Some Advertising and Quality rivalry, Administered prices Oligopoly Few producers, No differences in product. The consumers have an irrational preference for the product on account of its superiority, real or imaginary. As pointed out above, the demand curve is indeterminate and no single price-output decision is possible. It is also not necessary that the monopolist should always charge the highest possible price. As a result, the product cost decreases with production capacity enhancement. Entry is easy: In the long run, if firms are earning an economic profit, this will attract firms into the industry.
This situation would then attract new firms in the market. Since each firm is earning normal profit, the competition among the firms will come to an end. For example, diners can review all the menus available from restaurants in a town, before they make their choice. It often happens that price leadership is established as a result of price war in which one firm emerges as the winner. This is shown in Figure. Price Determination under Monopolistic Competition Characteristics of Monopolistic Competition : In the real world, we find neither perfect competition nor monopoly. It should be remembered that under perfect competition the average revenue curve of each firm is a horizontal straight line.
In the long period there will be full equilibrium i. Firms are often in fierce competition with other local firms offering a similar product or service, and may need to advertise on a local basis, to let customers know their differences. By taxing monopolies, a government can reduce monopoly profits, thereby softening some of the socially unacceptable effects of monopoly. Since there are only a few firms selling a homogeneous or differentiated product inoligopolistic markets, the action of each firm affects the other firms in the industryand vice versa. In other words, the cross-elasticity of demand between the product of the monopolist and the product of the closest rival must be very low, i.
This competition among rival firms would increase their output and as a result of this average cost will increase and the average cost will go to the higher position or will shift to the right. For example, retailers often constantly have to develop new ways to attract and retain local custom. Such demand is represented by a horizontal straight line parallel to the X-axis. It is possible that any one firm has introduced some new design or packing for its commodity and has attracted some of the customers of the rival firms. During this discontinuity the marginal cost curve is drawn.
A firm can change its plant and machinery and also a new firm can enter the industry. All these are sewing machines, but are differentiated from one another by their respective labels. It is under the control of the monopolist. It is further illustrated in the following diagram:. The demand curve is thus indeterminate. If the rival firms make larger price cut than the one which initiated it, the firm which first started the price cut will suffer a lot and may finish up with decreased sales. The long period equilibrium is illustrated.
In order to compete with a name brand product, a new firm will have to spend vast sums of money for potential consumers. If this kind of situation occurs, it leads to break-up of the cartel. Oligopoly is further classified as below: i Perfect or Pure Oligopoly: If the oligopolists in an industry are producing identical products it is called perfect or pure oligopoly. Jha, Bhusal and Bista Karna, Khanal and Chaulagain Khanal, Khatiwada and Thapa Bibliography Jha, P. Examination of the payoffs shows that the joint profit maximizing strategy for both is Cooperate-Cooperate. Within three weeks, all of the other major producers, U. The effectiveness of the particular brand may be attributed to continuous usage and heavy advertising.
Pursuit of their own self interests made each worse off. This is done by considering the individual members of the cartel as one firm i. We have examined the two extreme markets viz. The features of monopolistic and oligopoly arediscussed in detail in this unit. Collusion is an oligopolistic situation in which two or more firms jointly set their prices or outputs, divide the market among them, or make other business decisions jointly.
As the price of a particular product of a firm reduces, it attracts customers from its rival groups as defined by Chamberlin. Two firms have to charge the same price in order to survive in the industry. The conductor and Tchaikovsky would have had three-years rather than 10-year jail sentences if they had not falsely confessed, but the scenario was such that, individually, false confession was rational. Price determination has to be shown in the following diagram. Examples of monopolistic competition Examples of monopolistic competition can be found in every high street. This Kindle ebook has all the articles on microeconomics on this website as well as all of the images, but no ads, and you can read it offline on any device with the Kindle app. In other words, the average revenue curve and the average cost curve of each firm will be partially affected by the price and output policies of its rivals.
The forms of cartels may differ. The situation in the real world lies between these two extremes. Small output and high prices: As compared with perfect competition, oligopolist sets the prices at higher level and output at low level. Profit making situation is also called abnormal or super profit situation as given in Diagram 1. Types of Market Structures Structure No.