Evolution of Monopolistic Competitive Market

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Evolution of Monopolistic Competitive Market
Brand loyalty, Generic Entry and Price Competition in MP3 Player Market

Introduction

In this paper I will reflect the evolution of the monopolistically competitive market and by doing so guiding the concept with an insight of the Mp3 player market and its actors. One of the actors on the Mp3 market is the IPod created by the innovating company Apple. The IPod was realised in March 2004 and was immediately a success. Easy to manoeuvre and with its attractive and appealing look it took the profits from other existing firms and became the current market leader. Looking at the concept and the dynamics of a monopolistically competitive market we can foresee the future for the IPod and other firms in the Mp3 player market. By doing so we can predict losses by designing business strategies for monopolistically competitive industries.

Characteristics of Monopolistically Competitive Market

To be able to describe the Mp3 player market we firstly need to explain different market structures and the theory of monopolistically competitive markets. There are different market structures, perfect competitive market, such the supermarkets, where the market only determines price. The opposite market structure monopoly, a single firms dominates the market, can determine both its price and output. Finally there are imperfect markets like oligopoly, where a couple of firms have monopoly over a product, and then monopolistically competitive markets. As it implies it’s a mix of perfect competition and monopoly where the Mp3 player is operating in. “Monopolistic competition is the form of imperfect competition, in which the market has sufficient few firms that each one faces a downward sloping demand curve but enough that each can ignore the reaction of rivals to what it does,” stated by Joseph Stiglitz (1993 p. A14, 353-356). Stiglitz description refers to a market where a few number of firms compete on product quality, price, marketing and branding. The products in the market are substitutes and serve the same purpose e.g. the Mp3 player serve portable music with Mp3 files. To separate their products from rivals in the market, firms differentiate its product’s features such as colour, size, brand and so forth. This is called product differentiation and is an important unique characteristic for the market among with advertising and branding. Second important characteristic of monopolistically competitive market is, like perfect competitive markets, there are no entry barriers. In the absence of barriers to entry, firms can entry and exit the market.

Concept of monopolistic competition
Mentioning product differentiation in the market, firms try to differentiate their brand and products and make them imperfect substitutes. As a result the firm faces a downward sloping demand curve. Marginal revenue is associated with demand curve and also faces a downward sloping curve. This leads to a firm gain market power, and similar to monopoly, can set its own prices in the short run. As for any market the goal is to maximize economic profit, by producing quantity at which its marginal revenue equals to its marginal cost the firm. When existing firms in the market are currently making profits, by charging a price above their average cost and MR, firms gain a profit.

Economic profit in the Short run

The firm set its own prices since the firm is facing a downward sloping demand line that is higher than the marginal revenue (MR) and average total cost (ATC).

Since no barriers to entry new firms with new differentiated products enters the market in an attempt to gain some profit and market share. As new firms enter the market, market share and demand of each existing firm reduces and it’s demand curve shifts leftward (as seen in the graph below). Since number of substitutes enters the market, demand line also turns falter and more elastic.

Demand line shifts from D to D1 and sets new...
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