Economics
Monopolistically Competitive Firms
Monopolistically competitive firms are characterized by a market structure where many firms offer differentiated products, giving them some degree of market power. This allows firms to set prices above marginal cost, but they still face competition from similar products. In the long run, firms in this market structure can earn only normal profits due to low barriers to entry.
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10 Key excerpts on "Monopolistically Competitive Firms"
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The founding father of the theory of monopolistic competition was Edward Hastings Chamberlin in his pioneering book on the subject Theory of Monopolistic Competition (1933). Joan Robinson also receives credit as an early pioneer on the concept. Monopolistically competitive markets have the following characteristics: ____________________ WORLD TECHNOLOGIES ____________________ • There are many producers and many consumers in a given market, and no business has total control over the market price. • Consumers perceive that there are non-price differences among the competitors' products. • There are few barriers to entry and exit. • Producers have a degree of control over price. The long-run characteristics of a monopolistically competitive market are almost the same as in perfect competition, with the exception of monopolistic competition having heterogeneous products, and that monopolistic competition involves a great deal of non-price competition (based on subtle product differentiation). A firm making profits in the short run will break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This gives the amount of influence over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.
eBook - PDFEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
Chapter 4 The Firm and Market Structures 145 industries are doomed to extinction by a lack of profits. On the contrary, millions of busi- nesses that do very well are living under the pressures of perfect competition. Monopolistic competition is also highly competitive; however, it is considered a form of imperfect competition. Two economists, Edward H. Chamberlin (United States) and Joan Robinson (United Kingdom), identified this hybrid market and came up with the term because there are strong elements of competition in this market structure and also some monopoly-like conditions. The competitive characteristic is a notably large number of firms, while the monopoly aspect is the result of product differentiation. That is, if the seller can convince consumers that its product is uniquely different from other, similar products, then the seller can exercise some degree of pricing power over the market. A good example is the brand loyalty associated with soft drinks such as Coca-Cola. Many of Coca-Cola’s customers believe that the beverage is truly different from and better than all other soft drinks. The same is true for fashion creations and cosmetics. The oligopoly market structure is based on a relatively small number of firms supplying the market. The small number of firms in the market means that each firm must consider what retaliatory strategies the other firms will pursue when prices and production levels change. Consider the pricing behavior of commercial airline companies. Pricing strategies and route scheduling are based on the expected reaction of the other carriers in similar markets. For any given route—say, from Paris, France, to Chennai, India—only a few carriers are in competition. If one of the carriers changes its pricing package, others will likely retaliate. Understanding the market structure of oligopoly markets can help in identifying a logical pattern of strategic price changes for the competing firms.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Instead, these firms are competing in market structures that lie between the extremes of monopoly and perfect competition. How do they behave? Why do they exist? We will revisit this case later, to find out what happened. Perfect competition and monopoly are at opposite ends of the competition spectrum. A perfectly competitive market has many firms selling identical products, who all act as price takers in the face of the competition. If you recall, price takers are firms that have no market power. They simply have to take the market price as given. Monopoly arises when a single firm sells a product for which there are no close substitutes. We consider Microsoft, for instance, as a monopoly because it dominates the operating systems market. What about the vast majority of real world firms and organizations that fall between these extremes, firms that we could describe as imperfectly competitive? What determines their behavior? They have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly. What will they do? One type of imperfectly competitive market is monopolistic competition. Monopolistically competitive markets feature a large number of competing firms, but the products that they sell are not identical. Consider, as an example, the Mall of America in Minnesota, the largest shopping mall in the United States. In 2010, the Mall of America had 24 stores that sold women’s “ready-to-wear” clothing (like Ann Taylor and Urban Outfitters), another 50 stores that sold clothing for both men and women (like Banana Republic, J. Crew, and Nordstrom’s), plus 14 more stores that sold women’s specialty clothing (like Motherhood Maternity and Victoria’s Secret). Most of the markets that consumers encounter at the retail level are monopolistically competitive. The other type of imperfectly competitive market is oligopoly. Oligopolistic markets are those which a small number of firms dominate.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
Most of the markets that consumers encounter at the retail level are monopolistically competitive. The other type of imperfectly competitive market is oligopoly. Oligopolistic markets are those which a small number of firms dominate. Commercial aircraft provides a good example: Boeing and Airbus each produce slightly less than 50% of the large commercial aircraft in the world. Another example is the U.S. soft drink industry, which Coca-Cola and Pepsi dominate. We characterize oligopolies by high barriers to entry with firms choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the market. In this chapter, we first explore how Monopolistically Competitive Firms will choose their profit-maximizing level of output. We will then discuss oligopolistic firms, which face two conflicting temptations: to collaborate as if they were a single monopoly, or to individually compete to gain profits by expanding output levels and cutting prices. Oligopolistic markets and firms can also take on elements of monopoly and of perfect competition. 10.1 | Monopolistic Competition By the end of this section, you will be able to: • Explain the significance of differentiated products • Describe how a monopolistic competitor chooses price and quantity • Discuss entry, exit, and efficiency as they pertain to monopolistic competition • Analyze how advertising can impact monopolistic competition Monopolistic competition involves many firms competing against each other, but selling products that are distinctive in some way. Examples include stores that sell different styles of clothing; restaurants or grocery stores that sell a variety of food; and even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names. There are over 600,000 restaurants in the United States.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
12 IMPERFECTLY COMPETITIVE PRODUCT MARKETS ELIZABETH J. JENSEN Hamilton College A ny introductory course in microeconomics spends a considerable amount of time examining perfectly competitive markets. It is important to understand this model; it serves as a benchmark for examining other industry structures and the welfare consequences of mov-ing away from perfect competition. However, it is also important to look at imperfectly competitive output markets—markets in which products are not perfectly homo-geneous or in which there are only a few sellers. While the perfectly competitive model assumes a large number of buyers and sellers, each of which is a price taker, the monopoly model assumes the opposite: one seller with complete control over price. Structurally, most markets are neither perfectly competitive nor monopolistic; they fall somewhere in between these two extremes of the competi-tive spectrum. The in-between markets are classified as either monopolistic competition or oligopolies depending on the number of firms in the market and the height of bar-riers to entry and exit. We turn first to monopoly. Monopoly A monopoly is the only producer of a good for which there are no close substitutes. This puts the monopolist in a unique position: It can raise its price without losing consumers to competitors charging a lower price. Thus, the monopolist is the industry and faces the downward-sloping market demand curve for its product. The monopolist can choose any point along that demand curve; it can set a high price and sell a relatively small quantity of output, or it can lower price and sell more output. Very few—if any—industries in the real world are pure monopolies. Examples of industries that come close include public utilities such as the local distributor of electricity or natural gas, the cable company in most communities, and, in a small isolated town, the local grocery store or gas station.
eBook - PDF- William F. Samuelson, Stephen G. Marks, Jay L. Zagorsky(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
Because com- peting products are close substitutes, demand is relatively elastic, but not perfectly elastic as in per- fect competition. The firm has some discretion in raising price without losing its entire market to competitors. Conversely, lowering price will induce additional (but not unlimited) sales. In analyzing monopolistic competition, one often speaks of product groups. These are collections of similar prod- ucts produced by competing firms. For instance, designer dresses would be a typical product group, within which there are significant perceived differences among competitors. The determination of appropriate product groups always should be made on the basis of sub- stitutability and relative price effects. Many, if not most, retail stores operate under monopolistic competition. Consider competition among supermarkets. Besides differences in store size, types of products stocked, and service, these stores are distinguished by locational convenience—arguably the most important factor. Owing to locational convenience and other service differences, a spectrum of different prices can persist across supermarkets without inducing enormous sales swings toward lower-priced stores. Monopolistic competition is characterized by three features: 1. Firms sell differentiated products. Although these products are close substitutes, each firm has some control over its own price; demand is not perfectly elastic. 2. The product group contains a large number of firms. This number (be it 20 or 50) must be large enough so that each individual firm’s actions have negligible effects on the market’s average price and total output. In addition, firms act independently; that is, there is no collusion. 3. There is free entry into the market. One observes that the last two conditions are elements drawn from perfect competition. Nonetheless, by virtue of product differentiation (condition 1), the typical firm retains some degree of monopoly power.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- University Publications(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 4 Monopolistic Business Model In economics, a monopoly (from Greek monos / μονος (alone or single) + polein / πωλειν (to sell)) exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. (This is in contrast to a monopsony which relates to a single entity's control over a market to purchase a good or service, and contrasted with oligopoly where a few entities exert considerable influence over an industry) Monopolies are thus characterised by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. The verb monopolise refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition. A monopoly must be distinguished from monopsony, in which there is only one buyer of a product or service; a monopoly may also have monopsony control of a sector of a market. Likewise, a monopoly should be distinguished from a cartel (a form of oligopoly), in which several providers act together to coordinate services, prices or sale of goods. Monopolies, monopsonies and oligopolies are all situations where one or a few of the entities have market power and therefore must interact with their customers (monopoly), suppliers (monopsony) and the other firms (oligopoly) in a game theoretic manner - meaning that expectations about their behavior affects other players' choice of strategy and vice versa. This is to be contrasted with the model of perfect competition where firms are price takers and do not have market power. Monopolists typically produce fewer goods and sell them at a higher price than under perfect competition, resulting in abnormal and sustained profit. Monopolies can form naturally or through vertical or horizontal mergers.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- College Publishing House(Publisher)
This is to be contrasted with the model of perfect competition where firms are price takers and do not have market power. Monopolists typically produce fewer goods and sell them at a higher price than under perfect competition, resulting in abnormal and sustained profit. Monopolies can form naturally or through vertical or horizontal mergers. A monopoly is said to be coercive when the monopoly firm actively prohibits competitors from entering the field or punishes competitors who do. In many jurisdictions, competition laws place specific restrictions on monopolies. Holding a dominant position or a monopoly in the market is not illegal in itself, however certain categories of behavior can, when a business is dominant, be considered abusive and therefore be met with legal sanctions. A government-granted monopoly or legal monopoly , by contrast, is sanctioned by the state, often to provide an incentive to invest ____________________ WORLD TECHNOLOGIES ____________________ in a risky venture or enrich a domestic interest group. Patents, copyright, and trademarks are all examples of government granted and enforced monopolies. The government may also reserve the venture for itself, thus forming a government monopoly. Market structures In economics, monopoly is a pivotal area to the study of market structures, which directly concerns normative aspects of economic competition, and sets the foundations for fields such as industrial organization and economics of regulation. There are four basic types of market structures under traditional economic analysis: perfect competition, monopolistic competition, oligopoly and monopoly. A monopoly is a market structure in which a single supplier produces and sells the product. If there is a single seller in a certain industry and there are no close substitutes for the goods being produced, then the market structure is that of a pure monopoly.
eBook - PDFMicroeconomics for MBAs
The Economic Way of Thinking for Managers
- Richard B. McKenzie, Dwight R. Lee(Authors)
- 2016(Publication Date)
- Cambridge University Press(Publisher)
Problems with monopoly theory (30 minutes) 48. The lemon problem (19 minutes) The bottom line The key takeaways from Chapter 12 are the following: 1 Firms in monopolistically competitive and oligopoly markets will follow the same production rule for profit maximization that perfect competitors and pure monopolies follow: they will produce where marginal cost and marginal revenue are equal. 2 Monopolistic competitors may earn zero economic profits in the long run, but they will not produce at the minimum of their long-run average cost curve. 3 The downward sloping demand faced by a dominant producer in a market can be derived from the gaps between the quantity demanded and supplied at various prices by all other smaller producers. 4 The profit incentive firms have to form cartels in their markets is a cause for the cartels’ failures, as members cheat on cartel production and pricing agreements. 5 At times, producers demand government regulation because such regulation can enable the producers to restrict their aggregate production and charge above-competitive prices. Firm strategy under imperfectly competitive market conditions 547 6 Asset bubbles do happen, as they have happened. Economists have explained asset bubbles with theories founded on both rational and irrational decision making. 7 Although the analysis of imperfect competition tells us something about the working of real-world markets, it does not answer all the questions economists have asked. The theo-ries presented here have by no means done a perfect job of predicting the consequences of imperfect competition. Thus our conclusions regarding the pricing and production behav-ior of firms in monopolistically competitive and oligopolistic markets are tentative at best. 8 Economists seeking to make solid, empirically verifiable predictions about market behavior rely almost exclusively on supply and demand and monopoly models.
- Takashi Suzuki(Author)
- 2009(Publication Date)
- World Scientific(Publisher)
4 is 1 In the following chapters of his book, Lenin also emphasized the concentration in banks and the financial sectors, which is out of focus of this monograph. 184 Economies with Monopolistically Competitive Firms seriously insufficient for the equilibrium analysis, if we expect that the equi-librium is an approximation in one sense or another of the actual state of the economy. Therefore, our first task is to generalize the price-taking behavior so as to incor-porate the monopolistic behavior of the firms. This has been achieved by Negishi (1961). He assumed that each firm has its subjective (either perceived or expected) inverse demand q t = r b ( y t b , p t ), where the commodity t is assumed to be produced by the firm b , and p t is the current market price of the commodity t . In normal situ-ations, the firm would expect a downward-sloping inverse demand, which obeys the law of demand, and Negishi specified the function r b to be linear with respect to the output quantity, y t , q t = a b ( p t ) y t b + d b ( p t ), where a b ( p t ) ≤ 0 and d b ( p t ) ≥ 0 for all p t , and they satisfy the condition: a x t a = b y t b + a ω t a implies that q t = p t , which means that in equilibrium, the firm must have the correct or consistent expec-tation with the prevailing market price. In particular, if the firm has the constant expectation q t = p t , this firm is a price taker, hence Negishi’s formulation of the monopolistic firms contains the competitive firms as a special case (see Figs. 6.1(a) and (b)). Generally speaking, we believe that the technologies of the monopolistic firms exhibit at least one of the following properties: (i) the increasing returns to scale (Fig. 6.2(a)), (ii) the large setup costs (Fig. 6.2(b)), (iii) the differentiated commodities (see Section 5.3 of Chap. 5). The essential point is that in the cases of the increasing returns (a) and the large setup costs (b), the convexity of the production sets will violate.
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