Micro/Macro Economics - Essay Example

MICRO/MACRO ECONOMICS How might a firm in monopolistic competition increase its monopoly power? A firm in monopolistic competition does not have monopoly power as such but can develop a certain degree of dominance in the market that is almost a monopoly. This can happen when a particular firm develops a product that distinguishes it from the competitors and thus attract most buyers. The product can be protected by a patent which the company can utilize for many year before it becomes available to the rest of the industry.

Kodak and xerox dominated the market for many years in this manner.Also, a company can build brand value or brand equity of its product through superior quality, reliability, and distinctive services that others are unable to match, combined with massive and sustained promotions and advertising efforts. Nike grabbed a big slice of the market owing to its sustained "Just do it" ads at the expense of Reebok and many others. IBM also built its brand value through its reputation for quality and after-sales service for many years before others such as Dell Computer and Hewlett Packard found a way to make a dent on its competitive advantage.

Coca Cola is nothing but sweetened flavored water without the brand value it has carefully built and nurtured through many years.Another way for a firm to achieve some sort of monopoly power is by developing efficient mass-production or lean-production methods that result in cost efficiencies and therefore reduced production costs. Because of such economies of scale, the firm can then charge lower prices that its competitors cannot match or undercut.2. Might there be any benefits to the collusion?

In the context of the competitive business environment in the United States, open collusion among firms in an oligopoly would result in lawsuits and a strong possibility of damages or fines having to be paid. Subtle forms of (or tacit) collusion is however possible - primarily through price leadership. One firm, usually the biggest in the industry, increases its price. Under normal circumstances, that firm would lose business as buyers would avoid its high-price product or service, and give their business to those whose prices remain the same.

With price leadership, the others follow by charging the same price as the price leader, and thus cause the public to suffer from the monopoly profits that these firm earn. The firms may also increase their prices with only slight variations (a few cents, say) from that of the price leader and thus avoid public suspicion or investigation by regulatory authorities. 3. What would happen to output? What happens when a competitive labor market is unionized?Because the demand curve of a monopoly is negatively (downward) sloping, the output or quantity will have to decrease when the price is increased.

Some consumers will just inhibit themselves from buying its products even if there is no substitute or there is scarcely any substitute, even if the demand is relatively inelastic.In the case of the labor market, unionization would result in some kind of monopoly power of the unions. The unions can set a price (wages) which they will require employers to pay to new and existing workers. Then employers, who naturally are in the business for profit, will either accept union terms or find workable alternatives.

One alternative is to hire less workers and exact as much productivity as possible from them, otherwise these companies will have to downsize, which will then put pressure on the unions to reduce their demands. Currently, many U.S. employers establish manufacturing plants in other countries in order to circumvent high wages in this country; or they outsource the services part of their business to Third World countries in Asia, South America or central Europe where they can find trainable labor force that they can pay just a quarter, or thereabouts, of the prevailing wages in the United States.4. Doesnt the monopolist have to live with the industry demand curve?

What are the effects given a very elastic demand curve?A monopolist is the industry (Baumol and Blinder, 1997). In perfect competition, the demand curve is perfectly horizontal, which means any firm that charges differently from prevailing prices will be out of business rather quickly. In an oligopoly, as well as in a monopoly, the demand curve is downward sloping. For the monopoly, the constraint is not the competition but the elasticity of demand of the consumers: Consumers can decide to buy less or nothing or find substitutes, even poor substitutes, if the price increases.

For example, if electricity rates rise, consumers can switch to kerosene lamps or candles. Therefore, the monopolist does not have to deal with any demand curve of its industry, it has the demand curve.If the demand is very elastic - that is, the elasticity is much higher than 1.0, lets say 3.0 - any increase in the price of a commodity or service would result in a significant loss in revenues. This is because a 10 per cent increase in price would trigger a reduction in quantity demanded of 30 per cent.

On the other hand, if the firm reduces his price, this can result in a three-fold increase in the quantity demanded, and therefore more revenues and profits. If the demand curve is highly elastic, it pays to reduce the price, but the firm would be penalized by the market if it increases its price.--------REFERENCES:Baumol, W. J. & Blinder, A. S. (1997). Microeconomics, 7th ed. Orlando, FL: The Dryden PressMankiw, N.G. (1998). Principles of economics. Orlando, FL: The Dryden Press,