Monopoly and a Monopolistic Competition

EconomicsArticles / Tutorial Titles

Introduction

Companies usually become monopolies by having access to the entire supply chain, from production to sales which is known as vertical integration. In another way, a monopoly business can buy companies to become the only significant player in the market. This is called horizontal integration. Let us see in detail about monopoly and monopolistic competition.

What is a Monopoly?

A monopoly is a type of market structure where one company has dominance in a sector or an industry. Monopolies are devoid of competition and hence they are not encouraged in a free market economy. Many governments enact laws to counter monopoly so that no single organization can control the market and exploit the customers using its dominant position in the market.

In a monopoly, competition among firms is absent as only one player is dominant. Moreover, there is no availability of substitute products in the market. The company that is a sole player in a monopoly, therefore, has a free hand to determine the prices, and demand and supply do not determine the prices.

In a monopoly, the organization in the dominant position can go against the market forces to control the market. It can become a price maker and ignore the conditions of the market while determining the prices.

Another feature that is seen in monopolies is that the market leader creates a high barrier to entry to stop other businesses enter the industry or sector. Therefore, in a monopoly, the company in the dominant position tries to maintain the monopoly as long as possible.

Types of Monopolies

Monopolies are divided into the following types −

Pure Monopoly

In a pure monopoly, there is only one player in the market and it maintains a high barrier to entry. In a pure monopoly, the products of the company have no substitute. An example of a pure monopoly would be Microsoft Corporation whose software Windows held a 73% market share as of 2021.

Natural Monopoly

A natural monopoly is derived from the unique abilities or attributes of the company. Companies that have unique research and development facilities, such as pharma companies fall under this category.

Public Monopolies

Public monopolies provide essential services to the public and are controlled by the government. Energy companies and water supply companies are good examples of public monopolies.

What is a Monopolistic Competition?

In a market with monopolistic competition, many companies provide services or sell goods of similar nature but these are not perfect substitutes for one another. The barriers to entry and exit are usually low in the case of monopolistic competition. Moreover, the action of one player in monopolistic competition does not affect the business of other players. Monopolistic competition is heavily reliant on business strategy and brand differentiation

The idea of monopolistic competition falls in between pure monopoly and perfect competition. However, it has elements of both monopolies and perfect competition in general. The players in the case of monopolistic competition all have some market power to be the price setters.

The demand in the case of monopolistic competition is highly elastic in the long run. This means that the competition is price sensitive. The profits of players in monopolistic competition are positive in the short term but they approach zero in long run. The monopolistic competition players rely heavily on advertising to promote their products and grab market share.

Competing Companies in Monopolistic Competition

In the case of monopolistic competition, there are usually a few companies that vie for market share.

Examples include restaurants, such as McDonald’s and Burger King that offer similar products and compete for a similar market share

Product Differentiation

Product differentiation is a key concept in monopolistic competition because the players all have similar products which they need to differentiate in order to attract consumer attention. Therefore, they advertise heavily. There may be varieties of many qualities in the products but as general consumers are not aware of them, the player may set the strategy to sell items in a way that suits them.

Comparative actions

The action of one company in the case of monopolistic competition does not lead to a change in the strategy of other players. For example, a price change in McDonald’s burgers won't necessarily affect Burger King’s burger price. This is in contrast to oligopoly where a price change by one player may start a price war.

Price setting

As mentioned above, the players in monopolistic competition are price setters and not price takers. However, product differentiation is necessary if a company wants to increase the price of its products.

Demand elasticity

The demand is highly elastic in the case of monopolistic competition. If the price of a product is increased, the consumers would often shift to a competing product because there are options in the hands of the consumers to select a similar product at a lower price.

Economic profit

A company in monopolistic competition can make excess economic profit in the short run but when we consider the long-term aspects, the economic profit comes to zero.

Advertising

As there are differences in competing products in the case of monopolistic competition, the players tend to advertise heavily to differentiate their products. This may be useful to pinpoint the uniqueness but when blind advertising is done, it may lead to a deadweight loss to society.

Differences between Monopoly and Monopolistic Competition

The following differences exist between monopoly and monopolistic competition −

Monopoly Monopolistic Competition
In monopolies, there is only one dominant player and it controls the market. In the case of monopolistic competition, there are a few players who fight for the market share.
The seller in a monopoly hardly faces any competition. In a monopolistic market, there is palpable competition.
The demand and supply in a monopoly are controlled by the dominant player. In the case of monopolistic competition, the demand and supply are measured depending on the competition between the players.
Entry and exit in a monopoly are difficult. While in the case of monopolistic competition, these barriers are low.
The existence of a sole player forbids the consumers from exerting influence in product pricing in the case of monopolies. However, consumers may exert influence in product pricing in the case of monopolistic competition.
The product variety in the monopoly is limited and dependent on the sole player’s will. In the case of monopolistic competition, consumer pressure may let the players create new product variants.
Product predictability in monopolies is higher. In monopolistic competition as the latter has many players.

Conclusion

It can be seen that monopolies and monopolistic competition have many differences. However, monopolistic competition can be considered a form of monopoly too. Depending on the nature of the monopoly, there can be different aspects of it but the main aspect that only one player dominates the market remains unchanged in all conditions. That is why monopolistic competition is considered a better option than pure monopoly.

FAQs

Qns 1. Why is monopoly considered unfavorable for consumers?

Ans. Monopolies can use their sole existence in a market as a source to exploit the consumers by maximizing profit and offering low-quality products. That is why a monopoly is considered unfavorable for consumers.

Qns 2. What is price discrimination?

Ans. In a monopoly, the dominant player has the discretion to determine the price of a product. This is known as price discrimination.

Qns 3. Between monopoly and monopolistic competition, which is more common?

Ans. Monopolistic competition is more common than monopolies in the business world.

raja
Updated on 13-Oct-2022 11:19:47

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