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Pg 23.3.9
Innovation
Homogeneous
products:
this
makes
innovation to improve the quality of product an
irrelevant
point
here.
(no effect on revenue curves)
Perfect information: innovations are quickly
replicated by rival firms or attract new firms.
This discourages R&D since the innovating
firm will not be to reap the fruits of its
innovations.
(no differentiating effect on costs)
Earn normal profits in the long-run: R&D
expenditures are very high and at time
enormous. Without the supernormal profits,
firms will not be able to invest in purchasing
expensive equipment or hiring professional to
do R&D.
Consumer
Choice
Pg 23.3.15
Illustrate with a diagram to show that even with internal economies of scale,
the monopolist price is higher and output is lower than that of a perfect
competition.
Figure 1: Price & Output comparison for a monopoly & a perfectly competitive industry when
the monopoly reaps some internal economies of scale but still charging higher price and
producing at lower output
Cost/Revenue/Costs ($)
SSPC= MCPC
MCM
PM
PPC
B
Dd = AR
MR
0
QM QPC
Output
Higher Price and Lower Quantity than a Perfectly Competitive firm even with internal
economies of scale
With reference to Figure 1,
If the production is undertaken by a perfectly competitive industry, then the market will
achieve equilibrium where market demand Dd intersects the supply curve SSPC with a
price of PPC at the profit-maximising output QPC.
Pg 23.3.18
Innovation
Have Ability
The monopolist has the ability to do R&D as it
retains supernormal profits in the long-run and this
allows it to fund expensive projects.
No Incentive:
Assuming there are complete
barriers to entry, the dominant
position of the monopolist is
secured and thus there is no
need for the firm to do R&D.
Innovation may erode the value
of a monopolys existing
products and thus it may prefer
to stay status quo. For
example, the discovery of a
cheaper
and
faster
microprocessor will lower the
price of all its existing
microprocessor.
Consumer
Choice
Pg 23.3.23
Will non-price competition indeed lead to increase in profits?
Yes
Non-price competition that aims to
improve the quality of the products
and also to increase awareness
will lead to higher demand that
enables the producers to earn
higher revenue and thus profits,
assuming the increase in revenue
is more than cost.
No
Profits will only increase if the increase in revenue is
higher than the cost incurred in the non-price
competition. Example, if the sales revenue increase for
a particular product cannot cover the cost of
advertisement, the firm will not make more profits than
before.
Also, non-price competition may not lead to higher
demand. No one can guarantee that consumers will be
attracted to the new product or the marketing tactics.
Producers can influence taste and preferences but
cannot dictate it.
Pg 23.2.25
Discuss whether there is equity, innovation and consumer choice in an
oligopoly.
Equity
Similar to monopolies.
Similar to monopolies.
Innovation
Pg 23.3.34
Discuss whether there is equity, innovation and consumer choice in
monopolistic competition.
Equity
Innovation
Consumer
Choice
HOWEVER,
monopolistic
competition does not rectify
pre-existing income inequality.
Pg 23.3.35
Conclusion/Synthesis :
In reality, whether firms are monopolistically competitive or oligopolistic also depend on their
behaviour. For instance, several years ago there was a famous chicken rice war which
erupted between two adjacent chicken rice stalls located in Tampines. Both stalls went all
out to undercut prices to the extent that a plate of chicken rice was sold for only 50 cents. In
this case, the sellers were behaving more like oligopolists than monopolistically competitive
firms.