On one hand, the market for toothpaste seems to be full of competition, with thousands of competing brands and freedom of entry. Nature of Product : It is the nature of product that determines the market structure. Under a monopoly market, new firms cannot enter the market freely due to any of the reasons such as Government license and regulations, huge capital requirement, complex technology and economies of scale. It ensures that there are neither abnormal profits nor any abnormal losses to a firm in the long run. The companies in these market structures can be large or small, however, the most powerful firms often have patents, finance, physical resources and control over raw materials that create barriers to entry for new firms. On the other hand, there are no restrictions in entry and exit of firms in monopolistic competition due to product differentiation.
For practical purposes the firm is the same as the industry. How the market will behave, depending on the number of buyers or sellers, its dimensions, the existence of entry and exit barriers, etc. Firms under monopolistic competition compete in a number of ways to attract customers. The idea of perfect competition builds on a number of assumptions: 1 all firms maximize profits 2 there is free entry and exit to the market, 3 all firms sell completely identical i. Therefore, elasticity of demand factor is very important for him. Depending on who has greater negotiation power there can be different outcomes. In this scenario, a single firm does not have any significant market power.
Buyers and sellers are referred to as price takers rather than price influencers. It is for this reason that oligopolist firms spend much on advertisement and customer services. Under perfect competition, the area representing economic welfare is P, F and A, but under monopoly the area of welfare is P, F, C, B. However, by producing a unique product or establishing a particular reputation, each firm has partial control over the price. . Sources of Monopoly Power In a monopoly, specific sources generate the individual control of the market.
The product has no close substitutes. They use both Price Competition competing with other firms by reducing price of the product and Non-Price Competition to promote their sales. All rivals enter into a tacit or formal agreement with regard to price-output changes. So this individual seller will experience a sharp fall in the demand for his product. The first five conditions relate to pure competition while the remaining four conditions are also required for the existence of perfect competition.
In case of loss being sustained by the industry, some firms leave it. Due to this reason, selling costs constitute a substantial part of the total cost under monopolistic competition. Hence, the sellers and buyers of a particular commodity are spread over a large area. It refers to a single seller market having no close substitute. New entrepreneurs are often willing to take risks and employ new technologies in order to enter markets. That is why, a monopolist can increase his sales only by decreasing the price of his product and thereby maximise his profit.
Firms with monopoly power can set higher prices Pm than in a competitive market Pc. Generally, markets are divided into four structure types: , monopoly, monospony, and. The following assumptions are made when we talk about monopolies: 1 the monopolist maximizes profit, 2 it can set the price, 3 there are high barriers to entry and exit, 4 there is only one firm that dominates the entire market. Even though they are independent, a change in the price and output of one will affect the other, and may set a chain of reactions. The rate of customer churn is affected by the degree of consumer or brand loyalty and the influence of persuasive advertising and marketing We've just flicked the switch on moving all our digital resources to instant digital download - via our new subject stores. Simply, monopoly is a form of market where there is a single seller selling a particular commodity for which there are no close substitutes.
The is given when the monopolist sets the highest price that each consumer is willing to be pay. As against this, in a monopolistic competition, there is some control over price. Eventually, all super-normal profits are eroded away. Factors can also move from a low-paid to a high-paid industry. The loss of consumer surplus if the market is taken over by a monopoly is P P1 A B. Product differentiation Extreme Slight Degree of control over price Considerable but very regulated.
Discriminating monopoly: firms may want to charge different prices to different consumers, depending on their willingness to pay. The finally lost its monopoly status in 2006, when the market was opened up to competition. The majority of small firms in the real world operate in markets that could be said to be monopolistically competitive. The supplier is the price-maker, setting a price that maximizes profits. Because of the lack of competition, the monopolist can charge a higher price P1 than in a more competitive market at P.
This deadweight loss is represented by the areas A and B in the adjacent figure: while the monopolist gains area Cˈ and loses B, consumers transfer area Cˈ and lose A. As a result, monopolies are characterized by a lack of competition within the market producing a good or service. A monopolist can do either of the two things i. Demand curve Steep Flat Barriers to entry and exit Many No Difference between firm and industry No Yes Definition of Monopoly A type of market structure, where the firm has absolute power to produce and sell a product or service having no close substitutes. Products are close substitutes with a high cross-elasticity and not perfect substitutes. Firms can increase market share by increasing their sales and possibly benefiting from economies of scale. There are naturally occurring monopolies and those created through legislation, such as state-legislated liquor stores.