Economis Monopolistic Competition

Topics: Perfect competition, Monopoly, Economics Pages: 5 (1381 words) Published: March 23, 2011
In a monopolistically competitive market, the products of different sellers are differentiated on the basis of brands. Product differentiation gives rise to an element of monopoly to the producer over the competing product. As such the producer of the competing brand can increase the price of his product knowing fully well that his brand-loyal customers are not going to leave him. This is possible only because the products have no perfect substitutes. Since however all the brands are of close substitutes to one another, the seller will lose some of his customers to his competitors. Thus the market is a mix of monopolistic competition. There are three main features that distinguish between a perfect competition and monopoly market structure: the type of firm, the freedom of entry and the nature of the product (Sloman and Norris 1999, pg, 161). A table of these features is contained in Appendix A. These two market structures are on opposite ends of the scale and consequently, the features and benefits of each structure vary quite dramatically.

In a perfectly competitive market structure, there must be many firms in the market competing for business. In contrast to this, within a monopoly there is only one firm operating in the market. A firm that is operating within a perfect market is referred to as a price taker. Duffy (1993, pg. 107) explains that a condition of working within a perfectly competitive market is that “a price taker cannot control the price of the goods it sells; it simply takes the market price as given.”

In a monopoly, the firm does not have to take the given price. It is able to search the market for the best price to charge relative to the demand for the product, profitability and availability of the resources for manufacture. This is particularly relevant when there is a shortage of supply. As there is only one seller of the product, consumers are forced to purchase the goods at a higher price. The International Encyclopedia of Economics (1997, pg. 1041) states, “that the monopolist can unilaterally dictate the quantity, quality, and price of the good or service it provides.” This is in direct contrast to the fixed pricing structure of firms within a perfect competition market structure.

Many variables can restrict entry to a market. There may be government regulations, patents, import/export restrictions or large investment and start up costs. It is the number of restrictions in place that determines the difference between the two markets. There is no restriction on entering a perfect competition market. Sloman and Norris (1999, pg. 161) explain that there is complete freedom of entry for firms and established firms are unable to stop new firms entering the market. On the other hand, access to a monopoly is completely blocked or restricted. The access to a monopoly may be restricted for various reasons such as government regulations, legislation or initial set-up costs.

Within a perfect market Duffy (1993, pg. 107) describes the products sold as homogeneous since there is no differentiation between what the firms sell. A consumer is able to purchase the same product for a similar price from numerous suppliers. In a monopoly, the product is unique in that any other company does not supply that good in a similar fashion. The nature of the product is more to the monopolist’s advantage than that of the companies within a perfectly competitive market structure.

A monopolist has significant control over the services or products its provides due to the lack of competition. Due to the unique nature of the product a company provides, the monopolist is able to restrict the goods it supplies thereby increasing the price charged and the profit made. This is in direct contrast to a firm operating within a perfect competition market structure. Long run equilibrium

In the long run, all monopolistically competitive firms earn only normal profit. The reason for this can be...
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