The Various Shades Of Monopolies And Perfect Competition

For my research paper I decided to write about monopolies. I chose to write about monopolies because I wanted to learn more about them. No this type of monopoly is not a board game in which consumers engage in buying houses or property with fake money. Instead this type of monopoly is a firm that is the only seller of a good or service that does not have a close substitute. An example of a monopoly is natural gas company or Time Warner Cable or Microsoft and its Windows operating system. Although few people like monopolies and even though few companies are monopolies, the model of a monopoly can be useful. You see a monopoly is useful in analyzing situations in which firms agree to act together as if they were a monopoly. Monopolies are not illegal in the United States. What is illegal is actions taken by monopolies to limit competition. But there are times when one supplier in a market is better than a competitive market? Should the government work to protect that one supplier in a market?

Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because:

Monopolistic competition firms might maximize profit or minimize loss in the short run. The firms that under monopolistic competition used this strategy as the production of output where the marginal revenue is equal to the marginal cost (MR = MC).

Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. (McGraw-Hill) A pure monopoly is a firm that satisfies the following conditions, it is the only supplier in the market, there is no close substitute to the output good, and there is no threat of competition. In pure monopoly there are single sellers, no close substitutes, price maker and blocked entry.

This essay will look at efficiency between both a monopoly and a perfect competition, and whether a monopoly is necessarily less efficient than perfect competition. Using diagrams and equations reflecting the optimal choice of output, marginal revenue and marginal cost for monopolies, I will explain how efficiency is affected by low levels of production. At the same time monopolies can increase efficiency due to their ability in price discrimination, they price people differently and therefore people pay what they truly believe the good is worth. There needs to be a clear description of the differences between monopoly and perfect competition as well as efficiency; an analysis of deadweight loss and natural monopoly is also important

Monopolistic Competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms are able to differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term.

To understand better how the monopoly affects the market, we need to compare monopoly to perfect competition. Where there is perfect competition, the company is unable to decide the price of their product. In other words, the company has to label their prices according to the prices of their competitors. However, in a monopoly, they decide the prices and that too, at a much higher price with a different output compared to a competitive industry (Sloman, 2005).Some key points are given under:

People have been doing anything in their power to gain money. Many think they are leading the competition with doing nothing wrong. Others see it as unfair to do the things that monopolies have done to society. Lawsuits have been made to stop the ones behind this, but some monopolies weren’t always out to hurt the economy, but to help it. Monopolies have impacted this economy in the past and even to this day.

Answer: Typically, the approach to study and discuss monopoly bases on the firms’ behaviors in pursuit of maximizing monopolistic profit. In particular, the monopolist’s profit maximization is derived and interpreted through the first-order condition, which is the quantity of output that marginal revenue equals to marginal costs (Mankiw, 2012: 283). Following the above logic above, the discussion of maximization of monopoly profit is usually conducted by the mathematical equation and figure, which contains curves of demand, average cost, marginal cost, and marginal revenue. Different from the standard approach, the module of “Theoretical Foundation of Economic Policy” chose a different way to discuss monopoly. This module’s discussion on monopoly relied on case analysis.

Perfect competition is a type of market structre where there is highest level of competition. In perfect competition the firms are offering homogeneous product. Every firm believe that it can sell any amount of output it wishes at the prevailing market price. Because of homogenous product and large number of firms, no individual firm is in a position to effect the price of the product and therefore the demand curve for the firm under perfect competition is a horizontal straight line.

The theory of pure competition is a theory that is built on four assumptions: (1.)There are many sellers and many buyers, none of which is large in relation to total sales or purchases. (2.) Each firm produces and sells a homogeneous product. (3.) Buyers and sellers have all relevant information about prices, product quality, sources of supply, and so forth. (4.) Firms have easy entry and exit.

There are several characteristics of a monopoly. Firstly, extreme economies of scale are available to monopolist firms, giving them a huge advantage over any other company. Because of this and relatively low costs despite large product ranges, supernormal profits are achieved. Another characteristic is the inelastic demand for these firm’s products.

Unlike the theoretical perfect competition market, Oligopolies exist in real life. A market structure that is dominated by two companies is known as a duopoly. An example of an oligopoly is the soft drinks market that is dominated by Coca-Cola and Pepsi (Zheng, 2013). Oligopolies can be categorized according to the type of product they produce. The products may be either homogeneous or differentiated. On the one hand, Homogeneous products are produced by a standardized or a pure oligopoly. On the other hand, a differentiated oligopoly produces different products (William & Allan, 2011).

Within monopolistic firms there are a large number of organizations that operate within the industry which are independent from each other. The decision of one firm in the market has no significant effect on the demand curves of its rivals. There is also freedom of entry into the industry. The firms within an industry offer product differentiation, where one firm’s product is amply diverse from its competitor 's products, in order to allow raises in price without customers converting to alternate products.

Pure monopoly and perfect competition are two extreme cases of market structure. In reality, there are markets having large number of producers competing with each other in order to sell their product in the market. Thus, there is monopoly on the one hand and perfect competition, on the other hand. Such a mixture of monopoly and perfect competition is called monopolistic competition. It is a case of imperfect competition.