Monopoly & Monopolistic Competition

Presented by

Sunny Saurabh

MONOPOLY MARKET

“Pure monopoly is a market situation with one seller with no close substitutes” P.C. Dubey

MONOPOLISTIC COMPETATIONS

• It’s found in the industry where there is large number of small seller, selling differentiated but close substitute products.”

J.S. Bian

DEFINATION

TYPES OF MARKET FORMS

Market structure

Example Numberofproducers

Types of product

Power offirm overprice

Barriersto entry

Non-pricecompetition

Perfectcompetition

Parts ofagriculture arereasonably close

Many Standardized None Low None

Monopolistic competition

Retail trade Many Differentiated Some Low Advertising andproductdifferentiation

Oligopoly Computers, oil, steel

Few Standardized or differentiated

Some High Advertising andproductdifferentiation

Monopoly Public utilities

One Unique product

Considerable Very High

Advertising

CHARACTERISTICS OF MARKET TYPES

CHARACTERISTICS

Monopolistic competition

Each firm produces a differentiated product.

A large number of firms

Firms compete on product quality, price, and marketing.

Firms are free to enter and exit the industry.

Monopoly

One seller

large number of buyers

No close substitutes

Unique product

Very high barrier to entry/ completely blocked entry

O

P1

P

Q1 Q

D

D

Q2

Y

X

P2

Quantity

Price

NATURE OF DEMAND CURVE IN MONOPOLY AND MONOPOLY COMPETATIONS

REVENUE CURVES

MONOPOLY MONOPOLISTIC COMPETITION

MRAR

Y

XO

MR

AR

Y

XO

In both, the demand curve(AR) slopes downward to the right and the corresponding marginal revenue curves is below it.

Demand curve(AR) under monopolistic competition is “More Elastic” then monopoly.

AR & MR

QUANTITY

AR & MR

QUANTITY

REVENUE CURVES

MONOPOLY MONOPOLISTIC COMPETITION

Y

XO

In both, AC, MC and Average Variable Cost (AVC) are also “U” shaped.

MC AC

AR of production refers to cost of per unit of output

While MC refers to cost of producing an additional unit

COST

QUANTITY

&

DETERMINATION OF PRICE & OUTPUT OR EQUILIBRIUM UNDER MONOPOLY & MONOPOLISTIC

MONOPOLY MARKET DEMAND FUNCTION

MRAR

Y

XO

MR

AR

Y

XO

MC=MR MC curve cuts MR curves from below.

AR & MR

QUANTITY

AR & MR

QUANTITY

MARKET DEMAND FUNCTION

Quan. Price TR MR

0 10 0 0

1 9 9 9

2 8 16 7

3 7 21 5

4 6 24 3

5 5 25 1

6 4 24 -1

7 3 21 -3

8 2 16 -

9 1 9 -

Q2

MC>MR

MR>MC

SHORT RUN EQUILIBRIUMIt’s a time period in which there two types of production- fixed and variable,In this period volume of production can be changed but capacity of plant can’t be changedNew factories and plant equipment can’t be installedFirm can earn profit as well as losses

LONG RUN EQUILIBRIUMIts long period which is long enough to fully adjust the supply to the change of a productIn this period, all factors of production are variableBut in the long term a monopolist firm earns only profitIf price is less than long -run THE MONOPOLOSTIC would like to close down until rather than suffer the loss

SHORT & LONG RUN EQULIBRIUM Monopoly firm in the long-run is not contented with normal profits alone rather it is in the position to earn supernormal profit.

In long run monopolistc firm can fully exploit this situation.

1. Supernormal profit – AR>AC2. Normal profit – AR=AC3. Minimum loss – AR<AC

1.

2. 3,

Product Development And Marketing under MONOPOLISTIC COMPETITION

Innovation and Product DevelopmentWe’ve looked at a firm’s profit-maximizing output decision in the short

run and the long run of a given product and with given marketing effort.

To keep making an economic profit, a firm in monopolistic competition must be in a state of continuous product development.

New product development allows a firm to gain a competitive edge, if only temporarily, before competitors imitate the innovation.

Profit-Maximizing Product Innovation

Innovation is costly, but it increases total revenue.

Firms pursue product development until the marginal revenue from innovation equals the marginal cost of innovation.

Product Development and MarketingEfficiency and Product Innovation

Marginal social benefit of an innovation is the increase in the price that people are willing to pay for the innovation.

Marginal social cost is the amount that the firm must pay to make the innovation.

Profit is maximized when marginal revenue equals marginal cost.

In monopolistic competition, price exceeds marginal revenue, so the amount of innovation is probably less than efficient.

Selling Costs and Total CostsSelling costs, like advertising expenditures, fancy retail buildings, etc. are fixed

costs.

Average fixed costs decrease as production increases, so selling costs increase average total costs at any given level of output but do not affect the marginal cost of production.

Selling efforts such as advertising are successful if they increase the demand for the firm’s product.

Product Development and Marketing

Using Advertising to Signal Quality Why do Coke and Pepsi spend

millions of dollars a month advertising products that everyone knows?

One answer is that these firms use advertising to signal the high quality of their products.

A signal is an action taken by an informed person or firm to send a message to uninformed persons.

Product Development and Marketing

For example,

Coke is a high quality cola and Oke is a low quality cola.

If Coke spends millions on advertising, people think “Coke must be good.”

If it is truly good, when they try it, they will like it and keep buying it.

If Oke spends millions on advertising, people think “Oke must be good.”

If it is truly bad, when they try it, they will hate it and stop buying it.

So if Oke knows its product is bad, it will not bother to waste millions on advertising it.

And if Coke knows its product is good, it will spend millions on advertising it.

Consumers will read the signals and get the correct message.

None of the ads need mention the product. They just need to be flashy and expensive.

CASE STUDY ON MONOPOLY

DE BEER THE DIAMOND MONOPOLYDe Beers is the sole seller of diamonds with no close substitutes