Monopolistic Competition in the Market - Coursework Example

Economics. Name: Institution: Monopoly is whereby a company or industry produces services or goods with no close substitute existing. In monopoly, there is only one supplier who is protected from any sort of competition. There is a barrier which prevents any entry of a new firm which is likely to compete with the company. A monopolistic competition does arise when either firms produce and offer products or services which are similar and not substitutable. Firms are only able to enter into the industry when the profits are appealing. In this type of competition, all the firms involved are profit maximizers. All the firms which are involved have some market power thus they are not price takers. A monopolistic competition in the market can be characterized on their product differentiation. These firms sell products which are close but totally imperfect substitutes. These products perform similar basic functions having quality differences. Such differences in quality could be type, style, appearance; location and reputation tend to distinguish them from each other. For example, the motor vehicles are similar in functioning i.e. of moving people from one point to another in a considerable safety and comfort. But there are different types of motor vehicles e.g. trucks, motor scooters, cars, motor cycles etc. manufactured by Suzuki Company. The graph of a monopolistic competition structure   A Monopolistic firm is a price maker because he faces few competitors in the market. Therefore the demand is a price inelastic. A monopolistic company always seeks to maximize profits through setting output such that MR = MC This will be at the output Qm and the Price Pm. If the market would have been competitive, then the price would be lower and while the output higher. The monopolistic companies have very high degree of market power. These companies control the terms and conditions of all the exchange. These monopolistic companies can exponentially raise its prices without fearing to lose its customers. Also, these firms can lower their prices without causing a ruinous price war with their competitors. These firms have this market power because of their relatively few competitors. For a monopolistic market structure to thrive there must be a barrier to the entry to any rival in the market. The barriers to the entry of any competitor might be natural or legal impediments. These barriers do protect the particular firm from the competition from competition from the potential incoming entrants. Also a particular firm might acquire ownership of a high significant portion of a major resource. The government might also be giving a particular firm some exclusive rights to produce the goods. Some of the government monopolies result from corruption and special interest. The legal barriers against the entry of any entry of a potential rival come up with some legal monopoly. The legal monopoly in the market is whereby any entry and the competition is restricted through the grant of public license, copyright, patent or franchise. A patent is a right exclusively granted to an inventor of s service or product. A copyright is a right exclusively granted to a composer or author of some dramatic, artistic, literary or musical work. Also when a single firm has acquired ownership of a major resource, that firm might become monopolistic. This is because under such circumstances, no other firm is allowed to produce the same product or service. Examples of monopolistic market structures are the DeBeers dealing with the diamonds and the production of the aluminium by the Alcoa in the 1930’s. Natural monopolistic market structures do arise if one firm is able to supply a commodity to the entire market because of its lower price than the other firms. Some examples of the monopolistic firms include the electric power distributors and the Distributors of the Natural gas. The monopolistic companies have some sources of inefficiency. First, the firm mostly charges a price exceeding the marginal cost at its optimum output. These firms focuses on profit and this might to surplus production of goods and services. Secondly, these firms always operate with an excess capacity. Thus their profit maximizing output is lesser than the output which is associated with a minimum cost. The Green area = the Supernormal Profit, (AR-AC) Q The Pink area = the Deadweight welfare loss (the combined loss of the producer and the consumer surplus) which is compared to the competitive market Allocative Inefficiency. Any monopolistic firm is allocatively inefficient because in the market, the price is greater than the MC. i.e. P is greater than the MC. Also, the price would be lower, in a competitive market, thus more consumers would benefit. The Productive Inefficiency. The monopoly is productively inefficient because it is not the lowest point on the AC curve. X - is the Inefficiency. It is said that any monopoly has less incentive to have costs cut because it doesn't face competition from other companies. Therefore this AC curve is higher than expected. Supernormal Profit. A Monopolist makes Supernormal Profit Qm * (AR – AC ) leading to an unequal distribution of income. Monopolistically competitive firms are very inefficient. These firms focus on making more profit and incurring very minimum cost. These firms end up producing products of low quality. These firms don’t give a lot of emphasis on the innovation, substitutes and technological change. Also the monopolistic firms, might charge higher prices to their suppliers by using their supernormal profits. The supermarkets are also criticized for their low payments given to the farmers, who are their suppliers. A duopoly is a market competition that occurs when two countries or companies control almost all or all of the market for a particular service or product. There are two forms of duopolies: the Cournot and the Bertrand duopolies. In a Cournot duopoly, the competition between two firms is based entirely on the quantity of the products being supplied. The duopoly partisans agree essentially to have the market split. The price received by each firm for the product or service is based on the quantity of the items sold. Then these two firms react to each other’s changes in production until when equilibrium is attained. In the Bertrand duopoly, the two firms compete on the price. Normally, consumers usually opt to buy the cheaper of the two products which are identical. This phenomenon finally leads to a price of zero profit since the two competitors will be constantly attempting to attract more clients through the price cuts. The price undercutting means that a Bertrand equilibrium prices and profits are generally higher as the quantities are higher than in the Curnot duopolies. The duopoly compels all the producers to consider the potential reactions of their rivals to particular business decisions carefully. When the duopoly members compete on the price, they eventually drive the price of the product down to that cost of production. Thus both duopoly members get their profit lowered. This phenomenon gives a strong incentive to the duopolists to agree to charge a certain monopoly price and also share the resulting profits. However, the federal antitrust laws, the Sherman act notably, make such collusive activity in the United States of America to be illegal. Also, each duopolist has an incentive to compete while colluding with the competition. A price adjustment that is undetected would attract both the customers who buy or don’t buy the products from the competition. These price adjustments might be subtle, also including better faster delivery, credit terms or related free services.Duopolistic market competition is most effective if the demand for duopoly’s product is not affected by the price. This is the reason as to why the duopolies are mostly effective in short term, over in the long term. Often the prices become more elastic as the consumers are able to find substitutes for the product. The demand volatility also may lead to some disagreements within a collusive duopoly which regard to the outputs and prices. An oligopoly is a type of market structure where a few market firms dominate the market. When a market is shared between such few firms, it is thus said to be highly concentrated. But only very few firms dominate. In any oligopoly market environment, it is possible to have some small firms operating.eg the British Airways and the Air France are the major airlines but operate their routes with only very few close competitors. Although, also there are some many small airlines that do the catering for the holidaymaker or offer specialist services. (Negbennebor 2001). The companies which are under oligopoly have interdependence in decision making. Any change in price of the product by any firm has a direct impact on the fate of its rivals. Such a change has to be retaliated by these firms changing their output and price. Here, the firms have to balance between the market demand and the reactions of the others firms in the industry. Thus the interdependence in decision making.The companies which are in the oligopolistic market have very aggressive methods of maximizing the sales and the market share. Therefore, these firms incur great cost in advertisement and sales promotion. The selling and advertising costs are very important in the oligopolistic market structures.The oligopolistic firms have some group behavour. The monopolistic competition, In the case of perfect competition, the firms behave in such a manner as to have their profits maximized. But in oligopolistic structures, there is some group interdependence. The mutual interdependence brings about uncertainty to all the oligopolistic companies. Thus no company can predict the fate of its price and output. Under the oligopolistic competition, a firm can’t assume that if they change their price their rivals will have their price unaltered. Thus the oligopolistic demand curve faces losses its determinateness. (Vilves 1999). The demand is relatively elastic above the kink. This is because prices of other companies remain unchanged. Demand is relatively inelastic below the kink, because all other companies later introduce an identical price cut. This eventually leads to a price war. Thus, the best option for these oligopolists is producing at point E, the kink point and the equilibrium point. Some monopolistic elements exist in the oligopolistic markets. Producing a differentiated product, the firm under oligopoly is able to have a large market share. Thus in the lining of the output and price, these companies behave as a monopolist.There is price rigidity in the oligopolistic companies. Their prices are usually very sticky and rigid. The rival firms are usually on the lookout. In case of an immediate price-cutting by one firm, its rival firms have to respond immediately by cutting their prices too. Thus no firm can have a price-cut without having a decision on the price-output with the other rival firms. Thus the price becomes finite or rigid in the oligopolistic markets. (Kreps 1990). Zain was founded in 1994 in Jordan as the first mobile operator in the country. It was followed later by Orange , which was a subsidiary of the Jordan Telecom in the year 2000. In the years when Zain was the only mobile operator in Jordan, the call rates were higher. The Zain subscribers had no alternative other than complying with these call rates. With the coming of the Orange company, there was some change in the market. The percentage share in the market for the Zain company started to decrease as the market trend of the Orange started to increase. Though Zain has been dominating the mobile market in Jordan, its % share in the market has been having a declining trend. It has declined from 40.72% in the year 2009 then 36.8% in the year 2010 and also to 35.43% in the year 2011. This is due to the better services being offered by the Orange Company. Zain only managed to have an increment of only 263,000 as its new subscribers in the year 2011. On the other hand, the Orange Company attracted a total of 541,000 new customers in the market. Optimum price of the Zain depends on where Orange is expected to set its prices. By just Pricing below the other firm leads to a full demand (D) in the market being attained. Though this is can’t be optimal if the other firm is pricing just below marginal cost as that would lead to negative profits. In general terms, Zain best response function is p1’’(p2). This gives Zain an optimal price for each price set by Orange. Because Orange has the same marginal cost as Zain, its reaction function is symmetrical to the 45 degree line. The reaction functions are in the diagram below. MC = the marginal cost which is constant (equivalent to the constant production unit cost). p1 = price level for the Zain p2 = price level for the Orange pM = monopolistic price level The result of these firms' strategies is where no firm can increase its profits by unilaterally changing its price. The intersection of the reaction curves, is given by Point N on the diagram. At the point p1=p1’’(p2), also p2=p2’’(p1). From the curves, point N on the above diagram is where both companies price at a marginal cost. Therefore, both mobile operators will lower prices until when they reach the MC limit.In case one of these mobile operators has a lower average production cost, it will charge a price that is lower than the other company’s average cost thus taking all the market share. This is known as "limit pricing". The Orange company had to come in with lower call rates so as to thrive in the Zain dominated Jordan. Then the Zain Company was compelled to react by lowering its call rates. Currently, Zain is charging as low as $0.39 per minute which is better to the subscribers. So the two mobile operators had resulted into a duopolistic competition structure. These two companies had to agree to charge a certain monopoly price. The competition brought by the orange company, led to improved services. Currently there is advanced services like choosing of minutes, SMS plan, internet and paying of bill using the mobile phones. The customers are able to choose the amount of SMS, local time and MMS, international bundles and BlackBerry or the Mobile internet Bundles. This duopoly enabled the subscribers to have a wide range selection of the mobile services. The clients have been having the liberty to choose from which mobile operator, they should get SMS services from etc. In Jordan, the Jordan pond House is an example of a monopolistic restaurant in the country. The restaurant has been dated back to the 1870s. It is located in the Mount Desert Island and Acadia national Park. It has been offering some dining traditions by offering baked popovers, rich lobster stew, maine seafood and the homemade ice cream. Some clients nowadays lament that the restaurant, which has been a monopoly for a long time, should improve on the quality of their dishes. Others also complain that their dishes are very expensive. The restaurant might raise its prices exponentially without fearing to lose its customers. Despite these, the restaurant has a very large international market share. The restaurant offers its services with very little fear from its few competitors. The restaurant focuses on making more profit without necessarily improving the quality of their services. Sometimes, they have been focusing on the quantity and not quality of their services. (Samuelson 2003). References Pindyck.2001. Microeconomics. New Jersey: Prentice-Hall. Rodman.2008. Mass Media in a Changing World. New York: McGraw Hill Negbennebor.2001. Microeconomics, The Freedom to Choose. New York: Boston Publishing. Vives. 1999.Oligopoly pricing. London:MIT Press. Samuelson.2003. Managerial Economics. New Jersey: Prentice-Hall. Kreps. 1990. A Course in Microeconomic Theory.Princeton: New York: McGraw Hill Kreps.1990.There is nothing to guarantee an even split.Princeton: Princeton university press. Read More