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.
This position allows the firm to obtain abnormal profit in the long run when it operates at the profit maximising point, where marginal cost equals marginal revenue. The products in the industry are non-homogeneous and hence, they do not have close substitutes. A monopoly is characterised by asymmetric information. Consumers, who buy the product, do not have the same information as the supplier and
There are two different types of competition in a market, monopolistic competition and free competition or also known as perfect competition. An example of a monopolistic competition or monopoly is the market in China, where only one company or firm distributes resources and good. An example of a perfect competition is the United States or Singaporean market in which people are free to enter or exit the market. The question is, is a free market competition better than a monopolistic market competition? A free market competition is better than a monopolistic competition because there is little constraint for people to enter or start a business in the market and consumers are able to set the price based on the demand vs. supply concept.
There may be imperfections in the operation of the market forces introduced by monopolies market, or conditions in which the prices may not reflect real costs or benefits. Not only that prices of goods or services may be far above opportunity costs or that payments to resource owners may be far above or below the value of their contribution to real output, but also because social costs and benefits may be disregarded by individuals in their accounting although these costs or benefits may be very important from the point of view of social welfare which carries a significant weight in the Islamic system (Sheikh Ghazali Sheikh Abod, Syed Omar Syed Agil, & Aidit Haji Ghazali, 2008). Price discrimination occurs when monopolist is the price maker and the existence of monopoly power as there is no competition in the market. The monopoly power also allows the firms in the market to use markup pricing where the seller would add an amount to the price of a goods to cover up the overhead costs and to gain extra profit. These markups are the main contribution for their income.
One firm producing a product, the society suffers from excess pricing, due to allocative inefficiency in a monopoly. Monopoly can decrease production and avail less to consumers at a higher price with the sole aim of maximising profits. The monopoly market output is reduced to monopolistic quantities (QM) instead of the quantities (QC) (depicted in the diagram above) which could be produced in a competitive market. Due to an entity being the sole supplier it eventually enjoys the benefits of economies of scale due to massive volumes it produces resulting in lower unit average costs in the
The article written by Thomas J. DiLorenzo entitled The Myth ofNatural Monopoly, as the title states is about unravelling and explaining the natural monopoly myth. Natural monopoly is defined as a monopoly in which only a single firm can obtain the utmost benefit from the industry it is in. This usually happens when there is an extremely high fixed cost in production. As production increases, the long run average cost of production decrease as fixed cost is spread over the units produced. It would be more beneficial for the manufactured product to be produced by only one producer since more investors would possibly bloat the price considering the high fixed cost involved in manufacturing.
There is a distinct contrast between this system and that of a free market. In a free market they consumers decide what to be produced and the allocation of the factors of production via their buying power. Simply the consumers have all the power to dictate the firms, this is known as consumer sovereignty. This puts pressure on market and producers to fulfil the wants of the consumers so to make the most profit and beat their rivals. Again this creates a competitive and driven system.
In monopolistic competition, the industry consists of many firms competing each other, and each firm practices product differentiation with a product that is slightly different from the products of competing firms. Firms are free to enter and exit the industry. The product differentiation enables firms to compete on product quality, price and marketing. To stay in the industry for a considerable period, the firm must maximize its profit. Because of product differentiation, a firm in monopolistic competition faces a downward-sloping demand curve.
This model differs to that of Cournot’s in that Bertrand’s model assures that duopolies competition is linked to prices and not quantity, as suggested by Cournots model. (Serrano & Feldman, 2010) Bertrand’s duopoly model rests on specific assumptions, namely; two or more firms are producing a homogenous product and are unable to cooperate. The model also assumes that firms set prices simultaneously and therefore a firm that sets a lower price will gain all the demand from the consumers as the products are homogenous. (Allian, 2012) Thus marginal and average costs are equal to the competitive price at the point of Nash equilibrium. If the price drops below the marginal and average cost firms will cease to produce as they will incur a loss.
The consumer surplus area is indicated by the area a+b. This area is under the demand the curve and is also above to the Pe. The producer surplus is the area which is over the supply curve and under the Pe. This is represented by the areas c+d+e. At this point, the producer plus consumer surplus is at the peak and is : a+b+ c+d+e.