What are the main differences between Monoploy and Monopolistic Competition market structure - Essay Example

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A monopoly is a market situation where only one seller exists, producing a product which has no close substitutes.It is at the complete opposite end of the spectrum to perfect competition.In practice a monopoly situation can arise when a firm has a dominant position in the market in terms of its market share…
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What are the main differences between Monoploy and Monopolistic Competition market structure
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"What are the main differences between Monoploy and Monopolistic Competition market structure"

Download file to see previous pages A monopoly is a market situation where only one seller exists, producing a product which has no close substitutes. It is at the complete opposite end of the spectrum to perfect competition. In practice a monopoly situation can arise when a firm has a dominant position in the market in terms of its market share. For example, British Telecom enjoyed a monopoly until 1988 when the UK office of telecommunication decided to end it. The basis for a monopoly market is the existence of barriers to entry. These are factors that prevent new firms from entering the industry, or even if they do, will force them to close. Barriers can be of various forms.The high fixed cost or setup cost can be the toughest obstacle to tackle. The barrier here is access to capital. Only large firm will be able to fund the necessary investment. An established monopoly is likely to have developed specialized production and marketing skills. It is more likely to be aware of the most efficient techniques and the cheapest suppliers. In most cases, such firms have a major cost advantage because of economies of scale which allows them to operate on a lower cost curve. Advertising and brand names with a high degree of consumer loyalty may also prove a difficult barrier to overcome.The firm’s monopoly position may also be protected by patents and other legal protection such as various forms of licensing or tariffs, which may hinder entrance of local and foreign firms. Aggressive tactics and intimidation may also act as a barrier
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However, another market structure that exists is the monopolistic competition. It is close to the competitive end of the spectrum. It is a situation where a lot numerous firms compete with each other, but where each firm does nevertheless has a certain degree of market power thus the term ‘monopolistic’ competition. In monopolistic competition, there are a large number of sellers and due to this no one seller has a control over the supply of the product in the market. Hence, a single firm cannot influence price or output in the market. In other words, the price and output policies of each seller are independent. The grocery retailing market in the UK is arguably monopolistically competitive. In 1991, there were approximately 62,000 food retailing businesses. All were competing for the same product however, each one attempted to offer something unique and different (Anderton 1995). Each firm in monopolistic competition produces similar, but not identical goods and sells differentiated products which are close substitutes to one another. The product is differentiated in a number of ways such as altering the quality of the product, offering supplementary and other services, changing the location of the firm or promoting the product through advertisements. (Gillespie 2002). Unlike monopoly, there are no barriers to entry or exit in monopolistic competition. Entrance becomes possible due to a lower startup capital or the nature of the product. Moreover, in monopolistic competition, the main form of competition is price. Each firm sets the price arbitrarily, usually reducing the price of the product to gain from higher sales. However, at times firms in this type of market also resort to non price competition such as advertising and promotions to capture ...Download file to see next pagesRead More
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