The Example Of Monopolistic Competition
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Published: Thu, 18 May 2017
Monopoly refers to there is no competition and therefore the supplier has a very high degree of pricing power. In addition, monopoly also is a situation in which a single organization or group owns all or nearly all of the market for a given type of product or service. Besides, it also contains several characteristic, example and diagram in monopoly market.
In addition, there are four common types in competition free market which is perfect competition, monopolistic competition, oligopoly and monopoly. There are different meaning, features and examples in these four common types in a market.
A monopoly is when there are many buyers but there is only one seller that controls the supply of a product and its price. This allows the supplier to charge higher prices than if there was competition. Burkett, John P. (n.d, pg345) states that if a product has no close substitutes and a single seller, economists say that its market is a monopoly and its seller is a monopolist. Monopoly is like a market structure in which one company sells a special product into which entry is blocked in which the single firm has considerable control over product price. So, consumer has no option and choice to buy their product and service. There is few government agencies keep the formation of monopoly under control, especially in markets such as cable companies like Tenaga National and media.
2.1Characteristics of Monopoly
Monopoly market structure is having a one seller of a product which has no close substitutes. The characteristics of a monopoly market are as follow:
2.1.1 Single Seller
There is only one seller in a monopoly market. The seller controls the supply of a product and decides the product price. Besides, a monopolistic also control over the entire market because there is a single particular services in the market accruing to a rather large number of buyers.
2.1.2 Unique Product without close substitutes
In a monopoly market, their product and service are special and unique. They have their own idea and design for the product and service. All the units of a product are similar and there are no substitutes to that commodity in the company. The organization gains control over the market by offering a product or service that is not same with other. The company may use specialized information such as copyrights and trademarks in order to establish legal authority over the production of certain goods and services.
2.1.3 Barriers to Entry
Normally monopoly situation in a market can continue only when other firms do not enter the industry. Barriers to entry places limits on new company that inhibits its operating and expanding within the market. Each barrier is strong enough to discourage or prevent any would-be competitors from entering its market. Therefore, a monopoly presents barriers and circumstances that prevent entry into the market by potential competitors. The barriers may even be statutory in that the firm to take benefit of copyrights, tariffs and trade restrictions and others. If want continue the monopoly market should not be no entry for new firms.
2.1.4 Profit in the Long Run
The seller can earn more profit as he / she can if there is no any fear of competitive seller in the monopoly market. In other hand, if the seller gets abnormal profits in the long run, he / she cannot be removed from this position. However, this is not possible under perfect competition. If abnormal profits are available to a competitive firm, other firms will enter the competition with the result abnormal profits will be eliminated.
2.1.5 Price Discrimination
The seller can change the price and quality of the product. He sells more quantities charging fewer prices for the product in a very elastic market and if sells less quantities charging high price in a less elastic market.
2.2 Diagram of Monopoly
The diagram above shows the graph of monopoly. Ac stand for average cost, MC stand for marginal cost, MR stand for marginal revenue, P1 & P2 stand for the price, Q1 is quality of the product, AR represent average revenue, and D stand for demand. From the diagram, a profit maximizes increases output until MC=MR at Q1. The intersection of MC with MR gives the profit maximizing level of output. To find the market price one must project up from Q1 to the demand curve and across the vertical price axis, P1. Consumers are willing to pay P1 for Q1. Unit costs are only P2 so the firm is making an abnormal profit of (P1-P2)*Q1.
2.3 Conclusion of Monopoly
In conclusion, monopoly is only a seller but many buyers in a market. A monopolist is selling unique product and the design and idea create by his own. The seller is ‘price maker’, he decided to set the product price and maximize the profit. Therefore, monopoly is characterized by an absence of competition, which often results in high prices and inferior products. Besides, a monopolistic also needs to control some company no entry in monopoly market because some firms are strong to take advantages in your company.
3.0 Perfect competition, monopolistic competition, oligopoly and monopoly
Perfect competition means that has a market situation in which a large number of sellers or producers producing and selling homogeneous product. Monopolistic competition is which there are many firms selling differentiate products in a market. In addition, oligopoly is market structure in which there are a few independent companies and monopoly is the only one seller in the market and control the entire market.
3.1 Difference between the Features of Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly
3.1.1 Perfect Competition
Perfect competition refers to exists when there are many sellers in a market and no seller is large enough to dictate the price of the product. Besides, all the buyers and sellers are seeking the best price. Buyers and sellers also have perfect freedom of entry and exit from the market. Perfect competition means there are few, if have any barriers to entry for new firms and prices are determined by supply and demand. Under perfect competition, the product offered for sale by all sellers must be identical in every respect. The products offered for sale are perfect substitutes of one another. This is homogeneous product in perfect competition. Perfect knowledge also is a part of sellers and buyers in perfect competition. As we all know that no buyers are willing to pay a price higher than an original price. Sellers will not charge a price higher or lower than the original price.
Example of Perfect Competition
Agricultures are one of the finest perfect competition examples. In this aspect, there are many farmers produce their product and sell to government at the fixed prices. By the way it is not possible to any one supplier to increase the prices when others firms are selling the products at a fixed price. The perfect competition type of market includes companies producing consumer goods and durables and some daily essentials. Generally, interest rates are raised or slashed by all firms at the same time. So, the firms operating in the retail industry are a good example of perfect competition.
3.1.2 Monopolistic Competition
Monopolistic competition is a common market form. It refers to exists when a large number of sellers produce products that are very similar but are perceived by buyers as different. Generally, there is free entry and exit like perfect competition. But at the same time, there is product differentiation. Product differentiation allows firms to charge a high price and collect some profits. Besides, each producer can set the product price and quantity without affecting the marketplace as a whole. In monopolistic competition, consumers do not know everything, but they have relatively complete information about alternative prices, quality of the product and brand names, such as each seller also have relatively complete information about production techniques and the prices charged by their competitors. Therefore monopolistic competition includes restaurant, clothing and service industries.
Example of Monopolistic Competition
There are usually a large numbers of independent firms competing in the market. The most common example of monopolistic competition is fast food burger companies like Burger King and McDonald. These two companies are almost selling similar product but depends on consumers which they like the most. They are selling burger or any kind of foods like fried chicken, french fried and soft drinks. There are similar but no congruency.
Oligopoly is a form competition in which just a few sellers dominate a market and control the market by seller. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. In an oligopoly, there are at least two and more firms controlling the market. Companies in an oligopolistic industry attain and retain market control through barriers to entry. The most noted entry barriers are exclusive resource ownership, other government restrictions, high start-up cost and copyrights. Also, the profits of each seller depend materially on the actions of other major sellers, as well as its own actions. For example of oligopoly are automobiles, banking, petroleum, airline in an oligopoly. This is because a small number of firms control a large majority of the market.
Example of Oligopoly
For example, coke has many types like Coca Cola, Pepsi and Cola Turka. These are different firms’ product with similar characteristic but different quality and design. It just like when you go to buy a car, you find that almost all of the cars available are produced by a relatively small number of firms: Ford, Nissan, Honda, Toyota and several other firms produce a vast majority of cars sold in the United States. However, behind the many brand names in the U.S. are really few different car producers that sell their products under many different names.
Monopoly means that there are many buyers but only one seller controls the supply of a products and its price. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. A monopoly may also form when a company has a copyright or patent that prevents others firm entering the market. Besides, in monopoly market are no close substitutes, because the monopolistic create and design the product and set the price of product by him own. Therefore, the product that he produces is unique and no close substitute. Monopolists can raise their profits by charging different prices to different buyers based on them willing to pay or don’t.
Example of Monopoly
For example, a government can create a monopoly over an industry that it wants to control, such as electricity. There are very high barriers prevent the entry of any potential competitors. This is the way to protect from competition. For another instance, Microsoft which is considered a monopoly for operating system and some other software for personal computers is facing many litigation on the charge of following monopolistic practices.
These all above are the meaning, features and some examples about perfect competition, monopolistic competition, oligopoly and monopoly in free market. In a perfect competition, there is perfect knowledge because there is no information failure and knowledge shared between all participants. Monopolistic competition has many sellers sell products that are differentiated from one another that are products are substitutes. Oligopoly markets are the most common markets nowadays. One of the fiercest oligopolistic competitions exists in the mobile phone industry across worldwide. Monopoly is a market structure in which there is only one producer or seller for a product and controls the market and decides the price and profit.
4.0 Conclusions and Recommendations
In conclusion, after complete these two tasks, I gained extra knowledge about the detail of monopoly and it’s characteristic. In a monopoly market only has one seller running the business in entire market. Therefore, there is no competition with others. A monopolistic also needs to ensure no barriers to entry of other companies.
In addition, free market is the competition that comes from allowing anyone who needs to sell a particular service or item to do so. Under free market there have four common types which are perfect competition, monopolistic competition, oligopoly and monopoly. There are different market with different characteristics and examples.
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