Monopolistic Market

5 Key excerpts on "Monopolistic Market"

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  Economic Principles and Problems

  A Pluralist Introduction

  • Geoffrey Schneider(Author)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  Monopolistic competition is a market very similar to perfect competition, but there is one major difference: Firms in a monopolistically competitive market have a monopoly on one unique aspect of the market. This product differentiation allows some firms to charge higher prices than others, which is not possible in a perfectly competitive market.

  12.3 Monopolistic competition

  Monopolistic competition is another very competitive market structure with a large number of small firms due to easy entry into the market. Unlike in perfect competition, firms have a monopoly over certain unique business characteristics such as quality, brand, or location. This gives firms some control over their prices. Firms supply goods that are close but not perfect substitutes for each other. Examples include local services such as doctors, dentists, and lawyers and local retailers such as restaurants, bars, and gas stations. Businesses in all of these industries offer a similar product, but some can charge a higher price than others due to the differences in quality, brand, and location.

  The major characteristics of a monopolistically competitive market are as follows:

  1. Slightly differentiated products: Goods are close but not perfect substitutes for each other. If firms can successfully improve quality and establish brand name recognition, they can further differentiate their product from competing ones.
  2. Large number of sellers and buyers: The large number of competitors and consumers means that no one actor has a large influence over the market. Some firms are larger than others but no firm is dominant.
  3. Easy entry and exit

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  Exhibit 4-1 identified the five characteristics of monopoly markets:

  1. There is a single seller of a highly differentiated product. 2. The product offered by the seller has no close substitute. 3. Entry into the market is very difficult, with high costs and significant barriers to competition. 4. The firm has considerable pricing power. 5. The product is differentiated through nonprice strategies such as advertising.

  Monopoly markets are unusual. With a single seller dominating the market, power over price decisions is significant. For a single seller to achieve this power, there must be factors that allow the monopoly to exist. One obvious source of monopoly power would be a patent or copyright that prevents other firms from entering the market. Patent and copyright laws exist to reward intellectual capital and investment in research and development. In so doing, they provide significant barriers to entry.

  Another possible source of market power is control over critical resources used for production. One example is De Beers Consolidated Mines Limited. De Beers owned or controlled all diamond-mining operations in South Africa and established pricing agreements with other important diamond producers. In doing so, De Beers was able to control the prices for cut diamonds for decades. Technically, De Beers was a near-monopoly dominant firm rather than a pure monopoly, although its pricing procedure for cut diamonds resembled monopoly behavior.

  Perhaps the most common form of Monopolistic Market power occurs as the result of government-controlled authorization. In most urban areas, a single source of water and sewer services is offered. In some cases, these services are offered by a government-controlled entity. In other cases, private companies provide the services under government regulation. Such so-called natural monopolies require a large initial investment that benefits from economies of scale; therefore, government may authorize a single seller to provide a certain service because having multiple sellers would be too costly. For example, electricity in most markets is provided by a single seller. Economies of scale result when significant capital investment benefits from declining long-run average costs. In the case of electricity, a large gas-fueled power plant producing electricity for a large area is substantially more efficient than having a small diesel generator for every building. That is, the average cost of generating and delivering a kilowatt of electricity will be substantially lower with the single power station, but the initial fixed cost of building the power station and the lines delivering electricity to each home, factory, and office will be very high.

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  Business Economics

  • Rob Dransfield(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  In making a decision each player (e.g. an oligopolist) must first consider the options available to, and likely actions of, its rivals. Before Shell decides to reduce the price of its petrol it must first consider what BP is likely to do and what the potential impact will be.

  Monopolistic competition Key Term

  Monopolistic competition – exists where many competing producers are selling products that are differentiated from each other.

  Products are substitutes for each other but they have differences of brand and different features. In the short run a firm can make abnormal profits because of this differentiation. However, in the longer term new firms can enter the industry attracted by these profits, so abnormal profits will be competed away.

  The market structure under monopolistic competition has the following features:

  • There are many producers and consumers and no individual firm can control the market price.
  • Consumers believe that there are differences between the products being offered by the firms competing in the market.
  • There are few barriers to entry and exit from the market.
  • Producers have some control over the prices they charge in the short period.

  Producers often gain more market control, and so more monopolistic power, by applying for patents or trademarks. A patent is a grant provided by the official patent office giving the creator of an invention the sole right to apply it. A trademark is the exclusive right of one party, such as a business, to apply a word, phrase, symbol or design that is protected in law.

  Profits made in different market structures

  • Monopolists can make abnormal profits in the short and long periods.
  • Oligopolists can make abnormal profits in the short and long periods.
  • Monopolistic competitors can make abnormal profits in the short period but not in the long period.
  • Perfect competitors can make abnormal profits in the short period but only normal profits in the long period.

  Porter’s analysis of competitive forces

  Michael Porter (a Harvard academic) made an important contribution to competition theory. He has argued that the ‘key aspect of [an organization’s] environment is the industry or industries in which it competes’. He refers to five basic forces which he calls ‘the structural determinants of the intensity of competition’ (1979: 2). These, he feels, determine the profit potential of the industry. The five forces are:

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  Health Economics

  An Industrial Organization Perspective

  • Xavier Martinez-Giralt, Pedro Barros(Authors)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  ex-ante the overall effect is ambiguous. An empirical appraisal of the question is necessary to solve the ambiguity.

  Figure 4.8 Monopolistic competition equilibrium.

  The model of monopolistic competition just described lacks the strategic interaction characterizing the models of oligopoly. Therefore, let us consider that entry restrictions limit the number of active firms in the market, while maintaining all the other features in of Assumption 4.14. This true oligopoly model of product differentiation allows us to study firms’ decision processes where the strategic variable may be either the volume of output (as in the case of homogeneous products) or the price (without obtaining the degenerate outcome found in the case of homogeneous products). Then, a question arises regarding comparing the equilibrium in both cases.

  To make the analysis tractable, let us follow Singh and Vives (1984). These authors consider a system of linear demand functions and compute the equilibrium in prices and the equilibrium in quantities. It turns out that the equilibrium in quantities leads to higher prices and lower output volumes than the price equilibrium. Singh and Vives then say that competition in quantities is more monopolistic (in the sense that it gives the producers higher capacity to increase the price with respect to the marginal cost, i.e. higher Lerner index) than the competition in prices. Also, the difference in prices between both equilibria depend on the degree of differentiation between the two products.

  One question remains in the analysis. Given that firms are allowed to choose to compete in prices or in quantities, there are various possible types of competition in the market: both firms may decide (unilaterally) to choose prices; both firms may decide to choose quantities; and one firm may decide to choose the price while the other decides to choose the quantity. Singh and Vives also show that when the two varieties are substitute goods, both firms find it optimal to select quantities as their strategic variable (in the sense that obtain a higher level of profits than with the other three alternatives). This gives consistency to the equilibrium in quantities in the models of oligopoly with product differentiation characterized by the presence of a representative consumer.

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  Microeconomics

  A Global Text

  • Judy Whitehead(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  11 Monopolistic Competition

  The Chamberlin Model: Short and Long-run equilibrium ; Critique of the Model .

  The market structure of monopolistic competition is situated between those of perfect competition and monopoly. This market structure gains increasing relevance as national markets become more integrated into the global market. Many firms that previously operated as monopolies in their individual domestic markets experience a greater level of competition when lowered trade barriers expose them to the global market. Moreover, the increasing relevance of this model of market structure may be gauged from the efforts made to incorporate increasing returns to scale and differentiated products (central features of monopolistic competition) into modern International Trade theory.

  Until around the 1930s, perfect competition and monopoly were the principal market structures considered in Microeconomic theory. Around that time, a number of economists including Edward Chamberlin (1933), Joan Robinson (1933), and Piero Sraffa (1926), were raising questions about the general applicability of the older models based mainly on empirical grounds and were proposing new models of market structure which lie between the two polar extremes of perfect competition and monopoly. These new approaches, sometimes dubbed the imperfect competition (or monopolistic competition) revolution in microeconomic theory, saw the emergence of the model of monopolistic competition, a model largely attributed to Chamberlin (1933), and of models of oligopoly. Although oligopoly (duopoly) models date back to the nineteenth century (1830s), it was not until around the 1930s that they began to attract more widespread attention and became more popular as newer models were developed.

  Monopolistic competition received more attention in the mid-1970s with the Dixit– Stiglitz (1977) reformulation that is sometimes referred to as the second monopolistic competition revolution. This work has served to revive flagging interest in the much criticized model. This was buttressed by its further application to issues of increasing returns and intra-industry trade in the area of international economics, associated primarily with the work of Krugman (1979, 1981). Neary (2002) examines the interaction of monopolistic competition and international trade theory.

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