Market Structure: Monopoly and Monopolistic Competition (Coursework Sample)

Monopoly and monopolistic competition
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Monopolistic competition
Monopolistic competition is one form of the market structure where many firms are selling differentiated products. For example the market of books, the market contains many publishers selling the similar books and competing for the same customers. Sellers can enter the market without any barrier so that the market is less profitable, (Mankiw, 2009). Because each book has different name and genre, the publishers have different consideration about the prices.
In monopolistic market structure, we have several characteristics that distinguish it from other forms. They include:
1. A Large number of sellers: many firms are selling closely related but not homogeneous products. The companies act independently, and they have a limited share of the market.
2. Product differentiation: the firms are in a position to offer products that are not identical. In such, rather than being a price taker as for perfect competition, they set their prices that follow a downward sloping curve.
3. Free entry and exit: firms are free to enter into or leave the market. It continues until the remaining firms experience zero economic profit.
4. Lack of perfect knowledge: sellers and buyers do not have much information about the market conditions.
The demand curve under the monopolistic competition is a downward sloping because firm sales closely related but differentiated products. It implies that firms in this market structure sell more only by reducing the price of their products as shown in the diagram below
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116205077470
22098009842511620501270001762125136525P1Demand curve (AR Curve)
11620502628902495550272415P2
857250323215
OQ1Q2Q X
Where P and Q Price and Quantity
From the above diagram, at OP1 price, a seller can sell OQ1 quantity, demand rise to OQ2 when price is reduced to OP2. Therefore, the demand curve is negatively sloped as more quantity can be sold at lower prices.
In the short run, the firms in a monopolistic market structure are the same to monopoly. Because of their differentiated products, they experience downward sloping demand curve. When the firm charges higher price, the consumers’ willing to pay for the product will be low and when they charge relatively lower prices, consumers’ willingness to pay for the good rises as shown above.
For-profit maximization, firms under monopolistic competition get maximum profit when marginal revenue equals marginal cost. They make a profit when the market price exceeds the average total cost and suffer a loss when it is below the average total cost, (Shy, 2007).
In the long run, when firms make a profit, it attracts other firms to enter the market. As a result, the availability of goods in the market will raise thus giving customers’ wider preferences causing the decrease in demand for the incumbent firms, and firms will break even.
Monopoly
A monopoly is one of the market structures in which there is one seller of a particular good or service that has no close substitute and in which there is a barrier preventing new firms from entering. A monopolist can set prices with the only limitation of consumers’ willingness to pay because they are the price makers and consumers are price takers. The firm will choose its production output and price in order to maximize revenue.
Monopoly has several characteristics that make it stand. They include: one seller and many buyers, this characteristic makes it be a price maker as there is no any competition in the market. They fix prices that give maximum revenue to the firm. The products have close substitutes. Therefore, consumers have no choice but to take or leave it. The third feature is that there is a barrier to entry to the market. The barriers to entry might be natural or legal restrictions. A monopoly faces no competition because of the barriers to entry. The fourth characteristic is that they control specialized information. They are the only entity that has information concerning the product and the market, (Shy, 2007).
The sources of monopoly power include the enjoyment of the economies of scale in production. When the cost of production is much low as the size of the business increase and greater volume of production, the firm will have cost advantage over entrants. The firm can also get power by setting prices very low that existing rivals will not resist. Besides, a firm may acquire monopoly power by owning a scarce resource for the production that no other business can exploit.
From the monopoly powers, there are different types of monopoly that comes out. One is the natural monopoly. The producer has control over the source of the raw material used in the production o a particular product. The second is the one instituted by the government. It is called a statutory monopoly. Firms sometimes may decide to come together and become one so that the reaping of the supernormal profit becomes easier for them. The monopoly formed after the collusion is called Collusive monopoly. There is also a bilateral monopoly; this type consists of a single buyer and single seller.
Profit maximization in the monopolist market is done in both the short run and long run. This is because there is no competition in the market. Therefore, there is no distinction between the short period and the market period. The monopoly equilibrium is met at the point of equilibrium between the marginal cost curve and the marginal revenu...