The Monopolistic Market Structure - Case Study Example

What are the main differences between Perfect Competition and Monopolistic Competition market structures? Compare and contrast how these market structures respond over the long-run if Subnormal Profits are being made in the short-run. Customer name Instructor name Introduction The world of business is never static. There are changes going on regularly such as mergers and takeovers and companies breaking down. The news is frequently reporting about how small companies have been swallowed by larger corporations. Despite that, only a handful of people comprehend what monopolistic competition is, and very few are able explain it (Marshall 2008). This article looks into the monopolistic market structure, as well as its opposite, perfect competition. The article provides a comparison between the two structures and explores how these market structures respond over the long-run if companies are making subnormal profits in the short-run. Discussion There are several differences between monopolistic and perfect competition market structures. Monopolistic competition is when a firm has monopoly over its products whereas perfect competition is an economic model that is based on the principle of firms operating in a truly competitive market. The assumption of the perfect competition model is that there are several consumers and firms and there are no secrets amongst the firms. The model also assumes that the products produced are homogenous and there is absolute product mobility, and there are no barriers to the movement of resources between the firms and markets. On the contrary, firms who have a monopoly are involved in the production of goods and provision of services that are not comprehensive substitutes to the products in the market; there is no homogeneity of products and the products and services are regarded to be unique from other brands (Marshall 20008). They differ from each other such as in branding and so are not identical to each other. The variations that are present in the products produced by different companies are expressive of product differentiation. Although the goods are regarded similar, they have differences in them which can be grouped into physical, perceived and support differences. Physical differences refer to the physical variations in the appearance and nature of the product. Perceived differences do not entail any differences in the physical appearance of the product but are differences that arise due to different brands. On the other hand, support differences exist by differences in support services (Monopolistic Competition 2010). Moreover, where there is perfect mobility of resources in perfect competition, monopolistic competition does not entail the same degree of perfection; mobility is fairly good but it cannot be regarded as perfect. This means that in such a market structure, firms have the freedom to enter or exit the market with comparative ease. Although restrictions to mobility do exist, these restrictions are not large in number (Monopolistic Competition 2010). Perfect competition encompasses perfect knowledge but in monopolistic market structure, buyers are not aware of everything. They may have almost complete information about the prices of goods and other variations in the products. The producers are also equipped with the knowledge of various methods of production and the prices that are fixed by their rivals. Monopolistically competitive firms are also characteristic of making less number of products and selling them at a higher price in the market as compared to firms operating in a perfect market. Also, monopolistic competition does not result in economic efficiency since consumers have a lot of options to choose from (Boyes & Melvin 2008). It should be noted that in the real world, different factors operate that affect the nature of the market. Consequently there are no perfect markets; however some markets are near to perfect. Firms that are a part of perfect competition constitute only a small part of the larger market. The supply of their products does not have a major impact on the market. If their supply is altered, there are no serious or noticeable changes in functioning of the market. This follows that perfect competitors do not have any influence on the market price; rather they are bound to accept the market price. This is why perfect competitors are referred to as price takers (Perfect Competition Unit 2010). The perfect competition market structure constitutes an arena where there are a number of buyers and sellers and neither of them have the ability to significantly impact the market price since they form only a small part of the market. Moreover, any increase in the production of the producers does not affect the market price. However in a monopolistic model, the firm is able to influence the market price of the product through changes in its production. This contrasts with the influence that firms operating in perfect competition have over the market price. The given diagram illustrates how demand (D) and supply (S) influence the price of a product (Perfect Competition Unit 2010). The market price of a product is fixed by its demand and supply. In the diagram, the two curves intersect at a price of £5. This means that the firms that are operating in a perfect competition market structure are required to comply with this market price. Even if the firm increases its produce, the market price of the product will remain fixed at £5. The revenue curves for firms in a perfect competition market show that the increase in total revenue is in proportion with the increase in the produce. The total revenue increases at a fixed rate, which is under the control of the market price. The rate of change is fixed, and this causes the marginal revenue to be fixed as well. There are no changes in the average revenue, which always equals the market price. This follows that any additions made to the revenue are going to be equal to the average revenues, i.e. MR=AR. Boyes and Melvin (2008) have made a graph to exemplify the characteristics of profits and revenue in a perfect and monopolistic market structure. In perfect competition, the market price is shown as the intersection between the horizontal marginal revenue (MRpc) curve and the marginal costs (MC) curve. This point represents the bottom of the average total costs (ATC) curve where the Ppc and Qpc are shown in the long-run. In a monopolistic market, the firms produce at a cost where MR = MC. The demand curve in perfect competition shows complete elasticity whereas in monopolistic competition, it has a negative slope (Various 2010). The downward gradient of the demand curve represents that the quantity produced by these firms is less than the quantity made by firms in perfect competition. The market price of the goods is also greater in the monopolistic market, Pmc, as compared to perfect competition, Ppc. If the company is making subnormal profits in the short-run, it will be forced to earn normal profits in the long-run. When considering the long-run, the similarity between the monopolistic market structure and perfect competition become prominent. Although both market structures would require that the profits made by the firms return to normal through the entry or exit of some firms. In the long-run, all firms that constitute a part of perfect competition will be forced into a situation that brings down their profit to normal, and AR = AC. In the long-run, companies that have been making subnormal profits in the short-run, i.e. AR Various 2010, Xam Idea – Economics, VK Publications. Read More