Monopolies and Monopolistic Competition

A Monopoly can be described as a market situation where one producer (or a group of producers acting in concert) controls supply of a good or service, and where the entry of new producers is prevented or highly restricted. Monopolist firms (in their attempt to maximize profits) keep the price high and restrict the output, and show little or no responsiveness to the needs of their customers. Most governments therefore try to control monopolies by adopting the following ways:

1. imposing price controls

2. taking over their ownership (called 'nationalization')

3. by breaking them up into two or more competing firms.

Monopolistic competition on the other hand is a market situation midway between the extremes of perfect competition and monopoly,

There is only one producer of a product under monopoly while there are a number of produc¬ers under monopolistic competition.

2. There is no difference between firm and industry under monopoly. The monopoly firm is the industry. On the contrary, there are many firms in monopolistic competition and the industry is called a group.

3. Only a single product is produced under monopoly and there is no product differentiation. Under monopolistic competition every producer produces differentiated products. Products are similar but not identical. They are close substitutes rather than perfect substitutes. They differ from one an¬other in design, colour, flavour, packing etc. As a result, there is product differentiation.

4. There are no selling costs in monopoly because the monopolist has no competitor. However, when the monopoly firm is established, the monopolist may spend some money on advertisement to acquaint the consumers about his product. But he will spend on advertisement only once. On the other hand, due to large number of firms and existence of competition among them, expenditure on selling costs is essential under monopolistic

There being no close substitutes of the product under monopoly, the demand for his product is less elastic. Therefore, the demand curve of the monopolist is steep, i.e. less elastic. On the contrary, products are close substitutes under monopolistic competition. As a result, the demand for the product of every firm is more elastic and its demand curve is flat.

7. The inference can be drawn from the above analysis that the monopoly price is higher than the price under monopolistic competition. Moreover, the monopolist has more freedom in fixing the price for his product than the monopolistic competitor.

8. Firms can enter and leave the ‘group’ under monopolistic competition in the long run because the element of competition is present in this market situation. Since the monopolist has full control either over the price or the supply, no firm can enter the monopoly industry.

9. There being no fear of entry of new firms in monopoly, the monopolist earns super-normal profits even in the long run; whereas firms earn only normal profits in the long run under monopolistic competition because the firms can enter and leave the