Monopolistic Competition and Duopoly Market Structures - Term Paper Example

Monopolistic Competition and Duopoly Market Structures The study of market structures is an important area of economics that deals with the different economical situations that characterize the market and the way suppliers and consumers interacts on a daily basis. Oligopoly is a special type of oligopoly that describes a market structure or industry with only two firms competing to satisfy the demands of the customers. In duopoly, the decisions that are independently made by one firm have a number of effects on the second industry player. If one firm opts to increase its output, prices or any other decisions that has an impact on the market behavior, the second firm will be significantly affected. This demonstrates the interdependence that exists between the managerial decisions made by the two firms and this affects the pricing and output in the market. Monopolistic market structure is characterized by the presence of multiple of firms that sell similar but non-identical products to equally informed consumers. Consumers are thus presented with an opportunity of picking either product from any of the consumers, as they are substitutes of each other and thus serve the same purpose. Edward Chamberlin and Joan Robinson first described the monopolistic market structures in the 1930s and generated the characteristics of such a market. Duopoly and monopolistic market structures differ significantly in the number of producers, type of goods and the government influence that is exerted in each situation. This paper seeks to highlight the differences between the two market structures and this affects the performances of the firms involved. The paper also seeks to provide a case study of firms in the united states that operate under the two different market structures and how their success and failure has been influenced by this market structure (Weron and Weron, 438). The first obvious characteristic of duopoly market is the presence of only two firms, sellers or produces whose actions or lack of it affects the managerial decisions of the other. For long, a number of firms in the United States have operated under a duopoly market structure but has since changed due innovation and technological advancement. Pepsi and Coca-Cola are the major soft drink manufacturers in the United States and they literally control the market and its dynamics. Visa and MasterCard have also remained as the major plastic money providers not just in the United States but also in major economies around the world (Weron and Weron, 439). In a duopoly market structure, the decisions made by one of the firms affect the way the other firms will be managed and operated on a daily basis. This is because of the shift in consumer allegiance that may shift following one single decision by one of the firms in the market. If Coca-Cola lowers the prices of its soft drinks across the united states and also in other subsidiary countries, the demand for Pepsi products will reduce tremendously thus forcing Pepsi to follow suit. This feature of duopoly has been highlighted as a source of unhealthy competition of the two firms in the market. In trying to retain its consumer, one firm in a duopoly market structure will always struggle to react after an action by the competing firm. The changes in prices and output by one firm significantly affect the position of the other firm who must react to change their prices (Weron and Weron, 439). Duopoly market structures are thus characterized with either extremely low or extremely high price, which always arise from action reaction behaviors of the two firms. The products in duopoly can also be either homogenous or differentiated as is the case with Coca-Cola and Pepsi that produce soft drinks with almost the same quality. Visa and MasterCard also avail similar services to its consumers but the advancement in modern technologies has made it possible for the two oligopolies to diverge in a small way in the services they offer. Product differentiation acts as a major entry barrier in duopoly market structure due to the differences in the nature of services or products availed that this may create. Despite the changes in the prices that may arise from action-reaction mechanisms of the two firms, duopoly markets have their prices determined and set by the forces of demand and supply (Weron and Weron, 439). Response to the strategies of the other competing firm can also be in the form of increased output as opposed to price variations. The behavior of the two dominating firms in an oligopoly makes it almost completely impossible for a third firm to enter the market. This is due the actions that occur in synergy because of the actions of the two firms that compete for every opportunity that they get. This market structure also prohibits any collusive behavior between the two firms, which may result into the creation of cartels or merger of the two firms. Despite producing almost the same products, duopoly market structures only thrive if the two firms are in operations and not in the presence of any third party. Two models of duopoly market structures have been advanced and developed and these include the Cournot and Bertrand duopolies. In Cournot model of duopoly, the competition among the firms is based on the prices of their products as opposed to the quantity of their outputs. In Bertrand model, Nash equilibrium is developed in which each firm assumes that the competing firm will not raise their prices in response to its price cut. In this case, competition is based on the quantity of the products that they produce and not the prices. The two models have different implications for firms in this market structures despite the fact that they make similar assumptions. Courtnot model assumptions postulate the ability of duopoly to push the prices of goods produced and marketed by the two firms to marginal cost levels which results into a perfect competition (Layton, Robinson and Tucker 126). Monopolistic market structure is characterized by the presence of many producers who sell products that can serve as substitute of each other but are not identical. Consumers in this market structure are provided with the opportunity to choose the product they need to serve their desires from the variety substitutes of each other that exist in the market. This market structure was described by chamberlain as more realistic as compared to both perfect market structures and pure monopoly situations. Monopolistic competition as opposed to duopoly kind of market structure allows free entry of other producers or suppliers into the market without any restrictions. This leads to increased number of firms in the market who produce close non-identical products that are substitutes of each other (Blackstone and Larry 13). Monopolistic competition exists in major economies and a perfect example I will provide at this stage is India. In India, there exist a large number of firms that produce toothpastes and market those using different brand names. Colgate is known to have full control of its product and no firm is allowed to produce toothpaste with the same brand name even though other substitutes like prudent, forhans, close-up and promise exist. Product differentiation thus exists in monopolistic market structure and competition, which means that there is little variation in the prices of the products offered. The differentiation of the products is done through physical designing of the products to make them vary in color, design or even the materials used (Layton, Robinson and Tucker 123). Variations in price as a result of changes caused by one supplier will result into major shift of consumers, as these products are known to serve almost the same purpose. A fall in price thus leads to an increase in the quantity demanded but it is worth noting that a firm cannot fix the price under monopolistic market competition even though he may have control over it. As evident in duopoly market structure why firms are interdependent and the action or inaction of one firm affects the activities of the other, monopolistic market structures are characterized by absence of interdependence in the firms. Each firm therefore acts more or less independently and makes actions without the direct influence of the other firm’s actions. Monopolistic market structures are also characterized by increased advertisement costs as firms agitate to increase the presence in the market by promoting their products. Competition in this market structure is thus non-price competition that is supported by vibrant advertisements and promotion in order to attract more clients and consumers (Blackstone and Larry 13). Monopolistic market structure has a fairly elastic demand curve due to the existence of close substitutes, which limits the monopoly power that one firm may gain. Adopted from http://spot.colorado.edu/~kaplan/econ2010/section11/section11-main.html In the United States, Coca-Cola and Pepsi have continued to control the soft drink market with competitions and behaviors that are characteristic of a duopoly market structure. As evident in duopoly marker structures, the entry of new firms is restricted by the behaviors of the two competing firms, thus making it impossible for other firms to enter the software market in the United States. Other small firms have tried to break into this competition but the nature of the market and the competition waged by these two firms has made it completely impossible. As a result, Pepsi offered to buy Seven-Up Co, a third soft drink company that had tried with little success to break into the market controlled by the two firms (Layton, Robinson and Tucker 123). To counter this action with a reaction and increase their market capitalization, Coca-Cola made a $470 million bid for DR Pepper Co, a company owned by New York investment firm of Forstmann Little & Co. this is very common in any duopoly market where each action is countered by a reaction and firms are interdependent. The two companies have also moved to acquire ownership of bottling and processing companies in the United States, a move that analysts say could make it move completely towards a duopoly kind of structure where there is control of the pricing form an external source (Blackstone and Larry 14). Pepsi and Coca-Cola also produce goods, which are slightly similar due to the similarity in their uses but are differentiated by either design, color or the materials used to manufacture the products. Consumers can decide to buy a Pepsi or Coca-Cola not because of their similarities but due to the uniqueness and taste of each product. A look at the capability matrixes and the packaging claims on both the products clearly brings to fore the nature of the competition that exists between the two companies. The table below highlights some of marketing and labeling similarities between the two companies. Feature Pepsi Coke bar weight 10FL OZ 10 FL OZ Calories 150 121.25 Carbohydrates 34.5 33.75 Flavors 2 2 Product claims Offers beverage that resorts to the customers’ expectations and make it more enjoyable for them to lead healthier lives All foods and beverages can fit into healthy balanced diet when consumed in appropriate proportion Target consumers People from younger generation, sports, personalities and celebrities Children, adults, younger generation and sports personalities and celebrities Courtesy of weron and Weron, 440 The table above illustrates the level of competition that exists in product designing, target market and beneficial impacts of both the products to the potential consumers. The business strategies that the two companies have developed so far ensures improved product value and taste with the intention of increasing the consumer base and watering down the impacts of the competitors. Monopolistic competitions are characterized by many firms who produced similar but non-identical products in which consumers have a choice to make. Brand royalty is a common phenomenon in monopolistic competition as consumers build preferences for the products the value and trust most. In the United States, the mobile telecommunication industry today acts as a better example that can explain the presences of this kind of market structure in real life. Nokia, Samsung, LG and I-mobile companies among others compete for the mobile consumers in the country with products, which serve almost the same functions but differ in their shape, color and design (Layton, Robinson and Tucker 123). Monopolistic market structure has little restrictions for entry of new producers and suppliers as evident in the Pepsi and Coca-Cola case study that has been previously done. Here, other suppliers are allowed to enter and produce similar but non-identical products, which will serve the same purpose as the products already present. As a result, the united state mobile market is flooded by many producers and others are still making entry. Apple Company saw an opportunity in this market and shifted its focus from computer manufacturer also to focus on mobile phones. The company introduced a new set of products that revolutionized the industry and changed the marketing dynamics (Dixit and Stiglitz 299). The Smartphone introduced by apple into the company led to the introduction of other Smartphone devices by other industry players like Samsung and LG. After the much-fought battle between apple and Samsung over the patency of a Smartphone device, other mobile companies started to device similar products that had feature similar to the products produced by Samsung and Apple. Nokia introduced the Nokia Lumia as LG and Sony also introduced similar technologically developed phones. This increased the scale of competition in the market as the Smartphone market was not left under the duopoly control of apple and Samsung (Layton and Tucker 46). The developments in the mobile industry of the United States further make one characteristic of monopolistic market competition common. Brand loyalty is a common scenario in monopolistic market structures as the goods are technically similar and serve the same functions. Consumers here tend to develop preference for one brand that they will be free to use as opposed to the other products available in the market. Traditional mobile companies were given loyalty advantage by analysts due to the foundation that they developed among the consumers at an early stage. However, the new technological developments have resulted into increased shift in brand loyalty as consumers find new innovative products more useful to them. Monopolistic market structures have fixed market prices that are not fixed by the market players but influenced by the forces of demand and supply. The competition in this market structure can thus be described as non-price market competition as quality and brand loyalty reign supreme. Advertising and product promotion thus take centre stage in this type of market as consumers are made to recognize each good as viable and better as opposed to others present in the market. The war of product promotion that characterizes any monopolistic market structure is quite visible in the telecommunication industry (Dixit and Stiglitz 297). The market players have devised several ways of announcing their presence in the market and fighting to win new customers. The use of celebrity product endorsement has not escaped the United States mobile industry as evident in monopolistic market structure. Samsung has been at the forefront of using sports and other media personalities around the world to endorse their products and increase their brand loyalty ratio. Propaganda and innuendos characterize monopolistic market structures as competitors struggle to use any available means to outdo each other in winning the consumers and increasing market ratio controlled (Layton and Tucker 46) Decision making in monopolistic market structures are independent and this is quite visible in the American mobile industry where each firm can independently introduce a new product, change the design of their products and withdraw a product at any time they feel so. Such an action has no effect on the other mobile makers and does not destabilize the market price in any way. In making a decision, mobile companies put little considerations on the impacts that such a decision may have on its competitors. This is visible is the situation where other firms apart from Samsung decided to manufacture phones that use android operating system, a technology that was first adopted by Samsung and Apple. Each firm thus acts to increase and attract more consumers in a way that is not influenced by any market forces or rules whatsoever (Blackstone and Larry 16). The market power of firms in the monopolistic market makes it possible for firms in this market to increase the prices of their products without losing all the customers under its control. Such an increase in the price of the commodities of one company does not necessarily means that the competing firms will benefit. Apple phones are the most expensive smart phones followed by Samsung and Nokia. This does not make Apple lose its traditional consumers and loyalists to other cheap phone makers like LG and I-mobile. There is also no dominance by any firm on the market information and this makes the market industry an imperfect information market structure. Lack of dominance on the demand and supply information in the market makes the competition perfect as each firm has similar opportunities to market their goods to similarly informed consumers (Blackstone and Larry 13). Market structures are important areas of study in economics as they highlight the differences that characterize firm’s operation and duopoly. Monopolistic and duopoly market structures are common market structures in major economies around the world and firms in these market structures operate under the confines of their assumptions. This paper analyzed the differences that exist between the two market structures and provided a case study of firms that operate under each. Works cited Blackstone, Erwin and Larry, Darby. “The case of duopoly: industry structure is not sufficient basis for imposing regulation”. Regulation, Vol. 34, No. 4, p. 12. 2011. Dixit, Avinash and Stiglitz, Joseph. Monopolistic competition and optimum product diversity. American Economic Review. The American Economic Review, Vol. 67, No. 3. (Jun., 1977), pp. 297-308. Print. Layton, Allan, Robinson Tim, and Tucker Irvin. Economics for Today: Fourth Asia Pacific Edition (4th Edition). South Melbourne, Victoria, Australia: Cengage Learning Australia Pty Ltd. 2012. Print. Layton, Robinson, and Tucker, Tim. Monopolistic competition and oligopoly. 2012. Print. Weron, Sznajd and Weron, Rachel. “How effective is advertising in duopoly markets”. Physica A 324 (2003) 437 – 444. Read More