Monopoly market...

Introduction---

Monopoly is the market condition in which we have only one

provider of a particular service. Such a situation is beneficial
for service providers as they enjoy the freedom of lack of
market competitors. The customer has no alternatives for
the available service and has to buy the service at given
facilities and cost.
Market monopoly is what most of the top business eye at. It
can make you earn lots of buck. Bill Gates, the richest man
in world is an example of a person who understood and
exploited it. There are many reasons why it occurs. Few of
them are mentioned below:

1) When a businessman acquires resources for a product

which other fellow people can’t get.
2) When one gets skilled enough such that others can’t
touch his level of skill for that service.
3) The product gives excellent utilities and is most user-
friendly.
4) May be the product or service is newly invented and
hence the technology available reserved with that supplier.
5) A violation to above definition of monopoly can be when
there are enough competitors but the service provided by
this monopolist is unique in every sense to satisfy customers
need.

The role of government also comes into picture at times

when it prohibits the production of particular service by
citizens of its country. It does this by imposing fine and
registering the case to be against law. A Government puts
lots of restriction on production of certain products.
Generally the Government does this in cases where the
availability of that service may cause severe national and
international threat e.g. arms and ammunition, currency,
nuclear weapons etc. Such market policy is often called state
monopoly.

When a service provider obeys all the rules laid down by that
Government and yet is able to enjoy the market supremacy
then such situation is termed as Government granted
monopoly. The term natural monopoly is used to refer to
monopolist that acquire the entire market for service of its
type because of the amount of production he makes
comparative to others to fulfill the market demands for that
service.

Generally monopoly is viewed as person getting hold of

market by implementing unfair means such as providing the
service at much low cost than other service providers and
causing the competitor to bear heavy financial loss. This
result in removing opponent’s existence from market and
the monopolist again raises his service price to recover the
losses. This was what Microsoft did and cases filed against
its chairman.

There are some commodities for e.g. oil, gasoline etc whose
availability and production is more in gulf countries. The
availability of these products is limited, but the requirement
is much more hence their prices are high. This monopoly is
unfortunate and is difficult to be controlled since these
resources are provided by nature. Hence man has started
searching for alternative fuels Sometimes a company
produces more services than its main product by giving
them other brand names just to avoid the competitors in
that field. For e.g. say a book seller sells book for same
subject but with different contents with other brand names
just to give an illusion that they are from two different
companies but the owner being the same. In such a case a
company is said to be using monopolistic tactics.

There is solution to overcome this situation. Since to become

monopolist many things are done illegally and therefore can
be prevented by complaining against the firm in judiciary.
Most of the times a government steps in to either regulate
the monopoly, or forcibly break it up. For example AT&T had
the monopoly in early decades. After it was broken up into
the Baby Bell components, MCI, Sprint, and other companies
were able to compete effectively in the long-distance phone
market and started to take phone traffic from the less
efficient AT&T.

In terms of economics a firm is said to have monopoly power

if it faces a downward sloping demand curve. As against this
a price taker faces a horizontal demand curve. If the service
provider sets a high value, they will sell none. Contrary to
this they will sell enough products if sold at affordable
prices. It entirely depends on monopolist how he wants to
harness the market situation. Generally an ideal situation in
this worst case of market monopoly can be when the service
provider sells his service at such a price that can be
beneficial for both buyer and seller. Also the money collected
by monopolist being used in research of more efficient and
better than his available service.

In today’s modern jet age everyone being smart enough,

there is healthy competition for all types of services and it’s
very difficult to make monopoly. Although monopoly
undesirable can prove helpful in many cases if properly
handled. It’s said that with great power comes great
responsibility and so this situation although gives you
market command along with that you also have to look for
the unread social responsibility that comes to you.

TYPES OF MONOPOLIES
Pure Monopolies

A pure monopoly is a firm that satisfies the following

conditions:

1. It is the only supplier in the market.

 2. There is no close substitute to the output good.
3. There is no threat of competition.

In practice, pure monopolies are very rare. For instance, a

supermarket may be the only food supplier in a particular
town, but if it raises its prices and retains too much of a
profit, a competitor may enter the space. Even the threat of
serious competition entering the market forces the existing
firm to act conscionably, and differently from how it would
act otherwise. A train company may be the only carrier in a
particular station, but if cars are also available in the area,
there exists a close substitute to the output good.

Natural Monopoly

A natural monopoly is a firm with such extreme economies

of scale that once it begins creating a certain level of output,
it can produce more at a far lower cost than any smaller
competitor. Natural monopolies exist far more frequently
than pure monopolies, mainly because the requirements are
not as stringent.

Natural monopolies occur when, for whatever reason, the

average cost curves decline over a relevant span of output
quantities. A firm with high fixed costs relative to its
marginal costs will have declining average costs for a
significant span of quantities. A firm with a decreasing
marginal cost structure will also have declining average
costs. For example, utilities and software are two industries
where natural monopolies occur often.

SOME EXAMPLES
DISCRIMINATING MONOPOLY--

ELECTRICITY COMPANIES
PRIVATE MONOPOLY--

TATA AIRLINES

SOCIAL MONOPOLY--

ATOMIC ENERGY

LEGAL MONOPOLY--

BRANDS

NATURAL MONOPOLY--

DIAMONDS:SA

MONOPOLISTIC COMPETITION

INTRODUCTION----
---

In discussing industries that are neither monopolies nor p-

competitive, economists have tended to begin from the four
characteristics of a p-competitive industry. We recall that
those characteristics are:

• Many buyers and sellers

• A homogenous product
• Sufficient knowledge
• Free entry

Competition can be "imperfect" in an industry if the industry

deviates from any one of the four. Thus, if there are just a
few firms (but more than one), deviating from the first
characteristic, the industry is said to be an "oligopoly." Since
the nineteen-twenties, economists have also discussed the
situation when an "industry" deviates only in the second
characteristic. This is called "monopolistic competition," and
we have "monopolistic competition" when a group of firms
sell closely related, but not homogenous products. Instead,
the products are said to be "differentiated products." Thus,
the characteristics of "monopolistic competition" are:

• Many buyers and sellers

• Differentiated products
• Sufficient knowledge
• Free entry

To say that products are differentiated is to say that the

products may be (more or less) good substitutes, but they
are not perfect substitutes. For an example of a
monopolistically competitive "industry" we may think of the
hairdressing industry. There are many hairdressers in the
country, and most hairdressing firms are quite small. There
is free entry and it is at least possible that people know
enough about their hairdressing options so that the
"sufficient knowledge" condition is fulfilled. But the products
of different hairdressers are not perfect substitutes. At the
very least, their services are differentiated by location. A
hairdresser in Center City Philadelphia is not a perfect
substitute for a hairdresser in the suburbs -- although they
may be good substitutes from the point of view of a
customer who lives in the suburbs but works in Center City.
Hairdressers' services may be differentiated in other ways as
well. Their styles may be different; the decor of the salon
may be different, and that may make a difference for some
customers; and even the quality of the conversation may
make a difference. A very good friend of mine changed
hairdressers because her old hairdresser was an outspoken
Republican. My friend said that she just couldn't take it any
more without answering back -- and it's not a good idea to
get into a controversy with one's haircutter!
The model is especially useful in explaining the motivation
for intra-industry trade, i.e. trade between countries that
occurs within an industry rather than across industries. In
other words the model can explain why some countries
export and import automobiles simultaneously. This type of
trade, although frequently measured is not readily explained
in the context of the Ricardian or Heckscher-Ohlin models of
trade. In those models a country might export wine and
import cheese, but it would never export and import wine at
the same time.

Main Features of Monopolistic

Competition: Monopolistic competition is a modern
form of the market. A large variety of goods are sold in such
a market. Its main features can be stated as follows:

i) Large Number: The number of firms operating under

monopolistic competition is sufficiently large. Moreover there
is freedom of entry. There are no quantitative restrictions or
differences in market conditions. However, each firm differs
from its rivals in some qualitative respect.

ii) Close Substitutes: In case of a monopoly there are no

substitutes available. Under monopolistic competition firms
produce very close substitutes. Chocolates of one company
may serve a similar purpose as that of some other firm. The
only difference may be of some variation in the quality of the
product.

iii) Group: Firms under monopolistic competition together

form a group. They cannot be called an industry. This is
because their products are somewhat dissimilar and not
homogenous as under competitive industry.
iv) Product Differentiation: Under monopolistic
competition products are differentiated. This is the
outstanding feature of this form of market. Otherwise
monopolistic competition closely resembles perfect
competition. The fundamental difference between the two is
that products are no more homogenous. Goods produced are
deliberately differentiated. By differentiation we mean the
goods are made to appear somewhat different and superior
to those produced by other firms. Product differentiation
may be real or apparent. By real differentiation we mean
that a difference is maintained in some physical or chemical
composition of a product or in the taste and appearance of
that product. This is easily done with the help of attractive
packaging; or some extra services are rendered. A product
can also be marketed as superior using local advantage.
When products are differentiated more buyers are likely to
be attracted. Thereby the firm gains extra control over
demand and market conditions. The demand curve of a firm
will then alter to the advantage of a firm. It will become
more flexible and shift upwards. A firm’s capacity to alter the
demand curve for its own product is the chief analytical
feature of monopolistic competition. Under no other
form of market do producers attempt to influence the
demand which is entirely based on consumer behavior.
Gains of product differentiation have been shown in Figure
49. In the figure dd is the original demand curve that the
firm faces before product differentiation.

On this demand curve at market price P the firm sells output

Q. When the firm differentiates its product successfully its
demand curve alters and is now d1d1. On the new demand
curve the firm at point R1 can charge a price as high as P1
and sell old output Q. It could also charge the same price P
and sell a very large output Q1 at point R3. Or then the firm
could choose a somewhat higher price (higher than P1 but
lower than P2) P2 at point R2 and sell a somewhat larger
quantity Q2.
(v) Selling (Advertising) Cost: Selling Cost (SC) is another
outstanding feature of a monopolistic competitive market.
This in the form of advertisement expenditure. Selling Cost
and Product Differentiation together enable the producer to
maintain some control over market conditions and influence
the shape of the demand curve. Both features are
interdependent. Whenever a product is differentiated it is
necessary to inform buyers; and advertisement is the only
medium through which buyers can be told about superiority
of that product. Selling Cost by itself is apparent product
differentiation. When a product does not contain any
genuine qualitative difference, buyers can be made to treat
a product differently through advertisements. So whenever
products are differentiated and advertised, the market
becomes a monopolistic competition. These are the
hallmarks of this form of market. The presence of selling cost
increases the firm’s cost of production. In order to recover it,
firms have to charge a higher price. The net effect of a
monopolistic competitive market is pricing goods at a higher
rate. Consumers have to bear this extra expenditure.

According to E H CHAMBERLIN ,an american economist

,monopolistic competitionis a market form characterized by
both competition and monopoly elements…….the theory…..

Chamberlin’s assumptions: Since products are

differentiated under monopolistic competition, the demand
curve for a firm alters. The price of an individual firm may be
higher and its sales larger. All this calls for stiff reaction on
the part of other rival firms. Moreover under monopolistic
competition there is freedom of entry and the products are
close substitutes. All this makes the market situation highly
complex through continuous actions and reactions of the
firms. In order to simplify the analysis under such a market,
Chamberlin has made certain assumptions. Two of these
assumptions deserve special reference. Chamberlin has
called them Heroic assumptions.
i) Uniformity Assumption: Both demand conditions and
cost conditions, and demand and supply curves are uniform
throughout the group for all products produced. This ensures
that the ability of a firm to influence buyers is not caused by
a difference in the demand or cost structures of the firm. The
influence of the firm must arise purely out of its ability to
differentiate products.

ii) Symmetry Assumption: Any adjustment made in the

price or the product by an individual firm spreads its
influence over a large number of competitors. The impact of
such adjustments is significant. The net effect of these two
assumptions is on the demand curve of a product
differentiating firm. Before we proceed with equilibrium
analysis let us summarize the monopolistic and competitive
elements in this market. Chamberlin has called this market
one of monopolistic competition because of the blending of
the features of both competition and monopoly.

Problems and controversies relating to

monopolistic competition:
While monopolistically competitive firms are inefficient, it is
usually the case that the costs of regulating prices for every
product that is sold in monopolistic competition by far
exceed the benefits; the government would have to regulate
all firms that sold heterogeneous products - an impossible
proposition in a market economy.

Another concern of critics of monopolistic competition is that

it fosters advertising and the creation of brand names.
Critics argue that advertising induces customers into
spending more on products because of the name associated
with them rather than because of rational factors. This is
refuted by defenders of advertising who argue that (1) brand
names can represent a guarantee of quality, and (2)
advertising helps reduce the cost to consumers of weighing
the tradeoffs of numerous competing brands.
There are unique information and information processing
costs associated with selecting a brand in a monopolistically
competitive environment. In a monopoly industry, the
consumer is faced with a single brand and so information
gathering is relatively inexpensive. In a perfectly competitive
industry, the consumer is faced with many brands. However,
because the brands are virtually identical, again information
gathering is relatively inexpensive. Faced with a
monopolistically competitive industry, to select the best out
of many brands the consumer must collect and process
information on a large number of different brands. In many
cases, the cost of gathering information necessary to
selecting the best brand can exceed the benefit of
consuming the best brand (versus a randomly selected
brand). Evidence suggests that consumers use information
obtained from advertising not only to assess the single brand
advertised, but also to infer the possible existence of brands
that the consumer has, heretofore, not observed, as well as
to infer consumer satisfaction with brands similar to the
advertised brand.[