...Monopolistic competition: An evolutionary approach EXECUTIVE SUMMARY This term paper shows that a monopolistically competitive equilibrium can evolve without purposive profit maximization. Firms exit the industry if they fail to pass the survival test of making nonnegative wealth. Industry converges in probability to the monopolistically competitive equilibrium as the size of each firm becomes small relative to the market, as the entry cost becomes sufficiently small, and as time gets sufficiently large. Consequently, in the limit, the only surviving firms are those producing at the tangency of the demand curve to the average cost curve and no potential entrant can make a positive profit by entry. Introduction The criterion by which the economic system selects survivors: those who realize profits are the survivors; those who suffer losses disappear. In the late 1920s and early 1930s it became apparent that there were severe limitations in conducting economic analysis using a framework of either pure competition or pure monopoly. Consequently, economists began shifting their attention to middle ground between monopoly and perfect competition. One of the most notable achievements was Chamberlin’s, 1933 blending of elements of perfect competition and pure monopoly in a notion of ‘‘large group’’ monopolistic competition where there are many competing firms producing similar but different commodities which are not perfect substitutes. Because of the product...
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...Monopolistic Competition is a market structure in which there are several or many sellers; each produce similar, but slightly differentiated products. Differentiation can be on the basis of colour, design, size, taste, fragrances, etc. Each producer can set its price and quantity without affecting the marketplace as a whole. Wikipedia explains the concept as, “A common market form. Many marketers can be considered monopolistically competitive, often including the markets for restaurants, cereal, clothing, shoe, and service industry in large cities”. “Monopolistic Competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, the firms are left with excess production capacity. This market concept was developed by Chamberlin (USA) and Robinson (Great Britain)” – Investopedia. Chamberlin and Robinson also described this situation as an imperfect competition as the market does not have the conditions required for perfect competition. The characteristics of Monopolistic Competition are stated below: - 1. It has both the elements of Monopoly and Perfect Competition. 2. Large number of buyers and sellers in the market. 3. Non-Price difference (product differentiation) among the competitive products. 4. Few entry as well as exit barriers. 5. All the sellers have relatively small market share. 6. All the firms are profit maximizes. 7. Each firm has a limited ability to affect its output price. 8. The...
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...Chapter 15 Monopolistic Competition MONOPOLISTIC COMPETITION * market structure characterized by many sellers of differentiated products with free entry and exit * differentiated products --> market power * many sellers --> no collusion * free entry and exit --> zero economic profit in the long-run SHORT-RUN --JUST LIKE MONOPOLY * market power --> downward-sloping demand * downward-sloping demand --> marginal revenue less than price * produce the quantity such that MR = MC * charge highest price possible for that Q as shown by demand LONG-RUN--JUST LIKE PERFECT COMPETITION * short-run profit --> entry * entry --> decrease in demand for existing firms until zero profit * short-run loss --> exit * exit --> increase in demand for remaining firms until zero profit LONG RUN--EXCESS CAPACITY * monopolistically competitive firms charge P> MC * zero profit --> P = ATC * P > MC & P = ATC --> ATC > MC * ATC > MC --> ATC is not minimized * higher cost (& therefore price) is the price we pay for product variety MOTIVATION * goal: to develop a position (market niche) * effect: gain market power * reason: other products less likely to be seen as viable substitutes * result: command higher price VALUE IN DIVERSITY VS. COMPETITION AMONG SELLERS * product differentiation involves a trade-off * value in diversity: more products -->...
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...Monopolistic Competition in the Retail Industry The retail industry is a prime example of the modern version of Chamberlin and Robinson’s model of Monopolistic Competition (Grewal, 441). The retail industry consists of vast markets with different brands and goods of one common goal, to sell their products. To cater to this rapidly changing market many large scale retailers are findings ways to make their product more appealing to the public in hopes of gaining market share over their competition. As prices rise, customers are forced to buy substitutes of well-known brand names or alter their preferences. This results in the phenomenon known as monopolistic competition. Monopolistic competition is defined as the result of many firms competing for the same customers in a particular market differentiating their products. If a firm in a purely competitive market can differentiate its product or service, it becomes a part of the monopolistic competition market. Monopolistically, markets are dominated by the following trends: the demand curve is down-ward sloping, no major barriers to entry or exit, profit maximizers, make up the large majority of advertisers, specialize in product differentiation, and each company is free to set their own price and level of output. Due to the retail industry having a large number of firms and competition, there are three major implications of the retail industry that dictate whether a product or brand will succeed. The first implication is how...
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...Evaluate the effectiveness of monopolistic competition and oligopolies in meeting the needs of producers and consumers. A market is a place where buyers and sellers meet to exchange money for goods and services. There are four market structures; perfect competition, monopolistic competition, oligopoly and monopoly. Each structure of market operates in their own ways with each with their own characteristics; each structure has its own number and size of the firms, the level of the competition, product differentiation and difficulty of entering new firms into the market. The two similar structures are monopolistic competition and oligopolies; although they are similar they still operate quite different to each other. Monopolistic competition is defined as the structure with many small firms selling products of similar kind, therefore lots of choice and lots of range which means that there are lots of substitutes. Due to the fact that there are lots of substitutes price plays an important role; if a firm has established some sort of brand name or store name it will be able to charge a slightly increased price, but yet a very high increase in price will result in decrease of its market share. As firms have a very limited control on price to gain more consumers firms are involved in strong non-price competition of quality, advertising, packaging, promoting brand names, etc… To enter into a monopolistic market is relatively easy as there is no established market. Examples of this...
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...Monopolistic competition (MC) is the market structure of restaurants in Miami, FL. Monopolistic competition is a market structure in which many firms sell a differentiated product into which entry is relatively easy, in which the firm has some control over its product price and in which there is considerable non price competition. In Miami there is a large number of full service restaurants , 34,000, for the city’s population of 2.5 million. In monopolistic competition (MC) there are a large number of small firms, each of which is small compared to the size of the market. In MC all firms are relatively competitive with little market control over price and quantity , and each firm has 1000’s of potential customers. The restaurant business here in Miami is competitive, there are all kinds of restaurants in any neighborhood ranging in different prices with a large population as potential business. In (MC) there is similar but not identical products. Restaurants offer food, and there may be differences from one restaurant to the other as far as Italian, Cuban, Mexican, but the product is underlying food. In (MC) good sold are close but not identical substitutes. Two restaurants might prepare steak but the seasoning the preparation distinguishes each. The goods however satisfy the need to eat. Product differentiation , then, applies to restaurants. The difference in product may be physical, where one restaurant makes chocolate cake the other vanilla. The difference...
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...Assignment 2: Operations Decisions Name Professor Course Aug 13, 2015 Low-calorie Frozen Food Industry Low –calorie foods are those with 40 calories or less per serving. The low calorie frozen foods is the choice for a healthy and easy to cook meal. There are several choices of low calorie frozen, microwaveable food products available in the market nowadays (Creasy, 2015). This implies that the market structure is somewhere between a monopolistic and oligopolistic competition, leaning more towards monopolistic competition (Economicsonline.co.uk, 2015). The low-calorie frozen food products available in the market are relatively similar with slight differentiation amongst them. Leading Competitors The lifestyle of people has changed considerably over the years. A hundred years ago there was no such thing as frozen foods or microwaves for that matter. With the advent of technology, people have become accustomed to a certain way and standard of living. One such change is the way we cook our food, People have abandoned the traditional way of cooking on a gas or electric stove and gotten used to microwaving their food. Furthermore, there are a few hundred low-calorie food meal choices available today. There are names like Lean Cuisine and Weight Watchers who have been around for years, and now new entrants like Healthy Choice by ConAgra have joined their ranks (BURROS, 2015). Lean Cuisine is a brand owned by Nestle, it deals with providing frozen dinner across the USA...
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...Monopolistic Competition Monopolistically Competitive industries have the following characteristics: 1. Many small to medium sized firms 2. Similar product, but not identical 3. Less than perfect information, firm has some control over price 4. Easy, but not free, entry. Monopolistic Competition works much like monopoly, but in equilibrium, it has some features of perfect competition. As seen in the graph a monopolistically competitive firm faces a downward sloping demand curve for its output. But, since products in this industry are similar, though differentiated, the curve is relatively flat, reflecting the availability of substitutes. In long-run equilibrium, after entry occurs, we find the firm producing at point F in the next diagram. Here, we see: 1. P > MC 2. P > min AC 3. Max Profit = 0 We have two of the inefficiencies of monopoly, and one of the efficiencies of perfect competition. This firm structure is intermediate between the two. These types of firms will use advertising to shift the demand curve for their product out to the right, and to make it steeper, i.e., to convince consumers that their product has no "good substitutes". This is an attempt to lower the price elasticity of demand. Monopolistic Competition will lead to different versions of the product, but higher prices than perfect comeptition. We will get variety, but must pay for to get it. Besides advertising, we should expect give-aways, coupons, warranties, etc. ...
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...Company Overview Coca Cola is a US publicly traded company, with many locations outside of North America. Coca Cola operates in Central and Southern Europe, German, Iberia, and North West Europe. Their brand stretches wide and encompasses continents (The Coca Cola Company). “Coca Cola originated as a soda fountain beverage in 1886 selling for five cents a glass”(The Coca Cola Company). Although its growth was remarkable, more was needed for it to become a household brand. Once the bottling system was developed, Coca Cola flourished and became a world famous brand (Coca Cola Company). Two young attorneys decided that they would build a business around bottling Coca Cola. They had a meeting with Asa G.Candler , a natural born salesman, who transformed Coca-Cola from an invention into a business”(Scribd). They then bought the exclusive rights to bottle Coca Cola for one dollar. Soon thereafter, another lawyer joined the venture. They were on a mission to sell the bottling rights to local entrepreneurs. They divided the country and began their journey to make Coca Cola one of the greatest brands of our time. Not only did they stop at Coca Cola, they added new brands such as: Fanta, Sprite, Minute Maid, Mr Pibb, Cherry Coke, Powerade, Dasani, and many more (Coca Cola Company). “As technology led to a global economy, the retailers who sold Coca Cola merged and evolved into international mega chains”(Coca Cola Company). There were changes in the market due to politics...
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...MARKET STRUCTURE IN BANGLADESH QUESTION Question 3 (44 marks) Please note that this question requires substantial research Part A – (8 marks) Explain monopoly and monopolistic competition market structures, and identify the key factors that distinguish them Part B – (18 marks) Choose two different industries from your home country representing monopoly and monopolistic competition market structures. Identify their key characteristics in relation to the factors used to differentiate between the market structures. Using the real 5/5 data from your case studies analyse how well each case study fits with the different market structures. Part C – (6 marks) For the monopoly firm in your case study, identify the potential market power that it has and the types of controls (if any) that are in place to limit this. Part D – (6 marks) For the monopoly firm in your case study, identify if there are other benefits generated by the monopoly that would be difficult to gain from a monopolistic competition market structure. Part E – (6 marks) For the monopolistic competition industry, identify the extent to which firms are able to differentiate their products, and whether this allows them to gain some price advantages. SOLUTION Monopoly and monopolistic competition market structures Monopoly Market Structure The monopoly is understood to be the market structure associated with single seller of a product which has huge demand either as a result of necessity or because...
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... and wines (Apollo Group, Inc., 2011). To further her mission and vision, owner Kathy Kudler formed the business within the monopolistic competition market structure, developed a marketing overview, and created market surveys to evaluate the business’s competitiveness in the marketplace. The monopolistic competition market structure includes many firms selling slightly differentiated products. There is an easy entry into the market by new firms in the long run, and the firms are large enough to influence the total supply. There are also multiple dimensions of competition including distribution outlets, advertising, and product attributes (Colander, 2010). The marginal cost will be less than price at its profit-maximizing output level. According to the text, a monopolistic competitor cannot make long-run profit (Colander, 2010). The benefits of the monopolistic competition market structure are the ability to act independently to adapt to changing economic forces and customer tastes to differentiate KFF’s from its competitors. KFF exercises monopolistic behavior through product differentiation and marketing strategies to gain competitive advantage. Additionally, collusion is unlikely to occur because of the difficulty of getting a large number of firms to act as one (Colander, 2010). The challenging characteristics of the monopolistic competition market structure that KFF faces are the few barriers to entry so that many firms are competing in the same market...
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...slow until 6 years later because of pressure from big state-owned companies and multinationals that had just started doing business in China. It wasn't until 2001, when China joined the World Trade Organization, did the process accelerate. In August 2007, the law was finally passed by the National People's Congress. Although the measure compromised with state-owned enterprises, which dominate industry, people tend to believe it will make way for free market competition against monopolies. It's gained a lot of praise and set a milestone in China's legal history. In our daily life, we can face several kinds of monopolistic practice, for example, if your grocery store sells you a bag of tea with the condition that you buy a pound of sugar that would be a tie-in sale. In this paper, first, I will show the detail in the China competition law, then I will specific the monopolistic practice in Price discrimination which I think we usually face most in our society, and in the last part will be the impact of the Anti-monopoly law. China competition law On 30 August 2007, after more than a decade of legislative efforts, the Standing Committee of the National People’s Congress (NPC), completed its third official reading of the draft Anti-monopoly Law (AML) and formally adopted it as the country’s first comprehensive competition law. Scope of Law The draft is stated to apply to domestic conduct and to foreign activities that “restrict or affect” competition within China and identifies...
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...ECO 561 WEEK 3 LEARNING TEAM DELIVERABLE A+ Graded Tutorial Available At: http://hwsoloutions.com/?product=eco-561-week-3-learning-team-deliverable Visit Our website: http://hwsoloutions.com/ Product Description PRODUCT DESCRIPTION ECO 561 Week 3 Learning Team Deliverable Learning Team Deliverable As future business managers or entrepreneurs, the classification and types of marketstructure, upsurge the team’s interest. Thus, this week’s team deliverable focuses on pure monopoly, monopolistic competitive markets, oligopoly, and pure competition. In economics, market structure refers to the number of firms producing identical products or services. In a pure monopoly there is only one! The team pinpointed some key terms that helped us differentiate this type of market from the other three structures. A“single seller” monopoly is one where a single firm is the sole producer of a good or service. A “no close substitutes” is a company that sales a product and there is nothing in the market the can be used as a substitute, therefore everyone have only one place to go to buy the produce. The “price maker” is when a firm has control over the quantity supplied; consequently they will have control over the price of the product they are producing. The “blocked entry” limits competitors from entering a market due to certain barriers such as economic or legal, things such as patents or licenses (McConnell, Brue & Flynn, 2009).A monopoly exists when there is only one supplier...
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...Monopolistic Competition and Oligopoly 13 Monopolistic Competition W e have now examined two “pure” market structures. At one extreme is perfect competition, a market structure in which many firms, each small relative to the size of the market, produce undifferentiated products and have no market power at all. Each competitive firm takes price as given and faces a perfectly elastic demand for its product. At the other extreme is pure monopoly, a market structure in which only one firm is the industry. The monopoly holds the power to set price and is protected against competition by barriers to entry. Its market power would be complete if it did not face the discipline of the market demand curve. Even a monopoly, however, must produce a product that people want and are willing to pay for. Most industries in the United States fall somewhere between these two extremes. In this chapter, we focus on two types of industries in which firms exercise some market power but at the same time face competition. One type, monopolistic competition, differs from perfect competition only in that firms can differentiate their products. Entry to a monopolistically competitive industry is easy, and each industry is made up of many firms. The other type, oligopoly, is a broad category that covers many kinds of firm behavior and industry structure. An oligopoly is an industry comprising a small number of competitors; each firm in an oligopoly is large enough to have some control over market price...
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...What is economics? What role does economics play in your personal and organizational decisions? Provide an example of the role of economics in decision making. Economics is the study of how human beings coordinate their wants and desires, given the decision-making mechanisms, social customs, and political realities of the society. In my personal like economics plays a good role in our finances. At the moment we deal with only one income and with it comes the decision making of food, clothing and bills. Things like how much is available for eating our verses cooking a hot meal at home. In regards to the organization I work for I have to say that with my pregnancy the decision making of taking days off is the example. If I don’t go into work I will be losing leave time from that day and with it some of my maternity leave, but some rest will be gained. In the other hand staying home may cause me more in electricity bills. It can be an economic gamble. Identify a recent purchase of an important capital item by an organization with which you are familiar. What factors affected the decision to purchase this capital item? How important was the productivity associated with other inputs and their prices? How did the addition of this capital item affect the productivity of the existing workforce and the wages they earned? My article is actually of an item that has been taken from an organization that I’m familiar with, CVS Has Ended Sales of Tobacco. Even though the production...
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