essay about monopolistic competition

Essay on Monopolistic Competition

In this essay we will discuss about Monopolistic Competition. After reading this essay you will learn about: 1. Meaning of Monopolistic Competition 2. Price Determination of a Firm under Monopolistic Competition 3. Chamberlin’s Group Equilibrium 4. Theory of Excess Capacity 5. Selling Costs 6. Wastes of Monopolistic Competition.

• Essay on the Meaning of Monopolistic Competition
• Essay on the Price Determination of a Firm under Monopolistic Competition
• Essay on Chamberlin’s Group Equilibrium
• Essay on Theory of Excess Capacity
• Essay on the Selling Costs
• Essay on Wastes of Monopolistic Competition

Essay # 1. Meaning of Monopolistic Competition:

Monopolistic competition refers to a market situation where there are many firms selling a differentiated product. “There is competition which is keen, though not perfect, among many firms making very similar products.”

No firm can have any perceptible influence on the price-output policies of the other sellers nor can it be influenced much by their actions. According to Salvatore, “Monopolistic competition refers to the market organisation in which there are many firms selling closely related but not identical commodities.”

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Products are close substitutes with a high cross-elasticity and not perfect substitutes, Tata, Lipton, etc. tea; Hamam, Lux etc. soap; Pepsi, Coca Cola, etc. cold drinks are examples of product differentiation. Under monopolistic competition, no single firm controls more than a small portion of the total output of a product.

As the products are close substitutes, a reduction in the price of a product will increase the sales of the firm but it will have little effect on the price-output conditions of other firms, each will lose only a few of its customers. Likewise, an increase in its price will reduce its demand substantially but each of its rivals will attract only a few of its customers.

Therefore, the demand curve (average revenue curve) of a firm under monopolistic competition slopes downward to the right. It is elastic but not perfectly elastic within a relevant range of price at which he can sell any amount.

It means that it has some control over price due to product differentiation and there are price differentials between firms. Despite this, the slope of the demand curve is determined by the general level of the market price for the differentiated product.

In so far as it exercises some control over price, it resembles monopoly and since its demand curve is affected by market conditions, it resembles pure competition. Such a situation is, therefore, characterised as monopolistic competition.

Essay # 2. Price Determination of a Firm under Monopolistic Competition:

The equilibrium of the firm under monopolistic competition follows the usual analysis in the short-run and long-run.

(A) Short-Run Equilibrium Assumptions :

The short-run analysis of the firm under monopolistic competition is based on the following assumptions:

(1) The number of sellers is large and they act independently of each other. Each is a monopolist in his own sphere;

(2) The product of each seller is differentiated from the other products;

(3) The firm has a determinate demand curve (AR) which is elastic;

(4) The factor-services are in perfectly elastic supply for the production of the product in question;

(5) The short-run cost curves of each firm differ from each other; and

(6) No new firms enter the industry.

Explanation:

Given these assumptions, each firm fixes such price and output which maximises its profits. The equilibrium price and output is determined at a point where the short-run marginal cost curve (SMC) cuts the marginal revenue (MR) curve from below.

Since costs differ in the short-run, a firm with lower unit costs will be earning only normal profits. In case, it is able to cover just the average variable cost, it incurs losses.

In Figure 1 (A) the short-run marginal cost curve (SMC) cuts the MR curve at E. This equilibrium point establishes the price QA (=OP) and output OQ. As a result, the firm earns supernormal profits represented by the shaded area PABC.

Figure 1 (B) indicates the same equilibrium point of price and output. But in this case the firm just covers the short-run average unit cost as represented by the tangency of demand curve D and the short-run average unit cost curve SAC at A. It earns normal profits.

Figure 1 (C) shows a situation where the firm is not able to cover its short-run average unit cost and therefore incurs losses. Price set by the equality of SMC and MR curves is QA which covers only the average variable cost.

The tangency of the demand curve D and the average variable cost curve A VC at A makes it a shut-down point. If the firm lowers the price below QA, it will have to stop further production. However at this price, the firm will incur losses equal to the area CBAP during the short-run in the hope of lowering its costs in the long-run.

Monopolistic Competition – definition, diagram and examples

Definition: Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term.

A monopolistic competitive industry has the following features:

• Many firms.
• Freedom of entry and exit.
• Firms produce differentiated products.
• Firms have price inelastic demand; they are price makers because the good is highly differentiated
• Firms make normal profits in the long run but could make supernormal profits in the short term
• Firms are allocatively and productively inefficient.

Diagram monopolistic competition short run

The firm maximises profit where MR=MC. This is at output Q1 and price P1, leading to supernormal profit

Monopolistic competition long run

In the long-run, supernormal profit encourages new firms to enter. This reduces demand for existing firms and leads to normal profit. I

Efficiency of firms in monopolistic competition

• Allocative inefficient. The above diagrams show a price set above marginal cost
• Productive inefficiency. The above diagram shows a firm not producing on the lowest point of AC curve
• Dynamic efficiency. This is possible as firms have profit to invest in research and development.
• X-efficiency. This is possible as the firm does face competitive pressures to cut cost and provide better products.

Examples of monopolistic competition

• Restaurants – restaurants compete on quality of food as much as price. Product differentiation is a key element of the business. There are relatively low barriers to entry in setting up a new restaurant.
• Hairdressers. A service which will give firms a reputation for the quality of their hair-cutting.
• Clothing. Designer label clothes are about the brand and product differentiation
• TV programmes – globalisation has increased the diversity of tv programmes from networks around the world. Consumers can choose between domestic channels but also imports from other countries and new services, such as Netflix.

Limitations of the model of monopolistic competition

• Some firms will be better at brand differentiation and therefore, in the real world, they will be able to make supernormal profit.
• New firms will not be seen as a close substitute.
• There is considerable overlap with oligopoly – except the model of monopolistic competition assumes no barriers to entry. In the real world, there are likely to be at least some barriers to entry
• If a firm has strong brand loyalty and product differentiation – this itself becomes a barrier to entry. A new firm can’t easily capture the brand loyalty.
• Many industries, we may describe as monopolistically competitive are very profitable, so the assumption of normal profits is too simplistic.

Key difference with monopoly

In monopolistic competition there are no barriers to entry. Therefore in long run, the market will be competitive, with firms making normal profit.

Key difference with perfect competition

In Monopolistic competition, firms do produce differentiated products, therefore, they are not price takers (perfectly elastic demand). They have inelastic demand.

New trade theory and monopolistic competition

New trade theory places importance on the model of monopolistic competition for explaining trends in trade patterns. New trade theory suggests that a key element of product development is the drive for product differentiation – creating strong brands and new features for products. Therefore, specialisation doesn’t need to be based on traditional theories of comparative advantage, but we can have countries both importing and exporting the same good. For example, we import Italian fashion labels and export British fashion labels. To consumers, the importance is the choice of goods.

Readers Question : if all firms in a monopolistic competitive industry were to merge would that firm produce as many different brands or just one brand?

Interesting question. I think it is an open-ended question with many different possibilities. One approach is to think how firms in different industries may behave if they did merge. Bearing in mind the model of monopolistic competition doesn’t always stand up to scrutiny too well in the real world.

If the firms merged together, there is no certainty how they would behave.

In some industries, it makes sense to have many differentiated brands creating an illusion of competition and providing a barrier to entry.

How many soap powders are there? About 35. But, most of these brands are owned by two companies, Unilever and Proctor and Gamble. Having brand proliferation means it is harder for a new firm to enter the market. This is because a new firm would have to compete against 30 established brands as opposed to 2. There is less chance of getting a good market share with so many brands. Therefore the new firm would have an incentive to keep different brands to deter competitors.

However, if you have merge different brands there may be economies of scale. You can devote more resources and investment to improving that particular product and maximising its efficiency. This might be appropriate for an industry like computer software or computers. There used to be many different brands of computers until the pc came to dominate.

Are the different brands catering to different sectors of the market. If you take the restaurant business, there is a big difference between Chinese and Indian. If 2 restaurants merge, they would be better off retaining distinct business. It would make no sense to have a restaurant which offered a mixture of Chinese/Indian – consumers would trust it less.

If you fear the arrival of a powerful company, it might be good to consolidate your brands. For example, there are many small search engines, but they would be better off combining forces to compete against the mighty Google.

43 thoughts on “Monopolistic Competition – definition, diagram and examples”

Was requesting for economic restrictions for monopolistic competition

All great actions and thoughts have a negligible beginning.

I work hard, I insist, I will succeed

Thanks a lot sir you explain easily the topic and this is very helpful for me

it was helpful kindly send some more important information to my gmail, will appreciate

why is not possible for monopoly to exist to a large extent in agriculture?

hello sir, Could you please tell me that which theme you uses ?

Explain the dertemination of the optimal price and output combination in a monopolistic competition.use the resulting equilibrium to illustrate the statement that ‘production inefficient is a necessary price to pay for product variety’ comment on this statement (25)

hi, how is a monopolistic competition different from monopoly? thanks

In monopolistic competition there are no barriers to entry. Theoretically, if firms have no barriers to entry or exit, there will be mass competition as everyone wants to get a piece of the super normal profit. If this happens, there will be decreased demand for a specific product or service, as theres more substitue goods. leading to firms in monopolistic competition acheiving normal profit in the long run. Whereas with monopolies, the low competition means they control supply, without the threat of competition offering more supply to boost market cap and sales, leading to them being able to keep demand constant and acheive supernormal profits in both the long and short run.

Monopoly cannot exist in large extent in agriculture because the Monopoly you are talking about is short run

I’m happy to have learnt something new

Comments are closed.

• Monopolistic Competition

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 08, 2023

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Table of contents, what is monopolistic competition.

Monopolistic competition is a market structure where there are many small firms that produce differentiated products. Unlike perfect competition, each firm has some market power due to product differentiation, which allows them to charge slightly higher prices than their competitors .

However, because there are many firms producing similar but not identical products, consumers have a range of choices and can switch to another product if the price of one becomes too high.

As a result, firms in a monopolistically competitive market must engage in non-price competition, such as advertising and product differentiation, to attract customers.

Characteristics of Monopolistic Competition

Monopolistic competition is characterized by several key features:

Large Number of Small Firms . There are many firms operating in the market, none of which dominates the market.

Differentiated Products . Each firm produces a product that is distinct from its competitors' products, either through quality, design, or branding.

Some Market Power . Each firm has some control over the price of its product due to product differentiation, but this control is limited because there are many substitutes available to consumers.

Non-price Competition . Firms in a monopolistically competitive market compete using advertising, product development, and other marketing strategies to attract customers rather than relying on lower prices.

These characteristics create a market structure that combines elements of both monopoly and perfect competition, resulting in a market where firms have some market power, but not enough to eliminate competition altogether.

Examples of Monopolistic Competition

Monopolistic competition can be observed in a variety of industries, but here are some examples:

Restaurants

These are a good example of monopolistically competitive markets because they offer different types of cuisine, ambiance, and price range, which creates a range of options for consumers.

This differentiation allows each restaurant to have some control over its pricing strategy, but not enough to eliminate competition.

Clothing companies differentiate their products through design, quality, and brand image. This differentiation creates a range of options for consumers, giving each clothing company some market power over its pricing strategy.

Consumers often choose clothing based on brand image, style, and quality, rather than just the price.

Electronics

Companies producing electronics such as smartphones, laptops, and televisions are also good examples of monopolistically competitive markets. These companies differentiate their products through technology, features, and design.

For example, Apple's iPhone and Samsung's Galaxy phones have different designs, features, and operating systems, which create a range of options for consumers.

These industries have many firms competing for market share and offering slightly different products, making them good examples of monopolistically competitive markets.

Benefits of Monopolistic Competition

Monopolistic competition offers several benefits to both consumers and firms:

Consumer Choice

In a monopolistically competitive market, consumers have a range of options to choose from, leading to greater consumer satisfaction and utility.

Product Differentiation

Firms in a monopolistically competitive market differentiate their products, which encourages innovation and leads to a greater variety of products for consumers.

The need for product differentiation in a monopolistically competitive market drives firms to innovate and create new products, technologies, and marketing strategies to attract consumers.

This can lead to technological advancements and greater efficiency in the market.

Overall, monopolistic competition encourages competition, innovation, and variety, benefiting both consumers and firms in the market.

Challenges of Monopolistic Competition

While monopolistic competition offers some benefits, it also presents several challenges:

Barriers to Entry

The product differentiation in monopolistically competitive markets can make it difficult for new firms to enter the market and compete with established firms. This can lead to reduced competition and market inefficiencies.

Higher Prices for Consumers

Firms in a monopolistically competitive market have some market power, which allows them to charge slightly higher prices than in a perfectly competitive market.

This can lead to higher prices for consumers and reduced consumer surplus.

Inefficient Allocation of Resources

Monopolistic competition can lead to an inefficient allocation of resources, as firms may spend resources on advertising and product differentiation rather than on improving their production process.

This can result in less efficient use of resources and higher costs for consumers.

Applications of Monopolistic Competition

Monopolistic competition has several practical applications in business and government policies:

Business Strategy and Marketing

Firms in a monopolistically competitive market must focus on product differentiation and non-price competition to attract customers.

This can include investing in research and development, creating unique brand identities, and developing marketing campaigns to promote their products.

Government Regulation and Antitrust Policies

Because monopolistic competition can lead to market inefficiencies and reduced competition, governments may regulate these markets to promote fair competition and protect consumers.

Antitrust laws may be used to prevent monopolistic practices, such as price-fixing, collusion, or abuse of market power.

Understanding the characteristics and implications of monopolistic competition can help businesses make strategic decisions and help governments develop effective policies to promote competition and protect consumers.

Comparison of Monopolistic Competition with Other Market Structures

Monopolistic competition is just one of several market structures, each with its unique features:

• Perfect Competition

In a perfectly competitive market , many small firms sell identical products with no market power. Prices are determined by supply and demand , and there are no barriers to entry or exit.

Unlike the monopolistic competition, there is no product differentiation or non-price competition.

In a monopoly, there is only one firm in the market with complete market power. The firm can set prices and restrict output without facing competition. There are significant barriers to entry, making it difficult for new firms to enter the market.

Monopolistic competition sits between the extreme market structures of perfect competition and monopoly, with some market power due to product differentiation but still facing competition from other firms.

In an oligopoly, there are only a few firms in the market, each with a significant market share.

The firms may have some market power and engage in non-price competition, but there are significant barriers to entry and exit, making it difficult for new firms to enter the market.

Oligopoly is similar to monopolistic competition in that there are barriers to entry and a small number of firms, but with more market power and less product differentiation.

Final Thoughts

Monopolistic competition is a market structure in which many small firms produce differentiated products, leading to some market power and non-price competition.

This market structure offers benefits such as consumer choice, product differentiation, and innovation but also presents challenges such as barriers to entry, higher prices for consumers, and inefficient allocation of resources.

It is important to note that monopolistic competition is just one of several market structures, each with unique features and implications. You can speak to a wealth management professional to learn more about monopolistic competition.

Monopolistic Competition FAQs

What is monopolistic competition, and how does it differ from perfect competition.

Monopolistic competition is a market structure where many small firms produce differentiated products, creating some market power but still facing competition. Unlike perfect competition, firms have some control over the price of their product due to product differentiation.

What are some examples of industries that demonstrate monopolistic competition?

Monopolistic competition can be observed in industries such as restaurants, clothing, and electronics, where firms differentiate their products through features, design, and branding to attract customers.

What are the benefits of monopolistic competition?

Monopolistic competition offers benefits such as consumer choice, product differentiation, and innovation, as firms must constantly develop new products, technologies, and marketing strategies to remain competitive.

What are the challenges of monopolistic competition?

The need for product differentiation can create barriers to entry, making it difficult for new firms to enter the market and compete with established firms. This can lead to market inefficiencies and higher prices for consumers. Furthermore, monopolistic competition can result in an inefficient allocation of resources.

How can businesses and policymakers navigate the challenges of monopolistic competition?

Understanding the characteristics, benefits, and challenges of monopolistic competition is essential for businesses and policymakers seeking to navigate this market structure effectively. This includes investing in research and development, creating unique brand identities, and developing marketing campaigns to promote their products. Governments may also regulate these markets to promote fair competition and protect consumers through antitrust laws.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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10.1 Monopolistic Competition

Learning objectives.

By the end of this section, you will be able to:

• Explain the significance of differentiated products
• Describe how a monopolistic competitor chooses price and quantity
• Discuss entry, exit, and efficiency as they pertain to monopolistic competition
• Analyze how advertising can impact monopolistic competition

Monopolistic competition involves many firms competing against each other, but selling products that are distinctive in some way. Examples include stores that sell different styles of clothing; restaurants or grocery stores that sell a variety of food; and even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names. There are over 600,000 restaurants in the United States. When products are distinctive, each firm has a mini-monopoly on its particular style or flavor or brand name. However, firms producing such products must also compete with other styles and flavors and brand names. The term “monopolistic competition” captures this mixture of mini-monopoly and tough competition, and the following Clear It Up feature introduces its derivation.

Clear It Up

Who invented the theory of imperfect competition.

Two economists independently but simultaneously developed the theory of imperfect competition in 1933. The first was Edward Chamberlin of Harvard University who published The Economics of Monopolistic Competition . The second was Joan Robinson of Cambridge University who published The Economics of Imperfect Competition . Robinson subsequently became interested in macroeconomics and she became a prominent Keynesian, and later a post-Keynesian economist. (See the Welcome to Economics! and The Keynesian Perspective chapters for more on Keynes.)

Differentiated Products

A firm can try to make its products different from those of its competitors in several ways: physical aspects of the product, location from which it sells the product, intangible aspects of the product, and perceptions of the product. We call products that are distinctive in one of these ways differentiated products .

Physical aspects of a product include all the phrases you hear in advertisements: unbreakable bottle, nonstick surface, freezer-to-microwave, non-shrink, extra spicy, newly redesigned for your comfort. A firm's location can also create a difference between producers. For example, a gas station located at a heavily traveled intersection can probably sell more gas, because more cars drive by that corner. A supplier to an automobile manufacturer may find that it is an advantage to locate close to the car factory.

Intangible aspects can differentiate a product, too. Some intangible aspects may be promises like a guarantee of satisfaction or money back, a reputation for high quality, services like free delivery, or offering a loan to purchase the product. Finally, product differentiation may occur in the minds of buyers. For example, many people could not tell the difference in taste between common varieties of ketchup or mayonnaise if they were blindfolded but, because of past habits and advertising, they have strong preferences for certain brands. Advertising can play a role in shaping these intangible preferences.

The concept of differentiated products is closely related to the degree of variety that is available. If everyone in the economy wore only blue jeans, ate only white bread, and drank only tap water, then the markets for clothing, food, and drink would be much closer to perfectly competitive. The variety of styles, flavors, locations, and characteristics creates product differentiation and monopolistic competition.

Perceived Demand for a Monopolistic Competitor

A monopolistically competitive firm perceives a demand for its goods that is an intermediate case between monopoly and competition. Figure 10.2 offers a reminder that the demand curve that a perfectly competitive firm faces is perfectly elastic or flat, because the perfectly competitive firm can sell any quantity it wishes at the prevailing market price . In contrast, the demand curve, as faced by a monopolist, is the market demand curve, since a monopolist is the only firm in the market, and hence is downward sloping.

The demand curve as a monopolistic competitor faces is not flat, but rather downward-sloping, which means that the monopolistic competitor can raise its price without losing all of its customers or lower the price and gain more customers. Since there are substitutes, the demand curve facing a monopolistically competitive firm is more elastic than that of a monopoly where there are no close substitutes. If a monopolist raises its price, some consumers will choose not to purchase its product—but they will then need to buy a completely different product. However, when a monopolistic competitor raises its price, some consumers will choose not to purchase the product at all, but others will choose to buy a similar product from another firm. If a monopolistic competitor raises its price, it will not lose as many customers as would a perfectly competitive firm, but it will lose more customers than would a monopoly that raised its prices.

At a glance, the demand curves that a monopoly and a monopolistic competitor face look similar—that is, they both slope down. However, the underlying economic meaning of these perceived demand curves is different, because a monopolist faces the market demand curve and a monopolistic competitor does not. Rather, a monopolistically competitive firm’s demand curve is but one of many firms that make up the “before” market demand curve. Are you following? If so, how would you categorize the market for golf balls? Take a swing, then see the following Clear It Up feature.

Are golf balls really differentiated products?

Monopolistic competition refers to an industry that has more than a few firms, each offering a product which, from the consumer’s perspective, is different from its competitors. The U.S. Golf Association runs a laboratory that tests 20,000 golf balls a year. There are strict rules for what makes a golf ball legal. A ball's weight cannot exceed 1.620 ounces and its diameter cannot be less than 1.680 inches (which is a weight of 45.93 grams and a diameter of 42.67 millimeters, in case you were wondering). The Association also tests the balls by hitting them at different speeds. For example, the distance test involves having a mechanical golfer hit the ball with a titanium driver and a swing speed of 120 miles per hour. As the testing center explains: “The USGA system then uses an array of sensors that accurately measure the flight of a golf ball during a short, indoor trajectory from a ball launcher. From this flight data, a computer calculates the lift and drag forces that are generated by the speed, spin, and dimple pattern of the ball. ... The distance limit is 317 yards.”

Over 1800 golf balls made by more than 100 companies meet the USGA standards. The balls do differ in various ways, such as the pattern of dimples on the ball, the types of plastic on the cover and in the cores, and other factors. Since all balls need to conform to the USGA tests, they are much more alike than different. In other words, golf ball manufacturers are monopolistically competitive.

However, retail sales of golf balls are about $500 million per year, which means that many large companies have a powerful incentive to persuade players that golf balls are highly differentiated and that it makes a huge difference which one you choose. Sure, Tiger Woods can tell the difference. For the average amateur golfer who plays a few times a summer—and who loses many golf balls to the woods and lake and needs to buy new ones—most golf balls are pretty much indistinguishable.

How a Monopolistic Competitor Chooses Price and Quantity

The monopolistically competitive firm decides on its profit-maximizing quantity and price in much the same way as a monopolist. A monopolistic competitor, like a monopolist, faces a downward-sloping demand curve, and so it will choose some combination of price and quantity along its perceived demand curve.

As an example of a profit-maximizing monopolistic competitor, consider the Authentic Chinese Pizza store, which serves pizza with cheese, sweet and sour sauce, and your choice of vegetables and meats. Although Authentic Chinese Pizza must compete against other pizza businesses and restaurants, it has a differentiated product. The firm’s perceived demand curve is downward sloping, as Figure 10.3 shows and the first two columns of Table 10.1 .

We can multiply the combinations of price and quantity at each point on the demand curve to calculate the total revenue that the firm would receive, which is in the third column of Table 10.1 . We calculate marginal revenue, in the fourth column, as the change in total revenue divided by the change in quantity. The final columns of Table 10.1 show total cost, marginal cost, and average cost. As always, we calculate marginal cost by dividing the change in total cost by the change in quantity, while we calculate average cost by dividing total cost by quantity. The following Work It Out feature shows how these firms calculate how much of their products to supply at what price.

Work It Out

How a monopolistic competitor determines how much to produce and at what price.

The process by which a monopolistic competitor chooses its profit-maximizing quantity and price resembles closely how a monopoly makes these decisions process. First, the firm selects the profit-maximizing quantity to produce. Then the firm decides what price to charge for that quantity.

Step 1. The monopolistic competitor determines its profit-maximizing level of output. In this case, the Authentic Chinese Pizza company will determine the profit-maximizing quantity to produce by considering its marginal revenues and marginal costs. Two scenarios are possible:

• If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then the firm should keep expanding production, because each marginal unit is adding to profit by bringing in more revenue than its cost. In this way, the firm will produce up to the quantity where MR = MC.
• If the firm is producing at a quantity where marginal costs exceed marginal revenue, then each marginal unit is costing more than the revenue it brings in, and the firm will increase its profits by reducing the quantity of output until MR = MC.

In this example, MR and MC intersect at a quantity of 40, which is the profit-maximizing level of output for the firm.

Step 2. The monopolistic competitor decides what price to charge. When the firm has determined its profit-maximizing quantity of output, it can then look to its perceived demand curve to find out what it can charge for that quantity of output. On the graph, we show this process as a vertical line reaching up through the profit-maximizing quantity until it hits the firm’s perceived demand curve. For Authentic Chinese Pizza, it should charge a price of $16 per pizza for a quantity of 40.

Once the firm has chosen price and quantity, it’s in a position to calculate total revenue, total cost, and profit. At a quantity of 40, the price of $16 lies above the average cost curve, so the firm is making economic profits. From Table 10.1 we can see that, at an output of 40, the firm’s total revenue is $640 and its total cost is $580, so profits are $60. In Figure 10.3 , the firm’s total revenues are the rectangle with the quantity of 40 on the horizontal axis and the price of $16 on the vertical axis. The firm’s total costs are the light shaded rectangle with the same quantity of 40 on the horizontal axis but the average cost of $14.50 on the vertical axis. Profits are total revenues minus total costs, which is the shaded area above the average cost curve.

Although the process by which a monopolistic competitor makes decisions about quantity and price is similar to the way in which a monopolist makes such decisions, two differences are worth remembering. First, although both a monopolist and a monopolistic competitor face downward-sloping demand curves, the monopolist’s perceived demand curve is the market demand curve, while the perceived demand curve for a monopolistic competitor is based on the extent of its product differentiation and how many competitors it faces. Second, a monopolist is surrounded by barriers to entry and need not fear entry, but a monopolistic competitor who earns profits must expect the entry of firms with similar, but differentiated, products.

Monopolistic Competitors and Entry

If one monopolistic competitor earns positive economic profits, other firms will be tempted to enter the market. A gas station with a great location must worry that other gas stations might open across the street or down the road—and perhaps the new gas stations will sell coffee or have a carwash or some other attraction to lure customers. A successful restaurant with a unique barbecue sauce must be concerned that other restaurants will try to copy the sauce or offer their own unique recipes. A laundry detergent with a great reputation for quality must take note that other competitors may seek to build their own reputations.

The entry of other firms into the same general market (like gas, restaurants, or detergent) shifts the demand curve that a monopolistically competitive firm faces. As more firms enter the market, the quantity demanded at a given price for any particular firm will decline, and the firm’s perceived demand curve will shift to the left. As a firm’s perceived demand curve shifts to the left, its marginal revenue curve will shift to the left, too. The shift in marginal revenue will change the profit-maximizing quantity that the firm chooses to produce, since marginal revenue will then equal marginal cost at a lower quantity.

Figure 10.4 (a) shows a situation in which a monopolistic competitor was earning a profit with its original perceived demand curve (D 0 ). The intersection of the marginal revenue curve (MR 0 ) and marginal cost curve (MC) occurs at point S, corresponding to quantity Q 0 , which is associated on the demand curve at point T with price P 0 . The combination of price P 0 and quantity Q 0 lies above the average cost curve, which shows that the firm is earning positive economic profits.

Unlike a monopoly, with its high barriers to entry, a monopolistically competitive firm with positive economic profits will attract competition. When another competitor enters the market, the original firm’s perceived demand curve shifts to the left, from D 0 to D 1 , and the associated marginal revenue curve shifts from MR 0 to MR 1 . The new profit-maximizing output is Q 1 , because the intersection of the MR 1 and MC now occurs at point U. Moving vertically up from that quantity on the new demand curve, the optimal price is at P 1 .

As long as the firm is earning positive economic profits, new competitors will continue to enter the market, reducing the original firm’s demand and marginal revenue curves. The long-run equilibrium is in the figure at point Y, where the firm’s perceived demand curve touches the average cost curve. When price is equal to average cost, economic profits are zero. Thus, although a monopolistically competitive firm may earn positive economic profits in the short term, the process of new entry will drive down economic profits to zero in the long run. Remember that zero economic profit is not equivalent to zero accounting profit . A zero economic profit means the firm’s accounting profit is equal to what its resources could earn in their next best use. Figure 10.4 (b) shows the reverse situation, where a monopolistically competitive firm is originally losing money. The adjustment to long-run equilibrium is analogous to the previous example. The economic losses lead to firms exiting, which will result in increased demand for this particular firm, and consequently lower losses. Firms exit up to the point where there are no more losses in this market, for example when the demand curve touches the average cost curve, as in point Z.

Monopolistic competitors can make an economic profit or loss in the short run, but in the long run, entry and exit will drive these firms toward a zero economic profit outcome. However, the zero economic profit outcome in monopolistic competition looks different from the zero economic profit outcome in perfect competition in several ways relating both to efficiency and to variety in the market.

Monopolistic Competition and Efficiency

The long-term result of entry and exit in a perfectly competitive market is that all firms end up selling at the price level determined by the lowest point on the average cost curve. This outcome is why perfect competition displays productive efficiency : goods are produced at the lowest possible average cost. However, in monopolistic competition, the end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve, not at the very bottom of the AC curve. Thus, monopolistic competition will not be productively efficient.

In a perfectly competitive market, each firm produces at a quantity where price is set equal to marginal cost, both in the short and long run. This outcome is why perfect competition displays allocative efficiency: the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production. In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC—and price is higher than marginal revenue, not equal to it because the demand curve is downward sloping. When P > MC, which is the outcome in a monopolistically competitive market, the benefits to society of providing additional quantity, as measured by the price that people are willing to pay, exceed the marginal costs to society of producing those units. A monopolistically competitive firm does not produce more, which means that society loses the net benefit of those extra units. This is the same argument we made about monopoly, but in this case the allocative inefficiency will be smaller. Thus, a monopolistically competitive industry will produce a lower quantity of a good and charge a higher price for it than would a perfectly competitive industry. See the following Clear It Up feature for more detail on the impact of demand shifts.

Why does a shift in perceived demand cause a shift in marginal revenue?

We use the combinations of price and quantity at each point on a firm’s perceived demand curve to calculate total revenue for each combination of price and quantity. We then use this information on total revenue to calculate marginal revenue, which is the change in total revenue divided by the change in quantity. A change in perceived demand will change total revenue at every quantity of output and in turn, the change in total revenue will shift marginal revenue at each quantity of output. Thus, when entry occurs in a monopolistically competitive industry, the perceived demand curve for each firm will shift to the left, because a smaller quantity will be demanded at any given price. Another way of interpreting this shift in demand is to notice that, for each quantity sold, the firm will charge a lower price. Consequently, the marginal revenue will be lower for each quantity sold—and the marginal revenue curve will shift to the left as well. Conversely, exit causes the perceived demand curve for a monopolistically competitive firm to shift to the right and the corresponding marginal revenue curve to shift right, too.

A monopolistically competitive industry does not display productive or allocative efficiency in either the short run, when firms are making economic profits and losses, nor in the long run, when firms are earning zero profits.

The Benefits of Variety and Product Differentiation

Even though monopolistic competition does not provide productive efficiency or allocative efficiency, it does have benefits of its own. Product differentiation is based on variety and innovation. Most people would prefer to live in an economy with many kinds of clothes, foods, and car styles; not in a world of perfect competition where everyone will always wear blue jeans and white shirts, eat only spaghetti with plain red sauce, and drive an identical model of car. Most people would prefer to live in an economy where firms are struggling to figure out ways of attracting customers by methods like friendlier service, free delivery, guarantees of quality, variations on existing products, and a better shopping experience.

Economists have struggled, with only partial success, to address the question of whether a market-oriented economy produces the optimal amount of variety. Critics of market-oriented economies argue that society does not really need dozens of different athletic shoes or breakfast cereals or automobiles. They argue that much of the cost of creating such a high degree of product differentiation, and then of advertising and marketing this differentiation, is socially wasteful—that is, most people would be just as happy with a smaller range of differentiated products produced and sold at a lower price. Defenders of a market-oriented economy respond that if people do not want to buy differentiated products or highly advertised brand names, no one is forcing them to do so. Moreover, they argue that consumers benefit substantially when firms seek short-term profits by providing differentiated products. This controversy may never be fully resolved, in part because deciding on the optimal amount of variety is very difficult, and in part because the two sides often place different values on what variety means for consumers. Read the following Clear It Up feature for a discussion on the role that advertising plays in monopolistic competition.

How does advertising impact monopolistic competition?

The U.S. economy spent about $180.12 billion on advertising in 2014, according to eMarketer.com. Roughly one third of this was television advertising, and another third was divided roughly equally between internet, newspapers, and radio. The remaining third was divided between direct mail, magazines, telephone directory yellow pages, and billboards. Mobile devices are increasing the opportunities for advertisers.

Advertising is all about explaining to people, or making people believe, that the products of one firm are differentiated from another firm's products. In the framework of monopolistic competition, there are two ways to conceive of how advertising works: either advertising causes a firm’s perceived demand curve to become more inelastic (that is, it causes the perceived demand curve to become steeper); or advertising causes demand for the firm’s product to increase (that is, it causes the firm’s perceived demand curve to shift to the right). In either case, a successful advertising campaign may allow a firm to sell either a greater quantity or to charge a higher price, or both, and thus increase its profits.

However, economists and business owners have also long suspected that much of the advertising may only offset other advertising. Economist A. C. Pigou wrote the following back in 1920 in his book, The Economics of Welfare :

It may happen that expenditures on advertisement made by competing monopolists [that is, what we now call monopolistic competitors] will simply neutralise one another, and leave the industrial position exactly as it would have been if neither had expended anything. For, clearly, if each of two rivals makes equal efforts to attract the favour of the public away from the other, the total result is the same as it would have been if neither had made any effort at all.

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Essay on Monopolistic Competition

This term paper investigates the economic theory of monopolistic competition and its applicability to the modern business environment. In the study, monopolistic competition and its effects on a variety of industries—including technology, healthcare, and retail—are examined in three news items. The literature review contrasts and compares the writers’ viewpoints and provides significant facts, figures, and statistics to support the conclusions. The concerns discussed in the articles are examined using economic theory and concepts in the discussion section. The main findings and suggestions for decision-makers, companies, and consumers are outlined in the decision.

Monopolistic Competition

Monopolistic competition is a market structure where many firms compete by selling differentiated products. Each firm has some degree of market power, which allows them to charge higher prices than in a perfectly competitive market. Monopolistic competition can lead to product innovation but also lead to higher costs, reduced consumer welfare, and market inefficiencies. Hence, the need to examine the implications of monopolistic competition in various industries, including technology, healthcare, and retail.

Literature Review

Nick Dearden’s article “Breaking Corporate Monopolies: A Prerequisite for Democracy’s Survival” delves into the perils of corporate monopolies and their detrimental effects on democratic systems. The author posits that consolidating economic power among a select group of corporations and individuals harms democratic procedures and intensifies disparities in social and economic realms. Dearden illustrates the technology sector, wherein a few corporations, including Facebook, Google, and Amazon, hold a dominant position in the market and exercise significant control over extensive quantities of data and information. The author posits that the unregulated authority of these entities presents a potential hazard to personal privacy, freedom of expression, and democratic engagement and advocates for more robust antitrust policies to dismantle these monopolistic structures (Dearden, 2023). The article additionally examines the function of monopolies in sustaining environmental deterioration, labor exploitation, and the consolidation of wealth and authority. According to Dearden, addressing these concerns will necessitate a fundamental reorganization of the economy that prioritizes social justice, public goods, and democratic control (Dearden, 2023). Dearden’s article underscores the pressing necessity of mitigating the adverse effects of corporate monopolies on democratic processes and advocates for increased governmental intervention to foster competition and safeguard the public welfare.

According to the second article, “Pfizer and Moderna Hike Prices for COVID-19 Vaccines in EU Deals,” Pfizer and Moderna recently increased the cost of their COVID-19 vaccines. According to the article’s citations of industry experts, the pharmaceutical sector is characterized by monopolistic competition, with a few significant companies controlling the market for necessary medications and vaccines. According to the paper, the high pricing of COVID-19 vaccinations results from pharmaceutical companies’ monopolistic market position and a lack of industry competition. In particular, the COVID-19 pandemic is used to show the issue of monopolistic competition in the pharmaceutical sector. Data cited by the author demonstrates that Pfizer and Moderna increased the cost of their COVID-19 vaccines in recent agreements with the European Union, even though these vaccines were created with public monies and are crucial for containing the pandemic (Paolo et al., 2021). The article indicates that pharmaceutical companies’ market dominance, which has a substantial amount of control over the pricing of necessary medications and vaccinations, is partially to blame for the high prices of COVID-19 vaccines. According to the report, several variables contribute to this market power, such as the high costs of medication development and regulatory barriers to entry for new businesses. The article also mentions how, especially in poor nations, a lack of competition in the pharmaceutical sector can result in higher prices and restricted access to necessary medicines and vaccinations (Paolo et al., 2021). In order to encourage competition in the market, the article recommends that legislators increase financing for public research, lower regulatory barriers to entry for new businesses, and enact price restrictions on necessary medications and vaccines.

The article comprehensively analyzes the theory and empirical evidence pertaining to monopolistic competition. The article examines the genesis of the notion, its fundamental characteristics, and its ramifications for market results, including pricing, gains, and well-being. The article provides an overview of the empirical evidence about the incidence and ramifications of monopolistic competition in diverse sectors such as healthcare, technology, and retail. The article concludes that monopolistic competition can yield varying economic efficiency and welfare effects, contingent upon particular market conditions and policy interventions. The article thoroughly analyzes monopolistic competition and its impact on market results. The author emphasizes that monopolistic competition represents a market structure characterized by imperfect competition, wherein firms can differentiate their products and encounter demand curves that slope downwards (Leonhardt, 2018). The ability of firms to exercise market power and set prices above their marginal costs results in increased profitability. The author posits that monopolistic competition may engender heightened innovation and product diversity, conferring consumer advantages. This article reviews empirical evidence of monopolistic competition across industries. Retailers can differentiate their products by location and service quality. In the healthcare sector, healthcare providers such as hospitals and physicians may distinguish their offerings by emphasizing their quality and reputation. Companies can distinguish their offerings within the technology sector by incorporating unique features and compatibility measures. The article posits that the incidence of monopolistic competition within these sectors has the potential to result in augmented prices and profits. However, it may also prove advantageous for consumers by fostering more incredible innovation and a more comprehensive range of products (Leonhardt, 2018). The article additionally examines the function of policy interventions in overseeing monopolistic competition. According to the author, implementing antitrust policies and regulations can promote competition and deter market power exploitation by dominant entities. The author advises policymakers to exercise caution to avoid impeding innovation and product differentiation, as these factors can benefit consumers.

The three news items about monopolistic competition can be analyzed using various economic theories. Market power—the ability of enterprises to affect pricing, output, and other market outcomes—can be used first. Due to product differentiation and branding, monopolistic corporations have some market strength, yet they compete with other firms making comparable but not identical items. Market power can be enormous in industries with a few dominating enterprises, like electronics and pharmaceuticals, resulting in higher pricing, lesser output, and lower customer welfare. Second, market structure theory can compare perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition has many tiny enterprises making identical items, no market power, and no entrance or exit restrictions. Monopolistic competition is characterized by several enterprises producing differentiated products, some barriers to entry and departure, and some market dominance. Oligopoly is characterized by a few dominating enterprises producing similar or identical items with high entry and exit barriers and market dominance. Finally, a monopoly is a single firm with market strength, a unique product, and high entry and exit obstacles. Third, we can assess monopolistic competition’s welfare effects using consumer surplus. Consumer surplus is the gap between consumers’ maximum price for a product and their actual price. In perfect competition, firms charge the marginal cost of production, and consumers gain from the competition, maximizing consumer surplus. Monopolistic competition reduces consumer surplus because companies overcharge over marginal cost, giving consumers fewer choices and inferior quality.

Dearden claims that concentrating wealth and power in a few significant businesses distorts market competition stifles innovation, reduces customer choice, and increases inequality. In economics, “monopoly power” occurs when one or more enterprises dominate the market and set pricing and output. The second paper discusses pharmaceutical market dominance and COVID-19 vaccine costs. The paper implies that Pfizer and Moderna can charge exorbitant prices and limit access to critical pharmaceuticals and vaccines due to a lack of competition and regulation (Paolo et al., 2021). Price limits, compulsory licensing, and other policies can make vital medications and vaccinations inexpensive, especially during public health emergencies. The third paper examines monopolistic competition and market outcomes theoretically and empirically. Depending on market conditions and regulatory interventions, monopolistic competition can boost economic efficiency and welfare. Research and development subsidies, consumer protection legislation, and regulatory monitoring can help policymakers balance product differentiation and innovation with limited competition and higher prices.

To sum it up, the three articles demonstrate that monopolistic competition is relevant in today’s economy: market concentration and lack of competition in technology, healthcare, and retail hurt consumers. According to theory and research, monopolistic competition can improve or harm welfare depending on market conditions and regulatory interventions. To improve financial results, policymakers, firms, and consumers should be aware of the effects of monopolistic competition and endeavor to promote competition, protect consumers, and regulate market dominance.

Dearden, N. (2023). Breaking corporate monopolies is the only way to save democracy.  Open Democracy . https://www.opendemocracy.net/en/oureconomy/corporate-monopolies-are-threat-to-democracy-public-interest/

Leonhardt, D. (2018). The Monopolization of America.  The New York Times . https://www.nytimes.com/2018/11/25/opinion/monopolies-in-the-us.html

Paolo, D., Kuchler, H., Khan, M. (2021). Pfizer and Moderna raise EU Covid vaccine prices.  FINANCIAL TIMES . https://www.ft.com/content/d415a01e-d065-44a9-bad4-f9235aa04c1a

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1.5 Monopolistic Competition, Oligopoly, and Monopoly

Learning objective.

• Describe monopolistic competition, oligopoly, and monopoly.

Economists have identified four types of competition— perfect competition , monopolistic competition , oligopoly , and monopoly . Perfect competition was discussed in the last section; we’ll cover the remaining three types of competition here.

Monopolistic Competition

In monopolistic competition , we still have many sellers (as we had under perfect competition). Now, however, they don’t sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in a number of ways, including quality, style, convenience, location, and brand name. Some people prefer Coke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch (at least temporarily).

How is product differentiation accomplished? Sometimes, it’s simply geographical; you probably buy gasoline at the station closest to your home regardless of the brand. At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from another—and better than it. Regardless of customer loyalty to a product, however, if its price goes too high, the seller will lose business to a competitor. Under monopolistic competition, therefore, companies have only limited control over price.

Oligopoly means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low.

Companies in oligopolistic industries include such large-scale enterprises as automobile companies and airlines. As large firms supplying a sizable portion of a market, these companies have some control over the prices they charge. But there’s a catch: because products are fairly similar, when one company lowers prices, others are often forced to follow suit to remain competitive. You see this practice all the time in the airline industry: When American Airlines announces a fare decrease, Continental, United Airlines, and others do likewise. When one automaker offers a special deal, its competitors usually come up with similar promotions.

In terms of the number of sellers and degree of competition, monopolies lie at the opposite end of the spectrum from perfect competition. In perfect competition, there are many small companies, none of which can control prices; they simply accept the market price determined by supply and demand. In a monopoly , however, there’s only one seller in the market. The market could be a geographical area, such as a city or a regional area, and doesn’t necessarily have to be an entire country.

There are few monopolies in the United States because the government limits them. Most fall into one of two categories: natural and legal . Natural monopolies include public utilities, such as electricity and gas suppliers. Such enterprises require huge investments, and it would be inefficient to duplicate the products that they provide. They inhibit competition, but they’re legal because they’re important to society. In exchange for the right to conduct business without competition, they’re regulated. For instance, they can’t charge whatever prices they want, but they must adhere to government-controlled prices. As a rule, they’re required to serve all customers, even if doing so isn’t cost efficient.

A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years (United States Patent and Trademark Office, 2006). During this period, other companies can’t use the invented product or process without permission from the patent holder. Patents allow companies a certain period to recover the heavy costs of researching and developing products and technologies. A classic example of a company that enjoyed a patent-based legal monopoly is Polaroid, which for years held exclusive ownership of instant-film technology (Bellis, 2006). Polaroid priced the product high enough to recoup, over time, the high cost of bringing it to market. Without competition, in other words, it enjoyed a monopolistic position in regard to pricing.

Key Takeaways

• There are four types of competition in a free market system: perfect competition, monopolistic competition, oligopoly, and monopoly.
• Under monopolistic competition , many sellers offer differentiated products—products that differ slightly but serve similar purposes. By making consumers aware of product differences, sellers exert some control over price.
• In an oligopoly , a few sellers supply a sizable portion of products in the market. They exert some control over price, but because their products are similar, when one company lowers prices, the others follow.
• In a monopoly , there is only one seller in the market. The market could be a geographical area, such as a city or a regional area, and does not necessarily have to be an entire country. The single seller is able to control prices.
• Most monopolies fall into one of two categories: natural and legal .
• Natural monopolies include public utilities, such as electricity and gas suppliers. They inhibit competition, but they’re legal because they’re important to society.
• A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process for a limited time, generally twenty years.

Identify the four types of competition, explain the differences among them, and provide two examples of each. (Use examples different from those given in the text.)

Bellis, M., “Inventors-Edwin Land-Polaroid Photography-Instant Photography/Patents,” April 15, 2006, http://inventors.about.com/library/inventors/blpolaroid.htm (accessed January 21, 2012).

United States Patent and Trademark Office, General Information Concerning Patents , April 15, 2006, http://www.uspto.gov/web/offices/pac/doc/general/index.html#laws (accessed January 21, 2012).

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Monopolistic Market vs. Perfect Competition: An Overview

A monopolistic market and a perfectly competitive market represent two market structures that have several key distinctions in terms of market share , price control, and barriers to entry . In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services, and that firm has total market control. A perfectly competitive market is composed of many firms, where no one firm has market control.

Monopolistic and perfectly competitive markets affect supply, demand, and prices in different ways. In the real world, no market is purely monopolistic or perfectly competitive. Every real-world market combines elements of both of these market types.

Key Takeaways:

• In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services.
• A perfectly competitive market is composed of many firms, where no one firm has market control.
• In the real world, no market is purely monopolistic or perfectly competitive.
• In between a monopolistic market and perfect competition lies monopolistic competition or imperfect competition.
• In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control.

In a monopolistic market , firms are price makers because they control the prices of goods and services. In this type of market, prices are generally high for goods and services because firms have total control of the market. Firms have total market share, which creates difficult entry and exit points. Since barriers to entry in a monopolistic market are high, firms that manage to enter the market are still often dominated by one bigger firm.

A monopolistic market generally involves a single seller, and buyers do not have a choice concerning where to purchase their goods or services.

Purely monopolistic markets are extremely rare and perhaps even impossible in the absence of absolute barriers to entry, such as a ban on competition or sole possession of all natural resources. Sometimes, however, a government will establish a monopolistic market to ensure national interests or maintain critical infrastructure. For instance, many utilities such as power companies or water authorities may be granted a monopoly status for a certain area.

In the absence of such permission, governments often have laws and enforcement mechanisms to promote competition by preventing or breaking up monopolies. This is because a monopolistic market can often become inefficient, charge customers higher prices than would otherwise be available, and can prevent newcomers from entering the market. Thus, there are various antitrust regulations that keep monopolies at bay.

A monopoly is when there is only one seller in the market. A monopsony , on the other hand, is when there is only one buyer in a market.

In a market that experiences perfect competition , prices are dictated by supply and demand. Firms in a perfectly competitive market are all price takers because no one firm has enough market control. Unlike a monopolistic market, firms in a perfectly competitive market have a small market share. Barriers to entry are relatively low, and firms can enter and exit the market easily. Contrary to a monopolistic market, a perfectly competitive market has many buyers and sellers, and consumers can choose where they buy their goods and services.

Companies earn just enough profit to stay in business and no more. If they were to earn excess profits, other companies would enter the market and drive profits down. As mentioned earlier, perfect competition is a theoretical construct. As such, it is difficult to find real-life examples of perfect competition.

Pricing in perfect competition is based on supply and demand while pricing in monopolistic competition is set by the seller.

According to economic theory, when there is perfect competition, the prices of goods will approach their marginal cost of production , or the cost of producing one additional unit. This is because any firm that tries to sell at a higher price in an attempt to earn excess profits will be undercut by a competitor seeking to grab market share. This also promotes a sort of technological arms race in order to reduce the costs of production so that competitors can undercut one another and still earn a profit. Over time, however, as technology diffuses through to all producers, the effect is to lower consumer prices even further, as well as to erode profits for producers.

In between a monopolistic market and perfectly competitive market lies monopolistic competition . In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control. In contrast, whereas a monopolist in a monopolistic market has total control of the market, monopolistic competition offers very few barriers to entry. All firms are able to enter into a market if they feel the profits are attractive enough. This makes monopolistic competition similar to perfect competition.

However, in a monopolist competitive market, there is product differentiation . Products in monopolistic competition are close substitutes; the products have distinct features, such as branding or quality. This is unlike both a monopolistic market, where there are no substitutes for products, and perfect competition, where the products are identical.

In reality, all markets will display some form of imperfect competition. That is because there will always be some barriers to entry, some information asymmetries , larger and smaller competitors, and small differences in product differentiation .

What Are the Differences Between Monopolistic Markets and Perfect Competition?

In a monopolistic market, there is only one seller or producer of a good. Because there is no competition, this seller can charge any price they want subject to buyers' demand and establish barriers to entry to keep new companies out. On the other hand, perfectly competitive markets have several firms each competing with one another to sell their goods to buyers. In this case, prices are kept low through competition, and barriers to entry are low.

What Is the Difference Between a Monopoly and a Monopolistic Market?

A monopoly refers to a single producer or seller of a good or service. A monopolistic market is the scope of that monopoly. For instance, XYZ Co. may be a monopoly producer of widgets. It can control a monopolistic market over all the widgets sold in the United States whereby nobody else sells widgets.

What Are the Main Characteristics of Perfect Competition?

In a perfectly competitive market: All firms sell an identical product; all firms are  price-takers ; all firms have a relatively small market share; buyers know the nature of the product being sold and the prices charged by each firm; and the industry is characterized by freedom of entry and exit. In reality, some or all of these features are not present or are influenced in some way, leading to imperfect competition .

Monopolistic markets and perfectly competitive markets are two different types of market structures. Monopolistic markets are characterized by the domination of one firm, which can dictate price, supply, barriers to entry, and other terms. In contrast, perfectly competitive markets are composed of many firms, where no single firm has total control.

In the real world, most markets are neither monopolistic nor perfectly competitive. Rather, they exist on the spectrum between these two types.

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Monopoly, Oligopoly, and Monopolistic Competition, Essay Example

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A monopoly is a market structure in which there is only one seller of a particular good or service (Stigler). Oligopoly is a market structure in which the market for a particular good or service is dominated by a small number of sellers(Investopedia). Thus, the main difference between monopoly and oligopoly is that in monopoly a single seller controls the whole market for a particular good or service while in oligopoly there are few major players who control a major portion of the market together. Because firms in Oligopoly do have competition as opposed to monopoly, they don’t have the same pricing power that a monopoly firms has.

My family lived for a while in a small city named Farmersville in Texas where outdoor activities such as hunting and fishing were quite popular. Thus, my family also took up fishing as a hobby. During that time there was only one store in the city called Peter Fishing Mart (PFM) where you could buy fishing supplies. It was a time when the concept of internet shopping still didn’t exist, thus, the fishing enthusiasts didn’t have any other option to buy their fishing supplies except PFM. In other words, PFM operated as a monopoly. Because PFM operated as a monopoly, its prices were a little higher than what you could get in big cities like Dallas and Houston. PFM charged higher prices because it didn’t have any competition from any other store that could have put pricing pressure on it. PFM also knew that there is no substitute to the fishing supplies in Farmersville. In addition, the next closest fishing store was fifty miles outside Farmersville and thus, would not have been economical option for the customers due to the fuel costs. PFM rarely held sales events because of lack of competition and moreover, it knew that the demand for its products is relatively inelastic due to the popularity of fishing in Farmersville.

PFM was a price maker because it had control over its prices. It knew that even if it raised its prices a bit, customers would still come due to lack of options in the city. One could say that PFM had the entire fishing supplies market in Farmersville to itself because it was the only business that sold fishing supplies. PFM’s monopoly was also due to market size because even though Farmersville’s population was big enough to support a single business, it might not have been able to support two businesses. Thus, there was no incentive for anyone to get in competition with PFM since that would have meant both businesses barely covering their costs. In addition, PFM had been in business for generations and thus, had developed a loyal customer base which would also have acted as an entry barrier to anyone thinking of opening a fishing supplies store.

I have a close childhood friend who is studying at the University of Oklahoma in Norman, Oklahoma. Norman is a college town where most of the people enthusiastically follow the Oklahoma Sooners’ football games. Oklahoma Sooners are one of the top-ranked college football teams in the nation so my friend once invited me to attend a home football game. I stayed in Norman for few days and noticed that the grocery retail sector in Norman is structured as an oligopoly where the major players are Wal-Mart, Target, Homeland Stores, and Albertsons. When I visited Wal-Mart and Target in Norman, I found their prices to be quite similar to each other. This pricing behavior reflected Oligopoly market structure as the major players closely watch each other’s actions and follow quite similar pricing strategies. My friend also told me that almost all of the people in Norman go to these three, four stores for grocery shopping because they offer the best prices which is also reflective on an Oligopoly market structure. The two biggest players in Norman are Wal-Mart and Target and when you compare their offerings, you do find some different products at each store but on the most part their product offerings are quite similar. Even when they carry different brands or labels in some categories, the products are quite close substitutes to each other. When I visited a Target store in New York few months later, I noticed that the price differences between the same items at Target stores in New York and Oklahoma was much more than the price differences between Target and Wal-Mart stores in Norman. This shows that Target and Wal-Mart closely watch each other’s actions in Norman which may explain quite similar prices. In addition, there are barriers to entry in Norman’s grocery retailer market such as high start-up costs and customer loyalty which has already been secured by the few major grocery retailers.

The third marketing structure is monopolistic competition which is a combination of perfect competition and monopoly, just as the name indicates. There are a large number of sellers like perfect competition but they do have some pricing power due to branding and product differentiation. The products may be close substitutes but still have elements that differentiate themselves from the competition such as quality and consumers’ perceptions. One great example would be pizza shops in New York which along with Chicago has a reputation for one of the best pizza shops in the country. You can find pizza shops almost everywhere in New York and though most are priced in line with the competitors but some pizza shops have better reputation than others. This is why more popular pizza outlets such as Artichoke Basille’s Pizza, Di Fara Pizza, and Lombardi’s are able to charge little higher prices than the competition due to loyal customer base and reputation. But despite hundred’s of pizza outlets, it is relatively easy to setup a Pizza shop in New York which is a characteristic of a monopolistic market competition as there are low barriers to entry.

Investopedia. Oligopoly. 22 October 2011 <http://www.investopedia.com/terms/o/oligopoly.asp#axzz1WNm1d1ne>.

Stigler, George J. Monopoly. 22 October 2011 <http://www.econlib.org/library/Enc/Monopoly.html>.

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Monopolistic Competition Notes & Questions (A-Level, IB)

Relevant Exam Boards: A-Level (Edexcel, OCR, AQA, Eduqas, WJEC), IB, IAL, CIE Edexcel Economics Notes Directory | AQA Economics Notes Directory | IB Economics Notes Directory

Monopolistic Competition Definition: Monopolistic Competition is defined as a market structure with a large number of firms, low barriers to entry and differentiated products.

Monopolistic Competition Examples & Explanation: Local restaurants, pubs, hairdressers, and even tutoring businesses tend to fall into the monopolistic competition market structure. These businesses are relatively easy to set-up, meaning they have low barriers to entry. They sell slightly different products to one another (e.g. Irish bar vs Sports bar; Chinese vs Indian takeaway), which gives them some market power to set their own prices. The more differentiated/unique their product is, the less substitutes there are for what they are offering, and the more control they have over prices to maximise profits ( imagine takeaway sushi vs Michelin star sushi ). Despite they are likely to make supernormal profits in the short-run, more firms will enter into the market in the long-run and compete those profits away by offering more substitute products. This will be due to the ease of entry and high contestability of the market. Monopolistic competition is considered less efficient than perfect competition but also not as inefficient as a monopoly .

Monopolistic Competition Economics Notes with Diagrams

Monopolistic competition video explanation – econplusdal.

The left video gives an overview into monopolistic competition, the right looks at what happens in the market structure in the long-run.

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Monopolistic Competition And Monopoly Essay

Type of paper: Essay

Topic: Products , Competition , Customers , Monopoly , Market , Company , Marketing , Business

Words: 1800

Published: 11/22/2019

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Monopolistic Competition and Monopoly

Introduction

In economics there are four different kinds of market structures. These are monopoly, monopolistic competition, oligopoly and perfect competition. The potato chip company was previously operating in a monopolistic competitive market. There are certain characteristics of such a market. There are many buyers and sellers of commodities in the market therefore the firm is a price taker. It cannot control the price of a product although it has a level of influence over the price. The consumers assume that there are non-price differences in the products of the different businesses. The business tends to differentiate their products in order to attract and retain customers. There are very few barriers to businesses in their efforts to enter and exit this market. As long as there is profit to be earned in that market, the businesses will enter the market in order to earn profits. The company through product differentiation is able to raise its products prices as the customers are loyal to its products. In the market the consumers have all the information on the products in the market and their non-price differences A monopoly is a market structure whereby there is a single seller of a certain commodity in the market. The firm is therefore able to sell its products at a certain price that it desires. A monopoly is a company where the market demand is the same demand it faces for its products. Secondly, a price increase in its goods does not cause a decrease in the demand of its goods. Other firms are not able to enter the industry due to certain high barriers of entry such as the size of capital required or market regulation by the government.

The company is able to influence the prices of the goods. It is able to charge any price however it is limited to the demand of the market. The firm is the industry itself. The company engages in price discrimination. It charges lower prices for its products in highly elastic markets and charges high prices in the markets with less elasticity. Price discrimination occurs in a market that has fulfils certain conditions. The company could have a lot of market power, the consumer demands for goods and services differ or the company has the ability to prevent or arbitrage profit. A monopoly enjoys the three conditions necessary to effect discrimination. There are various advantages and disadvantages of operating as a monopoly to different stakeholders. However the benefits of a monopoly are marginal compared to the weight of the disadvantages. This paper will discuss the disadvantages and advantages of a monopoly market structure and show that it is not the best system to have. It is only beneficial to the firm since it earns supernormal profits.

Benefits of a Monopoly to Different Stakeholders.

There are several advantages that will accrue by the existence of the Wonks monopoly in the market. A monopoly produces goods in large scale in order to earn high profits. They are no other competitors in the market therefore the goods will definitely be sold. Due to the mass production, a monopoly can enjoy economies of scale. It can therefore charge averagely lesser prices of goods that companies in a competitive market would not be able to charge. This leads to an increase in the consumer welfare. Monopolies ensure there is no duplication of production of goods and services. This helps in helping to avoid wastage of resources. In a monopolistic competitive market, the business spends a lot of resources in producing differentiated products and engaging in marketing efforts such as branding and advertising. These are costs that the monopoly does not incur. There is a concern that this kind of market structure causes the consumers to spend more on a product due to advertising or a brand name and not because of the good or superior qualities of the product. The monopolies are also able to apply price discrimination whereby the people in the society who are not so financially well are able to purchase the products at a cheaper price. However, Wonks will be forced to compete in the international markets. It will have to create a competitive advantage in the global market place through research, development and innovative technology. The supernormal profits that monopolies make in the local market are used by the company for research and development.

Price and Output Determination in Monopolistic Competition and Monopoly structures

In a monopolistic competitive market, the firm faces competition from other firms. The company has to differentiate its products in order to gain some price control in the market. The company in the short run behaves like a monopoly however in the long run it will be operating in a perfectly competitive market. In the short run, it is the only company producing its unique product. The consumer cannot find perfect substitutes for the firm’s products. In the long run however, more firms enter the market and the company’s product no longer enjoys a differentiated advantage.

The demand curve for the monopolistic curve becomes flatter and flatter as the firm’s demand decreases. The prices will also go lower in the market. In the long run, the monopolistic competitive firm will still sell their products at the point where MC=MR, however the demand curve of the firm has become flatter, causing the average revenue and average costs to dip lower (Spence, 1976). As more firms enter the market, the company will no longer be able to set their product prices higher than the average costs. The company earns no economic profit. At this point there will be no entry in this market. Shortly firms will start leaving this industry to start looking for profits. This will be the long-term equilibrium of the firm. The prices will go down benefiting the customers. The output of the firm will also be reduced. In a monopoly however, both in the short and long-run, the company will charge higher prices for lower output. The differences in the output in the two markets will be that the products in the monopolistic market will be differentiated unlike the products in the monopoly. The monopoly will not have the need to differentiate its products to attract customers as it does not face any competition. In a monopoly, there is the tendency for the company to restrict output so that it can influence the prices of the goods. The lower output will definitely push the prices up. In the short run, both the monopolistic competitive and the monopoly firm are inefficient, producing less output while charging high prices. as shown below.

In a perfect market, the price of the product will be at the point where market demand is equal to market supply. This shows that there is allocative efficiency in the market. However for a monopoly, the profit maximizing point is where the company will produce quantity Qm at a price of Pm. This shows that the consumers will be paying a higher price for lesser goods in comparison to the market conditions in a perfectly competitive market. The firm is selling its products at a price higher than the average costs leading to inefficiency.

Wonk’s Beneficial Market Structure

The Wonk’s company should operate as a monopoly. In this market structure, the company makes supernormal profits both in the long run and in the short run as its product prices are above the average costs. The company also does not incur high costs in differentiating and marketing its products. It invests more in research and development. The monopoly market structure is not in the long run beneficial to the consumers. The monopoly has inefficiencies where it charges higher prices for products yet it produces less output in the market (Skeath, Velenchik, Nichols & Case, 1992). These actions lead to a deadweight welfare loss for the consumers in the market. There are also costs of monopolies that impact the economy. The monopoly will use part of its supernormal profits in rent-seeking behavior. It will aim to influence the government administration to allow it to remain a monopoly by creating or maintaining the existing barriers of entry (Cowling & Mueller, 1978).. Price discrimination is not also beneficial to all the consumers. There are consumers who will end up paying higher prices for a product than if a single product was being produced in that market. Price discrimination in these markets tends to lower consumer welfare (Cowan, 2007). The government usually steps in to control monopolies by introducing price regulation. This is to limit the monopolies from exploiting the consumers leading to loss in social welfare. The consumers will benefit more when the company operates in a monopolistic competitive environment. The firm will be forced to be innovative in differentiating its products to satisfy customer needs and wants. There will be a variety of goods for the consumers to choose from. The customer therefore gains from the constant improvements in the products. The monopoly firm has no incentive to improve in its product or production processes as there is no competition in the market place. In the short run, both the monopolistic competitive and monopoly firms are inefficient charging higher prices for their products. However in the long run, the consumer benefits in the monopolistic competitive environment since more firms will enter the market and the market inefficiencies will be eliminated.

The aim of any company is to make a profit. The company should therefore continue operating in the monopoly as it will get supernormal profits. However the monopoly causes loss in consumer welfare. It operates in allocative inefficiency of resources. It produces less goods and charges high prices. It does not really invest in innovation and a huge chunk of the supernormal profits it earns is spent in pressuring the government to let it continue as a monopoly.

References:

Cowan, S. (2007). The Welfare Effects of Third-Degree Price Discrimination with Nonlinear Demand Functions. The RAND Journal of Economics, 38(2), 419-428 Cowling, K & Mueller, D. (1978). The Social Costs of Monopoly Power. The Economic Journal, 88(352), 727-748 Skeath, S., Velenchik, A., Nichols, L. & Case, K. (1992). Consistent Comparisons between Monopoly and Perfect Competition. The Journal of Economic Education, 23(3), 255-261 Spence, M. (1976). Product differentiation and Welfare. The American Economic Review, 66(2), 407-414.

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The Concept of Monopolistic Competition Essay

Monopolistic competition is a situation in the market where there are multiple sellers with similar but differentiated products. These products are substitutes as they perform similar functions with the point of difference manifested in terms of branding, packaging, or any other form of differentiation capable of attracting consumers.

This type of competition in the market is also characterized by easier market entry and exit for operators. The existing operators have cut their own niches and do not resort to restrict new market entries as they in no way present challenges to their market shares. The operators are also free to set the prices of their products irrespective of the competitors’ moves or reaction as the competition is based on non-price related factors (Deneckere and Michael, 1992).

Monopolistic competition is best represented by the motor vehicle market. In a situation where there are many manufacturer selling cars, they will each have their own market segments depending on the nature of the differentiating factors they have incorporated into their products. The basic function performed by these cars is to move the users from one point to another. However, there are users who will prefer either fast, comfortable, four wheel drive, or even different colors for their cars. The manufacturers will differentiate the cars according to these factors in order to gain competitive edges to attract particular customers.

In figure one above; the operator is initially experiencing high demand which is represented by the average revenue curve. As more competitors gain market entry, they will offer substitutes to the operator’s goods. Assuming the operator’s product is not differentiated further the new demand will now be at the marginal revenue curve showing a decrease in demand due to loss of customers to competitors.

External costs and benefits

These are the third party effects that arise in the course of production and consumption of output and which are not accounted for. This is simply because they are felt by individuals outside the market in terms of the spill over effects. External costs are those that are incurred by parties outside the market for which they are not compensated for. On the other hand external benefits are those that are enjoyed by parties outside market and for which they do not pay for (Murty and Robert, 2005).

External costs can take the form of pollution by an industry caused by emission of toxic gases into the atmosphere. When this happens, there are various consequences that are felt by third parties. The toxic gases lead to acidic rain which corrodes iron roofs as well as destroying forests. Furthermore they also harm the ozone layer which leads to exposure to direct sun rays that can result in skin cancer. These costs are incurred by parties that did not participate in the initial activity that caused them (Pannell, 2008).

On the other hand, external benefits can best be explained by the effects that research and development programs have on people’s lives. Normally very few people engage in or contribute to research programs. In the event that these programs yield quality innovations, the effects will be felt by the entire market should the researchers chose to make them public or decide to capitalize on them. A research program that introduces an energy saving electrical appliance presents benefits to third parties that were not involved in the program.

In the above diagram, the price of the commodity in the market is represented by P1 and quantity consumed is Q1. at this level, the market mechanism fails to recognize the extra costs that are not charged to consumers but passed to society in terms of pollution. The optimal price should be at P2 to acknowledge these costs to society. At this level the quantity consumed ought to be Q2 which is less than what is consumed. The shaded region represents the total loss to society.

A mixed economic system

Mixed economies also known as dual economies are those that have blended the functioning of private enterprise with control by the government. The private entrepreneurs are free to engage in activities in the market at their own discretion. Their actions are however controlled, and not coerced, by the government to ensure the efficient functioning of the system in the form of regulations and taxes (Mixed economy a failure, 2011). In such economies the government might also have the monopoly in some areas that are essential for the public good but not profitable for private entrepreneurs such as conventional education, health care, and postal services.

Like many other developed economies, the US is a perfect example of a mixed economy system. There is the spirit of free enterprise with many multinationals such as Apple Inc, the Coca Cola Company, PepsiCo, and Intel based in the country. The production capacities are mainly owned by the private sector individuals. Furthermore these individuals’ activities are governed by the government through its various agencies that are concerned with upholding regulations and collecting taxes.

In fig. 3 the government is represented by the central circle. This shows its regulatory efforts to the other activities such as infrastructure, transport, health, education, and house market which are undertaken by the private entrepreneurs. The government oversees all these activities are well undertaken to ensure that they are functioning well.

Price elasticity of demand and supply

Price elasticity of demand and supply can generally be defined as the market reactions to the changes in commodity prices. It is categorized mainly into two price elasticity of demand and price elasticity of supply.

Price elasticity of demand is the buyers’ reaction to changes in the price of commodities. Generally price of commodities and demand are inversely related except for luxuries and necessities. When the percentage changes in demand are larger than the changes in price the demand is elastic (Graves and Robert, 2006). When they are less that the percentage change in price, the demand is inelastic. The nature of the buyers’ reactions or changes in demand will mainly depend on the type of good in question. Luxurious items have inelastic demand simply because their consumers have high disposable income which can accommodate the changes. Necessities also have inelastic demand as they are crucial in life and consumers cannot do without them, changes in prices cannot deter their consumption. On the other hand normal goods have elastic demand as they are not important for survival and consumers can do without them if not seek substitutes.

The demand for normal goods such as televisions can be used to show this relationship. When the prices of televisions decrease consumers will increase their levels of consumption while on the other hand they will decrease their consumption when the prices increase. The demand for food which is a necessity will remain unchanged when the prices change which signals their inelasticity.

Price elasticity of supply shows the reaction of output to the changes in prices of commodities (Tom, n.d.). The level of output and price of commodities are directly related as suppliers often increase their output level in the market when the commodity prices are high. Therefore price elasticity of supply is elastic as the price changes lead to changes in output level. When the prices of cars increase in the market, motor companies such as Toyota and General Motors will increase their supply in the market in order to satisfy this high level of demand as well as make higher profits. On the other hand when the prices decrease, they will reduce their supplies into the market as the demand can be satisfied by the available if not less supply.

In fig. 4, D1 represents the P1Q1 which are the price and quantity respectively at the initial price level. When the price drops to P2 the quantity demanded on the resultant demand curve increases to Q2. At the initial demand curve the quantity consumed could have been Q3 which represents equal percentage change in demanded. But at Q2 the change in price has caused less change in quantity which shows inelastic demand for the product.

Opportunity cost

Opportunity cost in economics refers to the value of the foregone alternative (Magni, 2009). It is not regarded in the financial statement but is used in the decision making process. In a majority of cases relating to choice, there are often numerous alternatives that can be selected. In the event that they are mutually exclusive one has to settle on only one of them. By selecting a particular alternative, one has to let go of the others that are available. Therefore a rationale decision maker is one who will reduce the value of opportunity costs when settling on an alternative.

This can be shown in a farmer who has one acre of land and has two crops in mind; wheat and corn. The one acre of land can produce 500 sacks of wheat or 700 sacks of corn if he decided to grow the latter. Assuming that the price of a sack of wheat and that of corn is same, the farmer will rely on opportunity cost to make a decision. His profits will be much higher when he decides to grow corn as opposed to wheat. A decision to grow corn will have a low opportunity cost which is the value of wheat whereas a decision to grow wheat will have a high opportunity cost which is the price of corn.

Fig. 5 shows the relationship between two commodities, food and clothing. Their consumption is mutually inclusive which implies a trade off between the two products. When the consumer settles for point B, the food is 80 units whereas clothing is 120 units. In the event that the consumer could have instead opted to choose point C he would have consumed 115 units of food and 95 units of clothing. The difference between these two points is 35 units for and 25 units of clothing. This shows a 7:5 trade off respectively. The opportunity cost for increasing food consumption is therefore 7/5 whereas that of clothing is 5/7. It is therefore more economical to consume more clothing than food as the opportunity cost is less.

Bibliography

Deneckere, Raymond, and Michael Rothschild. “Monopolistic Competition and Preference Diversity.” Review of Economic Studies 59.199 (1992): 361. Business Source Complete . EBSCO.

Graves, Philip E., and Robert L. Sexton. “Demand and Supply Curves: Rotations versus Shifts.” Atlantic Economic Journal 34.3 (2006): 361-364. Business Source Complete . EBSCO.

Magni, Carlo Alberto. “Opportunity Cost, Excess Profit, and Counterfactual Conditionals.” Frontiers in Finance & Economics 6.1 (2009): 118-154. Business Source Complete . EBSCO.

“Mixed economy a failure.” Gale: Opposing Viewpoints in Context . EBSCO.

Murty, Sushama, and R. Robert Russell. “Externality Policy Reform: A General Equilibrium Analysis.” Journal of Public Economic Theory 7.1 (2005): 117- 150. EconLit with Full Text . EBSCO.

Pannell, David J. “Public Benefits, Private Benefits, and Policy Mechanism Choice for Land-Use Change for Environmental Benefits.” Land Economics 84.2 (2008): 225-240. EconLit with Full Text . EBSCO.

Tom, Finkbiner. “Supply, Demand and Price Elasticity.” Journal of Commerce (n.d.): ProQuest: ABI/INFORM Complete (XML Gateway) . EBSCO.

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Monopolistic Competition

Last updated 2 Jul 2018

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Monopolistic competition is a form of imperfect competition and can be found in many real world markets ranging from clusters of sandwich bars, other fast food shops and coffee stores in a busy town centre to pizza delivery businesses in a city or hairdressers in a local area.

• Monopolistic competition
• Non-Price Competition
• Product Differentiation
• Contestable Markets
• Market structure

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Similarities and Difference between Monopoly and Monopolistic Competition: Essay Example

What do monopoly and monopolistic competition have in common? A similarity between monopoly and monopolistic competition is that in both market structures, firms decide the price level that customers would use to purchase goods and services in the market, but there’s also a significant difference between monopoly and monopolistic competition.

Why is it important? Is there any similarity with perfect competition? Keep reading to learn more!

Introduction

Ideally, the market place should be a space where buyers and sellers freely exchange goods and services. However, for most economies, this is not the case because players have different knowledge, expertise, and access to markets in ways that others do not (Dwivedi 2002). Consequently, it is common to find people or companies competing for different raw materials and access to markets.

Similarly, it is common to find customers haggling sellers for low prices and the latter selling their products at different prices, albeit they may be selling the same goods. These activities often lead to the creation of a perfect, or imperfect, competitive environment for buyers and sellers. Economists use different categories to outline market conditions or market structures that define these situations (Mukherjee, 2002).

Some of the most common categorizations for market differentiation include geographical area, time, and legal framework (Dwivedi 2002). Researchers have used these metrics to categorize markets into different types of perfect or imperfect trading structures (Lipsey & Harbury 1992). Two of the most common ones are a monopoly and monopolistic competition.

Many people have had trouble understanding a monopoly and a monopolistic competition because they sound the same (Rittenberg 2008). This paper strives to highlight the differences between the two types of markets by pointing out the main areas of commonality and differences.

By doing so, we will have a better grasp of the two main types of imperfect markets that exist in many parts of the world – monopolies and monopolistic competition. In the first section of this report, we highlight the similarities between the two types of imperfect market structures, and in the second section of this paper, we highlight the differences between the two. The last section of this paper provides a summary of our findings.

Definition of Monopoly

A monopoly differs from other types of market structures in the sense that there is only one producer in the market (Boyes & Melvin 2012). This situation gives immense power to the firm (monopoly) because it has no competition whatsoever.

More importantly, this producer exercises immense power in determining the price of goods and services in the market, leaving consumers at its mercy. This type of market condition ordinarily has high barriers to entry, thereby locking other players out of it and making those who are daring enough to venture in the same market pay a huge price for their bravery (Mukherjee 2002).

Based on the immense power enjoyed by firms operating in a monopoly market, economists argue that monopolies often have the highest prices in the market because consumers do not have other options to buy their goods or services (Lipsey & Harbury 1992). Monopolists also produce fewer products than other types of firms in other types of markets.

Several reasons explain why monopolies occur. Some of the most common reasons include natural monopolies, huge capital costs associated with market entry, patents associated with certain types of businesses, safely guarded trade secrets, poor access to exclusive or unique assets, location advantages, regulation, and collusion by competitors (Hardy1978).

Economic liberalization policies that have spread throughout most economies have seen the decline of monopolies (Dwivedi 2002). However, a few of them exist. For example, Comcast Corporation in the United States is an example of a monopoly in the present-day market (Rittenberg 2008).

Although some observers dispute this fact, few people could argue with the fact that it enjoys significant monopoly power in some American states and cities, such as Boston, Chicago, and Philadelphia. The company mostly focuses on providing internet, phone, and cable television services. Some people have criticized it for its high prices, but its customers have no alternatives.

Therefore, they have had to remain loyal to the company; otherwise, they would have to forgo the services offered by the company. In other countries, outside the US, monopolies often exist with the support of the government. Furthermore, they are mostly in the utility sector (Suarez-Villa, 2014).

Definition of Monopolistic Competition

Monopolistic competition is often characterized by the presence of many producers in the market (Economics Online Ltd., 2016). The availability of many firms also means that there is product differentiation in the market because each firm tries to outwit the other with unique marketing strategies to encourage customers to buy their goods and leave those of the competitors (Kingston 2012).

Most of the products available in monopolistic competition are close substitutes (Dwivedi 2002). In other words, these types of markets have groups of similar products. Their demand curves are also curved, and firms often refrain from reacting to the market actions of a rival firm because there are multiple players in the market (Cowen & Tabarrok 2012).

Lastly, these types of markets allow for easy entry and exit for firms that are willing to operate in them (Economics Online Ltd. 2016). Most firms that operate in this type of industry are usually similar or symmetric in their operations because they have the same motives for doing business (Kingston 2012). Lastly, it is important to note that marketing is often a key success factor for companies that operate in this market segment.

The US fast-food restaurant industry is an example of a monopolistic competition (Cowen & Tabarrok 2012). A few giant food companies, such as Mc Donald’s and Burger King, dominate the market. Each of these restaurant chains produces differentiated products, such as McDonald’s “Big Mac” and “Happy Meal” (Longley 2013). Burger King also has its unique products, such as the “Frame Grilled Chicken Burger,” and “Chicken Nuggets.”

Although the two restaurant chains may sell the same type of foods, they differentiate themselves based on their pricing and promotion strategies. This is a key characteristic of firms operating in a monopolistic competition.

Similarities between Monopoly and Monopolistic Competition

A large number of buyers present in the market.

Both monopolies and monopolistic competitions have a large number of buyers in the market (Mankiw 2011). As mentioned in earlier sections of this paper, the options available to these buyers is the point of difference between these two types of buyers in the market because, in monopolies, buyers do not have many options in the market, while in monopolistic markets, they have relatively more options to purchase goods and services (at least compared to a monopoly). Nonetheless, in both types of markets, there are large numbers of buyers.

Firms decide Prices and Output

In both monopolies and monopolistic competitions, firms decide the price level that customers would use to purchase goods and services in the market. They also decide the level of output of goods and services in the market (Cowen & Tabarrok 2012).

Short-run Equilibrium

Both monopolies and monopolistic markets have the same types of short-term equilibrium curves (Rittenberg 2008). In other words, firms that operate on both types of markets attain equilibrium of their marginal revenues and marginal costs at the same point of output.

The price points set by both companies also depend on the availability of demand for their products and services (Cowen & Tabarrok 2012). However, as highlighted in other sections of this paper, the two types of markets have different long-term outcomes. A graphical representation of this fact will appear in subsequent sections of this paper.

Difference between Monopoly and Monopolistic Competition

Nature of product.

A market monopoly normally avails one homogeneous product in the market (Suarez-Villa 2014). However, a monopolistic market subscribes to the principles of market differentiation, where players avail of different types of products in the market (market differentiation) (FK Publications 2015, p. 359-360).

Different Average and Marginal Revenue Curves

We can also use differences in average revenue curves and marginal revenue curves to explain the differences between a monopoly and a monopolistic market. A monopoly market often has two separate curves for both the average revenue and the marginal revenues of a company. The average revenue denoted by AR represents the price points of different units sold in a monopoly.

Comparatively, the MR index outlines the marginal income reported by firms selling the same units in the same type of market. The downward sloping nature of the units points out that for the firm to sell more units in the monopoly market, it has to lower its price point. The diagram below highlights this type of market dynamic.

The diagram also below shows a comparative analysis of the revenue curves under monopolistic competition.

In the above diagram, we find that the average revenue and marginal revenue curves under the monopolistic competition is still the same as it is in a monopoly.

Although they both slope downwards from left to right, they are more flexible than the ones in a monopoly. This flexibility could be evidenced by the fact that firms operating in the monopolistic competition have a greater output point than those operating in a monopoly (FK Publications 2015).

Implications Regarding Decisions

According to Musgrave and Kacapyr (2009), firms that operate in markets characterized by monopolistic competition, or a monopoly, can adjust their outputs or price points to attract new customers, but not both.

One significant point of departure for firms that operate in the two types of markets is the costs associated with selling because firms in monopolistic competition have to spend a lot of money on advertising costs, while those with a monopoly have to spend little, or no, money on the same because their customers do not have other purchasing options.

Comparison Regarding Profit

When understanding the difference between a monopoly and a monopolistic competition, it is important to appreciate the fact that different firms that operate under any of the above-mentioned market structures may earn normal profits, supernormal profits, or even suffer losses (Serrano & Feldman 2012).

In the short run, firms operating in monopolistic competition may earn supernormal profits or suffer losses, but in the long-run, they are bound to earn normal profits only (Musgrave & Kacapyr (2009).

However, firms that operate in a monopoly are privileged in the sense that they could earn supernormal profits in the long-run. Therefore, in the short-run, both sets of firms could share many similarities, but in the end, these similarities fade away because of market conditions.

This paper has highlighted the points of differences and similarities between monopolistic competition and a monopoly. First, we started by defining the two concepts to have a proper grasp of the different types of market structures defining both markets.

From this review, we found that the main difference between the two types of markets was the number of firms in each market. Monopolies only have one firm in the market, while a monopolistic competition has multiple firms.

Product differentiation also emerged as a key point of difference between monopolies and monopolistic competition because the latter has this attribute, while the former does not. Both market structures share a few similarities in the sense that firms operating in these markets dictate prices and output levels for goods and services and have a large pool of customers.

Of striking significance in our analysis is the realization that the term “monopolistic competition” used to describe this type of market structure comes from the fact that a monopolistic competition shares both the attributes of a perfectly competitive market and a monopoly.

Using this analogy as the main point of comparison between a monopoly and a monopolistic competition, we find that the main differentiating factor in monopolistic competition is its subtle features of perfect competition. In other words, monopolistic competition is a monopoly with a few subtle attributes of a perfectly competitive market.

Broadly, we find that the use of the word “monopoly” in “monopolistic competition” is confusing to most people, but it differs with a “monopoly” because of the multiplicity of firms and the presence of distinguishable products, which are features that are commonly found in perfectly competitive markets.

Boyes, W & Melvin, M 2012, Microeconomics , Cengage Learning, London.

Cowen, T & Tabarrok, A 2012, Coursesmart international e-book for modern principles of economics , Palgrave Macmillan, London.

Dwivedi, D 2002, Microeconomics: theory and applications , Pearson Education India, New Delhi.

Economics Online Ltd. 2016, Monopolistic competition . Web.

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Hardy, C 1978, The investor’s guide to technical analysis , Tata McGraw-Hill Education, London.

Kingston, W 2012, The political economy of innovation , Springer Science & Business Media, New York.

Lipsey, R & Harbury, C 1992, First principles of economics , Oxford University Press, London.

Longley, N 2013, An absence of competition: the sustained competitive advantage of the monopoly sports leagues , Springer Science & Business Media, New York.

Mankiw, G 2011, Principles of economics , Cengage Learning, London.

Mukherjee, S 2002, Modern economic theory , New Age International, New York.

Musgrave, F & Kacapyr, E 2009, AP Macroeconomics/microeconomics , Barron’s Educational Series, London.

Rittenberg, L 2008, Principles of microeconomics , Flat World Knowledge, New York.

Serrano, R & Feldman, A 2012, A short course in intermediate microeconomics with calculus , Cambridge University Press, Cambridge.

Suarez-Villa, L 2014, Corporate power, oligopolies, and the crisis of the state , SUNY Press, New York.

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Iatse continues bargaining with amptp; more basic agreement talks set for june, justice department files antitrust lawsuit seeking to break up live nation-ticketmaster; “baseless” pr stunt, company responds – update.

By Ted Johnson , Dominic Patten

UPDATED, 7:58 AM PT: As expected, the Justice Department sued Live Nation – Ticketmaster today, claiming that the ticketing and concert events giant is stifling competition and driving up prices for consumers.

In response, the self-described “largest live entertainment company in the world” accused the feds of going for a PR hit over the facts of the live music industry.

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READ THE DOJ’S ANTITRUST SUIT AGAINST LIVE NATION HERE

In a statement, Attorney General Merrick Garland said, “We allege that Live Nation relies on unlawful, anticompetitive conduct to exercise its monopolistic control over the live events industry in the United States at the cost of fans, artists, smaller promoters, and venue operators. The result is that fans pay more in fees, artists have fewer opportunities to play concerts, smaller promoters get squeezed out, and venues have fewer real choices for ticketing services. It is time to break up Live Nation-Ticketmaster.” 

“When companies like Live Nation control every aspect of an event, it leads to bad blood – concertgoers and sports fans suffer and are forced to pay cruel prices,” New York Attorney General Letitia James said in a statement of her own.

No one said the name “ Taylor Swift ,” the ticketing crash that kicked off the superstar’s Eras tour last year and left millions of Swifties screaming at their screens set off a new round of scrutiny among lawmakers on Capitol Hill. The Justice Department was said to already be investigating the company at the time, as Live Nation-Ticketmaster has been operating under a consent decree stemming from its merger in 2010.

The DOJ claimed that Live Nation-Ticketmaster had created “a self-reinforcing ‘flywheel'” that is used “to connect their multiple interconnected businesses and interests.”

Among other things, the Justice Department attorneys cited instances of threatened retaliation against a firm unless it stopped a subsidiary from trying to gain “a foothold in the U.S. concert promotions market.”

“Live Nation-Ticketmaster’s power in concert promotions means that every live concert venue knows choosing another promoter or ticketer comes with a risk of drawing an adverse reaction from Live Nation-Ticketmaster that would result in losing concerts, revenue, and fans,” the lawsuit stated.

The government also alleged that the company restricted artists’ access to venues unless they also agreed to use their promotion services. Also cited in the complaint was Oak View Group, a potential competitor which the DOJ attorneys wrote has “avoided bidding against Live Nation for artist talent and influenced venues to sign exclusive agreements with Ticketmaster.”

Claiming that the DOJ’s actions won’t help reduce high ticket prices and that there is no monopoly, Live Nation, which melded with Ticketmaster in 2010, has painted the long expected suit as “baseless.”

“The DOJ’s lawsuit won’t solve the issues fans care about relating to ticket prices, service fees, and access to in-demand shows,” a spokesperson for the company told Deadline this morning.

“Calling Ticketmaster a monopoly may be a PR win for the DOJ in the short term, but it will lose in court because it ignores the basic economics of live entertainment, such as the fact that the bulk of service fees go to venues, and that competition has steadily eroded Ticketmaster’s market share and profit margin,” Live Nation added. “Our growth comes from helping artists tour globally, creating lasting memories for millions of fans, and supporting local economies across the country by sustaining quality jobs. We will defend against these baseless allegations, use this opportunity to shed light on the industry, and continue to push for reforms that truly protect consumers and artists.”

The lawsuit does reference the longtime frustration with Ticketmaster fees, calling it a “Ticketmaster tax,” and noting that “any fan who has logged onto Ticketmaster’s website to buy a concert ticket knows the feeling of shock and frustration as the base cost of the ticket increases dramatically with the addition of fees,” including such thing as service and handling fees.

PREVIOUSLY, 5:30 AM PT: The Justice Department is expected to file a lawsuit against Live Nation-Ticketmaster today, claiming that the live events and ticketing company has illegally stifled competition.

Multiple media outlets reported on Wednesday evening that the DOJ, along with several states, will see remedies including that the company should be split up.

The lawsuit — rumored for weeks — would be the latest action taken by the Biden administration to rein in corporate power. The DOJ sued Apple in March, claming that the company had a monopoly over the smartphone market.

Live Nation and Ticketmaster have long been in the crosshairs of the DOJ.

Live Nation  is under a consent decree  from its 2010 merger with Ticketmaster, put in place as part of a settlement agreement with the  Justice Department .

Last year, the company faced hours of criticism and brutal attacks from lawmakers at a Senate hearing on practices in the ticketing industry. That followed an incident in which Ticketmaster’s website crashed amid an overload of demand for Taylor Swift concert tickets. Joe Berchtold, president and CFO, f aced a grilling by lawmakers  of both parties at the hearing. But Berchtold said that the artist sets the price of the ticket and, in most cases, the venue controls the fee. 

Sen. Amy Klobuchar (D-MN), who chairs a Senate Judiciary subcommittee on antitrust issues, said in a statement, “If the reports are correct, the Justice Department is doing the right thing by bringing this suit against Live Nation. This is about ensuring fair treatment for fans everywhere and reinvigorating competition in ticketing markets.” 

Dan Wall, executive vice president for corporate and regulatory affairs at the company, wrote in March that the “real explanations for high ticket prices are well-understood and have very little to do with Live Nation or Ticketmaster.  They begin with the economic conditions that explain most pricing:  supply and demand.” His essay addressed ongoing attacks on the company on Capitol Hill, suggesting that lawmakers advanced the idea that “alleged ‘monopolies’ are responsible for high ticket prices.”

“Rhetorically, that’s understandable, because if you want to rile up fans against Live Nation and Ticketmaster, there is no better way than to blame them for something you know fans dislike,” he wrote.

Bloomberg News first reported on the plans for the lawsuit.

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Exit the Modest Merchant Prince

Bruce Nordstrom was both the force behind his family’s multibillion-dollar retail dynasty and a stealth godfather to the fashion trade.

By Guy Trebay

“Nice” tends to be dirty word in business. The cliché holding that nice guys finish last has seldom seemed more true than in the landscape of contemporary retailing, where business is dominated by corporate consolidation, monopolistic practices and shareholder returns as the ultimate value.

Yet nice, as it turns out, may not be altogether pejorative — at least judging by the career of Bruce Nordstrom, who died May 18 at age 90 . It may even be a key to success.

For decades, Mr. Nordstrom helped lead the Nordstrom retail empire, which was founded in Seattle in 1901 by his grandfather, an immigrant from Sweden. The fashion retail colossus began as a shoe store, and ultimately expanded to include 150 locations worldwide.

Publicly traded since the 1970s and still family-run, the Nordstrom chain was predicated on an ethos of decency and niceness, Robert Spector wrote in “The Nordstrom Way,” his 1996 book about the company’s vaunted reputation for customer service.

“I came at the reputation with skepticism,” Mr. Spector said by telephone from his home outside Seattle. “I wish it were more complicated, but they are who they say they are, decent and humble and focused on the customer first.”

The Nordstrom culture of customer care is not only real, it originated from a family tradition of bottom-up managerial training. Bruce Nordstrom may have run a multibillion-dollar company, but he never forgot his beginnings sweeping floors and breaking down boxes for 25 cents an hour. “It may be the biggest competitive advantage they have,” Mr. Spector said of Nordstrom’s unusual company structure.

A familiar story in retail circles would appear to underscore this mind-set. “The C.E.O. of a huge retail chain was dealing with a series of problems,” the fashion brand consultant Josh Peskowitz said by telephone this week. “And someone in the corporate office said: ‘You know what? Call up Mr. Nordstrom and ask for his advice.’”

By then some years into his tenure as president of the family business, Mr. Nordstrom promptly issued an invitation. “He said, ‘If you want to come out to Seattle, I’m happy to have a chat and tell you what we do,’” Mr. Peskowitz recalled.

Mr. Nordstrom opened up his company’s books to the C.E.O., Mr. Peskowitz said, showing him “the employee guide, the return policies, everything, and then, at the end of the meeting, the man said: ‘Wow, thank you. I really appreciate you doing this.’”

Not surprisingly, he asked Mr. Nordstrom why. “The way the story’s told,” Mr. Peskowitz said, “Mr. Nordstrom’s response was, ‘I’m happy to show you anything we do because I know you can’t do it.’”

While the tale smacks of myth, it is not altogether implausible, say those in the garment business, where the Nordstrom reputation for almost sleepy solidity is buoyed by an aptitude for innovation and a willingness to bet on new talents and stand by them. One of the company’s largest sales producers, Jesse James Barnholdt, was early to social-media commerce, and is reported to have sold $2 million worth of designer shoes through Instagram. Given the volume of labels currently exiting the business, this approach is no small thing.

“They took a chance on Bode and have continued to support our growth in many forms, from helping us build our first shop-in-shop retail experience to bringing us to the Met gala,” the designer Emily Bode said by text message on Monday. “I’ve always been honored to work with them because of their family history, brand values and honesty in this wild industry.”

When the men’s wear designer Joseph Abboud was starting out in the 1980s, the 1930s cuts of his suits, with their slouchy attitude and ventless jackets, were deemed too sophisticated and European to market to consumers accustomed to boxy Brooks Brothers suits. “There was a general mandate not to buy nonvented clothing,” Mr. Abboud said this week. “Then one brave Nordstrom’s buyer bought 230 units.”

As the buyer rightly predicted, Mr. Abboud was onto the zeitgeist. Thirties glamour was to be the next evolutionary stage in men’s wear, and he went on to sell millions of dollars at Nordstrom in the coming decade and to win the men’s wear designer of the year award from the Council of Fashion Designers of America two years in a row. “To a large extent, we’ve lost that creative courage at retail,” Mr. Abboud said.

Merchant princes like Mr. Nordstrom, he added, have largely been replaced by consultants well-versed in corporate-speak and omni-channel marketing and yet lacking the gut instincts that once made department stores essential cultural destinations — places to encounter novelty, to experience great showmanship and to track that ineffable yet central dimension of fashion: buzz.

“True, Nordstrom never had the Bloomingdale’s hype or the Barneys sizzle,” Mr. Abboud said. “But in their quiet, decent way, they led in innovation, and did it with an added weapon, which was this incredible old world concept that the customer comes first.”

Guy Trebay is a reporter for the Style section of The Times, writing about the intersections of style, culture, art and fashion. More about Guy Trebay

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The Best Evil Laugh : The Wicked Witch. Dr. Evil. Mr. Burns. Ena Da? At the Evil Laugh Competition in Brooklyn , a contest for the best mwahahahaha.

Who’s Afraid of Double Denim?: Time to make way for another kind of suit, pairing a trucker jacket with matching jeans.

Michael Cohen and Rosie O’Donnell: For years, Donald Trump hurled insults her way. Now, she is BFF with his former enforcer .

The World of Butlers: The rise of “executive butlers” — whose job combines silver polishing with being a concierge — reflects the changing nature  of the very rich.

Living in the Past: When the pandemic hit, the company Samson Historical that specializes in 18th-century re-enactment clothing and goods found an unlikely ally : the internet.

Is Everything A.S.M.R. Now?: Videos that tickle what is known as the Autonomous Sensory Meridian Response used to belong to a specific corner of the internet. Now t hey’re virtually everywhere .