profit maximising price of the goods and services. As a result, in this point there would occur two specific cases under monopolistic competition. Initially, the organisations under this type of market would be able to produce a surplus in the long run. In the next situation, the firms can break even, however, would not be able to earn organisational profits.
From the above diagram it can be observed that the shift of demand curve under the monopolistically competitive firm would tend to move to long run. According to Feenstra (2016), it can be mentioned that if the organisations would be able to earn positive as well as higher economic profitability under this type of market structure, other organisations would get the opportunity to enter into the industry. As a result, it can be observed that each of the organisations would get lower amount of market share. More specifically, it can be mentioned that the market demand curve would shift towards the leftward. This shifting of the demand curve would be continuous when the break even situation would rise in the industry. On the other hand, Feng, Wang & Zhang (2014) stated that other organisations outside of the market would not be capable to enter into this type of organisational competition.
As per the concept of economic efficiency, the firms under the monopolistically competitive industry are performed similarly the firms under the monopolistic firms. In this purpose, it can be stated that the firms have the supremacy to determine the price of the goods. Hence, it can be inferred that the organisations are capable to set the prices what they have estimated for their goods without the influence of the market forces. This price of the goods can be identified at the level where the profit maximising level crosses the demand curve. This pricing level would be higher in the comparison with marginal cost of the firm. As a result, the customers need to compensate the price, which is higher than the pricing structure in the perfectly competitive type market structure. On the other hand, this would reduce the consumer surplus. Moreover, Kirzner (2015) opined that the producers of the monopolistically competitive market can produce lower quantity of products compared to the quantity of production under the perfectly competitive type market. Therefore, it can be inferred that the profitability statement would be offset and the firms can earn higher profitability by charging larger prices. Therefore, the producer surplus would be reduced.
This above diagram emphasizes that the monopolistically competitive firms create the social deadweight loss as well as the inefficiency, which can be represented by the orange coloured shaded region. In this context, it can be mentioned that the productive effectiveness arises when a firm utilise all of the resources in the effective manner. As per the statement of Lucas (2016), this situation occurs when the commodity price is identified with the help of the level of marginal cost. The marginal cost of the product is equal to the average cost of the goods. On the other hand, Nikaido (2015) opined that the firms also focused to control the entire process as the price of the goods is more compared to the marginal cost under monopolistic competition. This would in turn highlight the ineffectiveness of the market. This quantity can be produced if QM and the marginal cost curve touch each other. Similarly, it can be observed that the allocative efficiency would take place if the production level of the goods can maximises the social well being. This situation arises when the price of the goods is similar to the marginal benefits and also similar to the marginal cost. However, the price of the products under the monopolistically competitive market would be larger compared to the marginal cost. In addition, it can be stated that the market is not the allocative efficient.
In the points of Olabi (2016), it can be stated that restaurant industry can be an appropriate example, where monopolistic competition prevails effectively. In this connection, it can be mentioned that there are a large number of restaurants under this type of market structure and in addition, it can be added that there is no barriers to entry and exit. On the other hand, it can be mentioned that each of the restaurant are closely substitute to each other under monopolistically competitive market structure.
Profit maximisation condition:
As per the statement of Parenti, Ushchev & Thisse (2017), it can be stated that the restaurants increase the price up to a specific level above in the comparison with the other restaurants with which it compete in the market. Moreover, it can be added that all of the restaurants are different from the others, and some of the individuals are willing to support in continuously. Under this condition, the restaurants would be able to charge the individuals and the specific price.
Short run condition:
A restaurant makes a competition with the other restaurants within the market and there are no barriers to entry or barriers to exit. As a result, it can be stated that the demand curve of the products of the market is downward sloping. In addition, it can be mentioned that the restaurant would increase the price in the comparison with the other competitors. Therefore, the visitors would visit to the other restaurants where the price of the products is usually lower. Therefore, the marginal revenue curve of the restaurants would lie below the demand curve is downward sloping. In addition, the marginal revenue of the additional food substances of the restaurant will be relatively lesser compared to the overall market price.
Long run condition:
According to Park et al., (2015), it can be mentioned that with the entry of new companies in the market, the availability of getting foods in the restaurants can be increased. If the demand for the food substances would reduce, then the demand curve for the restaurant would be more elastic. Therefore, the demand curve for the restaurants would move to the left. As a result, new restaurants would aim to enter into the market and they will enter into the market up to a certain limit where the restaurants will be able to make economic profitability. On the other hand, it can be observed that the zero solution will be observed when the demand curve for the restaurant will be tangent to the average total cost curve. Therefore, it can be inferred that the pricing structure of the restaurants would be reduced and the output level will also be reduced.
The nature of the restaurants under the monopolistic competition can be explained as the following way:
In this study, it can be observed that Adani group’s Carmichael coal mine is located in Queensland’s Galilee Basin. Due to the performance of the organisation, the organisation has released harmful gases; therefore, third parties have been suffering from the negative externalities. In this connection, it can be stated that the first and the second parties are recognised as the producers and the consumers respectively. According to Schweinberger & Suedekum (2015), it can be stated that negative externality is related with the cost or the benefits. This will in turn make an impact on the third party. They are not incurred cost or the benefit. Moreover, it can be added that negative externality is connected with the external cost.
The above diagram highlights the effect of the negative externality. The optimal production quality has estimated by the Q2, here negative externality would reflect the output level. In this diagram, the shaded region would explain the deadweight loss of the society.
On the other hand, the negative externalities, which are associated with the mentioned coal mine company, can be discussed in the following manner:
Apart from this, it can be added that Adani group’s operation also raise the pollution in the air and this is identified as the negative externality. On the other hand, it can be mentioned that individuals, who live outside of the surroundings, are forced to pay for the pollution. Negative externalities also increase the medical bills and the quality of life would be decreased. Hence, the coal mining of this organisation would lead to the negative cost on the individuals. Furthermore, Zhelobodko et al., (2012) opined that Adani Group’s has released green house gas and it would make an issue in the environment. As per the review of the report, it can be identified that Adani group has released sulphur near about 145 million tons. As a result, it can be inferred that due to the emissions of gravely toxic, the water would be polluted. As per the statement of Roberts (2014), negative externality has adverse impact on the expansion of the economic function. Hence, external diseconomy would reflect the environment by increasing the level of pollution.
The above figure shows the effect of the negative externality. The coal industry is operated in the competitive market. In this connection, it can be noticed that marginal social cost is larger than the marginal private cost. Marginal social cost is higher due to the amount of external cost. Moreover, it can be added that the marginal benefits is related with the function of coal mining. Hence, the marginal social cost would similar to the marginal private benefit. The above figure depicted that if the individuals would consider their own private cost, then it will end with the price level P1 and quantity Q1. In this purpose, individual would not consider the higher effectual price P2 and the effective quantity Q2. The social cost is larger than social benefit. Individuals would be better off between the quantity of Q1 and The government can improve the operational function of Adani group’s.
In this study, importance of development of the environmental recompense mechanism has described, which can reduce the negative externality. On the other hand, ecological services have a specific economic valuation. Therefore, it would exchange the perfectly competitive market. Moreover, market failure is also associated with the operation of coal mining. It can optimally supervise the performance of resource developers to restore the locality. Therefore, the relationship between the ecological as well as environmental balances would be improved.
References
Assenza, T., Grazzini, J., Hommes, C., & Massaro, D. (2015). PQ strategies in monopolistic competition: Some insights from the lab. Journal of Economic Dynamics and Control, 50, 62-77.
Balistreri, E. J., & Rutherford, T. F. (2013). Computing general equilibrium theories of monopolistic competition and heterogeneous firms. Handbook of Computable General Equilibrium Modeling, 1, 1513-1570.
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
Bertoletti, P., & Etro, F. (2015). Monopolistic competition when income matters. The Economic Journal.
Calvo, J. A. P., & Pérez, A. M. J. (2016). Optimal extraction policy when the environmental and social costs of the opencast coal mining activity are internalized: Mining District of the Department of El Cesar (Colombia) case study. Energy Economics, 59, 159-166.
Collier, P., & Venables, A. J. (2014). Closing coal: economic and moral incentives. Oxford Review of Economic Policy, 30(3), 492-512.
Erku?-Öztürk, H., & Terhorst, P. (2016). Innovative restaurants in a mass-tourism city: Evidence from Antalya. Tourism Management, 54, 477-489.
Feenstra, R. C. (2016). Gains from Trade Under Monopolistic Competition. Pacific Economic Review, 21(1), 35-44.
Feng, S., Wang, D., & Zhang, X. (2014). Study on Ecological Compensation for Coal Mining Activities Based on Economic Externalities. Journal of Geoscience and Environment Protection, 2(02), 151.
Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago press.
Lucas, A. (2016). Stranded assets, externalities and carbon risk in the Australian coal industry: The case for contraction in a carbon-constrained world. Energy Research & Social Science, 11, 53-66.
Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6). Princeton University Press.
Olabi, A. G. (2016). Energy quadrilemma and the future of renewable energy. Energy, 108, 1-6.
Parenti, M., Ushchev, P., & Thisse, J. F. (2017). Toward a theory of monopolistic competition. Journal of Economic Theory, 167, 86-115.
Park, S. J., Cachon, G. P., Lai, G., & Seshadri, S. (2015). Supply chain design and carbon penalty: monopoly vs. monopolistic competition. Production and Operations Management, 24(9), 1494-1508.
Phelan, A. A., Dawes, L., Costanza, R., & Kubiszewski, I. (2017). Evaluation of social externalities in regional communities affected by coal seam gas projects: A case study from Southeast Queensland. Ecological Economics, 131, 300-311.
Roberts, K. (2014). The limit points of monopolistic competition. Noncooperative Approaches to the Theory of Perfect Competition, 3, 141.
Roper, S., Love, J. H., & Bonner, K. (2017). Firms’ knowledge search and local knowledge externalities in innovation performance. Research Policy, 46(1), 43-56.
Schweinberger, A. G., & Suedekum, J. (2015). De-industrialization and entrepreneurship under monopolistic competition. Oxford Economic Papers, 67(4), 1174-1185.
Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.
Zhelobodko, E., Kokovin, S., Parenti, M., & Thisse, J. F. (2012). Monopolistic competition: Beyond the constant elasticity of substitution. Econometrica, 80(6), 2765-2784.
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