Analysis of Perfect Competition and Pure Monopoly Industry Structure - Coursework Example

Managerial Economics al Affiliation) Competitive markets The degree of competition in a market or industry is determinedby the number of suppliers seeking to satisfy the demands of consumers. The hierarchy of competition ranks from the highly competitive markets. Here, the large numbers of sellers leaves the market open; hence, no single player can determine the price of goods in the market. The lowest competition market is the monopoly. From the name monopoly, it is easy to recognize the impact of a single player on the entire market. Few producers in the market dominate the oligopoly. These few producers are dominant over the other players in a highly concentrated industry or market. A perfect competition market is a market in which competition is at its highest level. The economists in the neo-classical theory argue that with perfect competition, the consumers and society enjoy better outcomes. This market structure has many firms that offer homogenous product(s). The market is existent upon a number of assumptions (Roberts, 2011). The market assumes that each of the many suppliers in the market holds an insignificant share of the market. This implies that the overall market is quite big relative to the small nature of the firms in this market. The firms have no power to influence the prevailing market price through the change of its own supply. The firms are price takers. Firms in this market sell homogenous products. This means that the output of each firm is identical to that of competing firms. The products are standardized and they act as perfect substitutes (Thomson & Strickland, 2008). Consumers of theses products view the products as identical. Consumers in this market are fully aware of the market trends and products. The consumers enjoy perfect information concerning the market price charged by all the sellers in the market. Due to the identical nature of the products, a firm that charges a price that is higher than the set market price faces the substitution effect as consumers opt for the other firms. All the new entrants and industry participants of the competitive market have equal access to the resources availed in the market. Such resources include technology, labor amongst other factors. For instance, the improvement in technology by one firm in the market is likely to spill over to the other firms and suppliers in the same market (Tanzi, 2011). In the long run, the competitive market assumes no barriers to entry or exit. This means that the market is open for any new firms to enter at their will. The profits made by each firm are affected by this assumption in the long run. The competitive market equilibrium in the long run occurs when the firm realizes normal profit over the long term. The competitive market has no externalities in the consumption and production. This implies that there is no disparity between private or social costs and benefits. The market also has a large number of firms. The role of the government in the market is insignificant. The firms do the regulation. The only duty of the government is to provide an enabling environment that makes the market only more competitive for the consumers to benefit. The profits made in the long run for each firm in the competitive market are normal profits, but in the short run, a firm can make supernormal profits. A single firm in the competitive market derives its price from the industry. The industry includes all the firms in the industry, and producers achieve the market price at the point where the market supply equals the demand. Firms are attracted to the competitive market because of the supernormal profits by incumbent firms (Lele, 2005). This is due to the free entry and free exit policy that is in the market, and the existence of perfect knowledge on the market. The firms that enter the market cause a right shift in the supply curve of industry. This inserts a downward pressure on the price to the point at which the market has exhausted the supernormal profits. In the case that firms are making losses, they are forced out of the market, as there are no hindrances to the choice of a firm to exit the industry (Lele, 2005). This decision by certain firms to exit the market shifts the industrial supply curve to the left. This leftward shift causes the price to move up, and the firms that remained in the market then enjoy normal profits. The supernormal profits that are realized by some firms of the competitive firms in the short run tend to lure new firms into the market. These firms enter the market and increase the market supply, the increase of supply of a homogenous product in the market pushes the price of that product downwards. This action is relevant until all firms make normal profits. The perfect market has perfect knowledge that makes it beneficial for all participants. The knowledge ensures that there is no market failure due to information deficiency. In the competitive markets, all the mechanisms are in place to ensure that firms realize only normal profits. This works to the advantage of the producers as they only struggle to cover their opportunity cost. The market cannot have other firms manipulating the resources available at their own peril. This implies that no single firm can have monopoly power over the other players in the competitive market (Roberts, 2011). In the competitive markets, there is the possibility of the highest consumer surplus. The consumer surplus is the situation that the consumers enjoy paying less than they are to pay. In the competitive markets, when the producers get a price that is higher than the price they incurred in the process of production, they prepare to supply more because at this price they are able to recover their production costs. The competitive market places more emphasis on the economic welfare of the entire society from a transaction. In the competitive market, there is productive efficiency. The long run equilibrium in this market represents the productive efficiency. In addition, the market has allocative efficiency at the equilibrium point where the marginal costs equal the price (Lele, 2005). The consumers also enjoy maximum choice. The main aim of firms is to make profits, the profit of a firm is the sales revenue less the accounting, economic, and opportunity costs. This is simply the difference between a firm’s revenue and its costs. ∏ (q) = R (q) – C (q); R (q) = total revenue; C (q) = total costs. ∏ (q) = profits. The firms in a competitive market have horizontal demand curves. The choice on the amount of the product (q) is dependent on the price taker, which is the firm in the market. In this market, firm’s actions are the determinants of price. At higher prices, firms sell less amounts of output as the consumers are eager for a price fall (Tanzi, 2011). This is demonstrated as R (q) = p (q) x q. This is the revenue function and it is curved. Marginal revenue is the slope of the revenue curve. The impact of an additional output unit on the total revenue realized is the profit function. For the firms in a competitive market to maximize profits, the marginal cost must equate to the marginal revenue. MC = MR But for a competitive market, the MR = P., the quantity that maximizes profit is MC (q) = p. The firm being the price taker cannot affect the market price by decisions to increase or reduce the price. By producing an extra unit of output, the additional revenue remains to be the market price. The firm’s productivity depends on the market price being higher or lower than the minimum average costs of the firm. This is broken down as if R (q) < C (q) then the firm is at a loss. If R (q) > C (q), the firm is making profits. If R (q) = C (q), the firm is break even. The competitive market equation is R (q) = p x q and the total revenue is divided by the total cost. Hence; if p = ATC, the firm is even, If p < ATC, the firm incurs losses; p > ATC, the firm has profits. The firm is profitable if the minimum average total cost is less than the total costs. In the short run competitive market structure, the firm has output varies with changes in other inputs such as labor but not capital. Input of capital is fixed. Total costs in the short run are independent on the output level produced (Norman, 2008). This enables firms to continue operating despite making losses. These fixed costs oblige the firm to pay regardless of their participation in production. The profit maximization is dependent on variable costs. At point MR = MC, a firm should refrain from producing because there is no specified output level that enables the firm to offset the variable costs. The profit maximization function in the short run for firms is when the minimum average price is lower than the market price. This enables firms to choose their own amount of output to level the market price to the marginal cost. At this point, firms can produce and sell hence maximizing the profits. Pure Monopoly Markets. A monopoly is a market in which there exists only one supplier. The firm, which dominates this market, is the major producer of the product that has no substitutes. The case under which monopoly is mostly created is in the provision of public utility goods and services. In some instances, monopolies control the operations of major professional sports leagues. FIFA, for example, is in a monopoly of controlling all the soccer related businesses in the world. The regulation of the monopoly happens when there is monopoly power (Norman, 2008). A particular firm takes control of more than 25% of the market share in this situation. A monopoly formation occurs when the ownership of a resource is exclusive to one firm. This resource in many cases is a scarce resource. The ownership of Windows brand by the Microsoft cooperation gives the company monopoly power in the control of this resource, hence the exploitation rights of this resource remain solely with Microsoft. Monopolies are created when two or more firms combine in the same industry. This refers to merging. When these firms combine, there is reduced competition, and the firms in the merger are subject to direct regulation. The merger may be prevented if the firms take control of more than 25% of the market share (Tanzi, 2011). Monopoly power arises when a firm has patents over certain rights. The rights include images, designs, names, characters, and ideas. This grants the producers with exclusive rights to supply the rights as experienced in most music industries where the rights to sell a song lie squarely with the songwriter. The government also is a determiner in the creation of monopoly power. The government is responsible for the provision of public utility goods. Such goods include postal services, water, sewerage, roads, and healthcare and education services (Norman, 2008). The monopoly of the Royal Mail Group was broken in the year 2006, and opened the mail industry to competition. A single firm that can maintain its supernormal profits in the long run dominates the monopoly market. All the other firms in the industry maximize their profits at the point where marginal costs equal the marginal revenue. The profits in the monopoly industry are determined by the level of competition that is experienced in the market. In this case, competition is zero. Monopolies sell unique services and goods. These goods have no close substitutes, and this makes the consumers with no alternative market to acquire the same resources. These products are sold at a price that mostly suits the economic capability of majority of the consumers (Thomson & Strickland, 2008). Similar products can be found in other global industries, but it is unique given that in that region of the world, no close substitutes of the good can be found. The seller of the product offered in the monopoly has the authority to charge any price to the consumers. The monopoly has restricted rights over the resources, hence making it the only player that influences the price of the product. This makes the monopolist the price maker. The price charged by the monopolist is suitable to maximize the profits. The price is set by restriction on the output levels. The entry of other firms in the monopoly market is not as free as in the competitive markets. Legal frameworks make it suitable for the major firm to operate in the market. Such legal protections protect the exclusive ownership of a copyright or patent. Besides, other economic and technological barriers hinder other new firms from venturing in the market. The secrecy of the production technique and method is left with the monopoly. This makes it difficult to identify firms that have pure monopoly powers but easier to identify the industry with a monopoly player (Thomson & Strickland, 2008). The monopoly firms have no reason to indulge in non-price actions. Advertisements and promotion costs are insignificant for the monopoly firms. The monopoly firm may indulge in other activities such as goodwill advertising to boost the public’s confidence. Employing public relation tactics also give consumers the feeling that the firm is the best placed to handle the distribution of the exclusive product. It also eliminates consumer antagonism. The monopolist may indulge in unfair competition. This strategy is employed to eliminate the existence of competitors. The monopolist may lead a competing firm into bankruptcy. The unfair competition goes further into hindering the entrance of other firms into the market. The monopolist may under price the product, or even block the access to the resource market. Monopolies benefit largely from the economies of scale. The monopolies are protected because they hinder wasteful exploitation of precious resources by new firms. Domestic monopolies are advantaged also in their own territory because they become dominant. The advantage enables them to exploit other markets overseas. This earns the country revenue from the exports, as experienced in the Microsoft monopoly. Monopoly power is advantageous in the generation of dynamic efficiency. This efficiency translates in the progression of technology. The high levels of returns help to increase the investment in R&D. The profits also help reduce the costs of investing in new technologies through the innovation of processes. This action shifts the supply curve of the monopolist to the right against the supply curve of the industry. However, monopolies are criticized for their role in minimizing the market output. This means that a system failure by the monopoly paralyses the entire operations of the industry. The monopolies derail the sovereignty of the consumers. Consumers have the right to enjoy diversity and satisfaction for the payment for services. In the case of monopolies, consumer choice is eliminated, and the consumer has to conform to the systems of the monopoly. The monopoly is responsible for hindering the economic welfare and consumer surplus. At no single time will the consumer find a price that is lower than the price that he/she is willing and ready to pay for the acquisition of the service. The monopolies also charge higher prices that suit only their profit goals. This is worse off than in the competitive markets that each firm takes the price that is determined by all the competing firms in the market (Roberts, 2011). The demand curve of a monopoly is downward sloping. This is because the monopoly is the only existing firm in the industry. The demand of the products in this kind of market is price sensitive. In the case of provision of natural resources derived monopolies such as electricity, the consumers may shift to other sources of energy if the electricity supplying company charges extremely high rates. The monopolist is able to lower the market price of all the units sold in order to sell one extra unit. At any quantity, the price is greater than the marginal revenue. If the market has a straight demand curve, the demand curve is half the slope of the marginal revenue (Mosman, 2009). The profit maximization point of the monopoly is arrived at where the marginal revenue equals the marginal costs. This is the point at which the curves intersect. MR = MC. The production of a single lesser unit of output implies that a profit is lost. The opposite applies when an extra unit of output is produced. At this point, the marginal revenue is in excess of the marginal revenue. To determine the amount of profit after equating the MR to the MC, the optimum quantity has to be established. The optimum quantity establishes the unit cost from the total cost curve, and the unit price from the demand curve. From this point, the profit of the monopoly is the total revenue less the total cost (Mosman, 2009). The monopoly maximizes profits by essentially taking full control of the quantity and price. In the short run, however, the decrease in consumer demand forces the monopolist to run at a loss. The monopolies operate in an environment that makes it favorable for the rise of cartels. This occurs in the case of price discrimination where the consumers have imperfect information of the market. This is inflicted by the monopolies power to control the price. This makes the monopolies appear selfish for their ability to maximize profits, the involvement in price discrimination is illegal according to the Sherman Act. The elimination of cartels is difficult given that they have the backing of the government and they enjoy legal protection. Despite this, the regulation of monopoly activity can be regulated. The formation of an independent commission to oversee the operations of the industry goes a long way in setting the code of conduct and ethics. The setting up of fixed prices is a way to ensure fair pricing. This means that the price equals the average total cost. The components of the average total cost are the market returns’ rate (Mosman, 2009). This ensures that extra funds are devoted to the expansion of the market. The commission also can set the price below the average total cost and offset the losses by subsidies. This is in the case of the transport sector. References Lele, M. (2005). Monopoly rules: How to find, capture, and control the most lucrative markets in any business. New York: Crown Business. Monopoly power. (2009). Mosman: IMinds. Norman, G. (2008). Recent developments in monopoly and competition policy. Cheltenham: Edward Elgar. Roberts, K. (2011). The origins of business, money, and markets. New York: Columbia Business School Pub. Tanzi, V. (2011). Government versus markets: The changing economic role of the state. New York, NY: Cambridge University Press. Thompson, A., & Strickland, A. (2008). Crafting and executing strategy: The quest for competitive advantage: Concepts and cases (16th Ed.). Boston: McGraw-Hill/Irwin. Read More