Understanding Monopoly, Monopolistic Competition, Oligopoly And Markets

Monopoly and Monopolistic Competition

1.Monopoly is known as the market situation, where a single firm is the producer of a product leading to complete control over the market and that firm serves large number of buyers. A monopoly firm is considered as the price maker due to its complete control over the supply of goods and services (Zeuthen 2018). Products produced by a monopoly producer do not have any substitute and due to their ability to control market, they produce less and charge higher price. Part A of Figure 1, showcase the monopoly market situation, where it produces Q_m amount of output and sells it at P_m price.

Monopolistic competition is one of the imperfect market situations, where many producers sell highly differentiated products; however, they are not perfect substitute. The number of buyers in this market scenario is large and number of sellers is moderate; higher than the monopoly market but lower than the perfect competition (Nikaido 2015). Market power in the case of monopolistic competition is lower and market supply is subject to competition. Part B of Figure 1, depicts the monopolistically competitive market condition, where price is P_l and quantity is

 

Figure 1: Long run Monopoly v/s monopolistically competitive firm

Source: (Created by Author)

Comparing the monopoly market with the monopolistically competitive market, various differences can be seen. As the figure 1 depicts, long run price of the monopoly market is much higher than the monopolistically competitive market. Moreover, output in the perfect competition is lower than the monopolistically competitive market output. Difference between the Q_l and Q_m is the output difference between the monopoly output and monopolistic market output in the long run. When it comes to price, then difference in Pm and P_l is the price difference between the both market in long run. From here, it can be seen that monopoly profit is higher. However, in long run, inefficiency in both types of market leads to lower efficiency. It can be seen that both the market are inefficient due to presence of deadweight loss. It decreases consumer surplus and enhance producer surplus with substantial amount of deadweight loss.

2.Price discrimination is a condition, where manufacturers charge different price for same product to the different consumers, where the difference in supply cost is not reflected by the price difference. Conditions for price discrimination are as follows:

• Varied Price Elasticity of Demand is necessary
• There are barriers to prevent consumer switching
• Supplier need to be potent to discriminate the market into sections

3.Price and output level in an oligopoly market is indeterminate because firms are mutually dependant for the pricing policy. Thus, it has become hard for the economists to determine theory of output and price under the oligopoly market (Ciliberto, Murry & Tamer 2016). However, Sweezy came with kinked demand curve model in 1939 to determine the demand and output in the oligopoly market.

Price Discrimination

 

Figure 2: Kinked demand curve

Source: (tutor2u 2018)

An oligopoly firm faces two-demand curve, depending upon the price, which are dd’ and DD’. For low price, it faces inelastic demand curve DD’ (Figure 2) and in case of high price, it faces highly elastic demand curve dd’ (Figure 2). Due to high interdependence on the rivals in case of oligopoly market, if there is any change in price, then it will alter the demand for other firms too. For instance, if the price of a firm is increased, then demand would shift from DD’ to dd’ and the consumer will switch to the rival fir. It will enhance the demand of the rival oligopoly firm and dP part of demand curve dd’ will be more elastic, that placed above the present market price. If there is price cut in the rival firms, then consumer will shift to rival leading to forced shift of demand curve from dP to DP. Thus in oligopoly market, there is kinked demand curve.

4.Three types of capabilities identified in the Resource Based Theory of the firm used to increase long-term competitiveness are as follows (Wu & Chu 2015):

• Resources are valuable: resources aid to enhance the effectiveness of the firm; moreover, it helps to increase efficiency of the firm.
• Resources are rare: Resources are rare and it helps to produce goods and services. Who have the resource, that firm will have competitive advantage.
• Resources are non-substitutable: resources cannot be synthesised, thus, it is important to produce new goods.

5.Rule of employing factors of production is as follows (Henderson 2014):

• Check whether to produce or it is good to shut down
• Decide how much to produce
• Select the ideal input combination to be used in production
• Chalk out the technology requirement

 

Figure 3: Rule of employing factors of production

Source: (Harper 2015)

As the figure 3 describes, managerial economics can be used to imply the above mentioned  rules, where input factors like land, labour and capital is used with ideal technology to produce environment friendly goods and services

6.

Figure 4: Demand and supply of Land resource

Source: (Spaulding 2018)

Land is non-exhaustible resource that cannot be produced. Thus, the only factor that can alter the price of land is demand. With higher demand price will go up (P₂) and in case of reduction in demand, price will fall (P₁).  

Supply curve is highly in elastic in nature.

7.

	Price decision	Level of competition	Level of knowledge
Perfect competition	Price taker	High	Perfect knowledge
Monopoly	Price maker	Nil	Imperfect knowledge
Oligopoly	Partial control	Few	Imperfect knowledge
Monopolistic competition	Rigidity in price	Large	Imperfect knowledge

Table 1: Difference of 4 types of market

Source: (Created by author)

According the table 1, it can be seen that perfect competition market has high number of competitors, who have complete knowledge of market and price is decided naturally. On the other hand monopoly is another form of market where number of sellers is only one and posses imperfect knowledge about market. Being the only producer, monopoly producer is price maker (Shen & Bjork 2015). In case of oligopoly market, both of them have imperfect market knowledge and they are doing not have complete control over market due to large numbers of seller compared to monopoly market.  

8.If a firm makes loss, then it means it is not able to earn normal profit where MC is equal to the Average Cost (AC). Now if the firm is not able to its Average Variable Cost (AVC) too, then the firm has to shut down. Thus, the proposition is not true.

9.The ability of a firm to keep producing in the short run lies in the MC, AC and AVC. If the firm produces at MC, then it would produce at normal profit and the production will continue until it reaches to shutdown point (Burke, Hsiang & Miguel 2015).

10.Apple operates in oligopoly market, where the producers create close substitute product. However, branding of the firm, marketing and product differentiation has aided the brand to have competitive advantage when it introduced the iPhone. 

Reference:

Burke, M., Hsiang, S. M., & Miguel, E. (2015). Global non-linear effect of temperature on economic production. Nature, 527(7577), 235-239.

Ciliberto, F., Murry, C., & Tamer, E. T. (2016). Market structure and competition in airline markets.

Harper, C. (2015). Organizations: Structures, processes and outcomes. Routledge.

Henderson, J. V. (2014). Economic theory and the cities. Academic Press.

Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6). Princeton University Press.

Shen, C., & Björk, B. C. (2015). ‘Predatory’open access: a longitudinal study of article volumes and market characteristics. BMC medicine, 13(1), 230.

Spaulding, W. (2018). Economic Rent. [online] Thismatter.com. Available at: https://thismatter.com/economics/economic-rent.htm [Accessed 27 Jan. 2018].

tutor2u. (2018). Oligopoly – Kinked Demand Curve | tutor2u Economics. [online] Available at: https://www.tutor2u.net/economics/reference/oligopoly-kinked-demand-curve [Accessed 27 Jan. 2018].

Wu, L., & Chiu, M. L. (2015). Organizational applications of IT innovation and firm’s competitive performance: A resource-based view and the innovation diffusion approach. Journal of Engineering and Technology Management, 35, 25-44.

Zeuthen, F. (2018). Problems of monopoly and economic warfare (Vol. 25). Routledge.