Why is monopoly competition called monopoly

Monopoly competition

The term monopoly competition denotes a form of imperfect market. Product differentiation gives consumers a wide choice between substitutable products that are manufactured and offered by specialized companies. Each provider is large enough to be able to influence its prices with regard to the reactions of the competitor (s).

Alternative definitions

  • "A market where companies can freely enter and each produce their own brand or version of a differentiated product."[1]
  • "The market model of monopolistic competition is often found in reality. It represents the polypole on the imperfect market (polypolistic competition) in which many suppliers and many consumers act independently of one another ...".[2]

Demarcation

You can divide markets according to different criteria. Depending on the perspective, markets must be differentiated according to market participants (monopoly, oligopoly, polypol), demand intensity (mass market, shrinking market) or also according to the goods traded (goods or product market, factor market). The model of monopoly competition combines different market forms and models, including monopoly and oligopoly, with the characteristics of competition.

Model description

The term monopoly competition is an expression coined by Edward Hastings Chamberlin for the market form of imperfect competition.

With a sufficiently strong product differentiation it is possible for the individual supplier to assume a monopoly position, albeit a weak one. Within certain limits, a provider can, for example, change its price like a monopoly. In a market with, albeit few, other providers, every strategic market measure always leads to a reaction from competitors.

Chamberlin assumes that a single provider tries to achieve the maximum profitable price, i.e. acts like a monopoly (Cournot's point). Since market entry is free and profits are made, new providers enter the market with comparable products and the price-sales function of the previous providers shifts towards the origin. If profit is ultimately no longer possible, the average cost curve affects the price-sales function (Chamberlin's tangent solution).

In contrast to Chamberlin's tangent solution, Erich Gutenberg assumes that the individual price-sales functions are kinked twice due to preferences, i.e. that a monopoly area is in the polypolistic price-sales function (Gutenberg function).[3]

The model

Characteristics

  • As part of product differentiation, goods are brought onto the market that are imperfect substitutes. In some cases, the difference can only be seen by the customer, who consumes through differences in quality and price as well as brand loyalty.
Example: Kellogg's cornflakes and a no-name product have the same purpose, but must be distinguished by the above-mentioned characteristics.
  • The pricing policy assumes that the companies behave like monopolists. The greater the degree of product differentiation, the more independent the price can be. Furthermore, the pricing policy is differentiated through special customer programs, such as student or senior rates, discount campaigns and also through a general price classification.
  • Market entry barriers or market barriers prevent new companies from entering the market. These barriers can take different forms, such as legal regulations, technical peculiarities, the existing number of providers and even market strategies.

Basic assumptions

The higher the demand for a product and the higher the price of the competitors, the greater the sales. As a result, one can assume that sales will decrease as the number of competitors increases. Assuming that all companies in the branch are symmetrical, this results in an identical demand and cost function for all companies.

Market equilibrium

See main article: Market Equilibrium in Monopoly Competition
Fig.[4]: Market equilibrium with monopoly competition.

In monopoly competition, the market equilibrium considers supply and demand as well as the number of providers in market equilibrium.

  1. Number of companies and average costs:
    The cost function states that the average costs (AC) increase with an increasing number of competitors, since the individual company produces and sells less. As a result, the CC curve is rising.
  2. Number of activities and the price:
    As the number of companies (n) increases, so does the price (P) that each individual provider can charge. This results in a falling PP curve.
  3. ratio of PP and CC:
    To the left of the equilibrium point (GG), the industry is making profits, which attracts new providers. If the market is to the right of the point GG, losses are recorded and the branch is emigrated.
  4. Number of companies in equilibrium
    The point GG represents the long-term equilibrium. This is where the PP curve and the CC curve intersect. In the above figure, this is in n and AC, P. In: at this point, the industry does not make any gains or losses, since the average cost is equal to the price.

Restrictions

The model of monopoly competition only applies to a few industries. The assumption that every company behaves as a "real" monopoly is unsustainable for reality. Rather, the individual providers are aware of their influence on the behavior of their competitors. In the model of monopolistic competition, two typical behavioral patterns of the oligopoly are excluded. On the one hand, the coordinated behavior (collusion), which is unfavorable for the consumer, since the price here is kept above the calculated profit level. The coordination can take place through explicit contracts or tacit coordination strategies. The second possibility is strategic behavior, which creates barriers to the market by adding additional capacity. These targeted decisions reduce profits, but they influence the behavior of the competition and prevent potential rivals from entering the market. A model is always limited to the essential factors in order to represent reality in a simplified manner. Here, too, simplification is of great importance for understanding, especially with regard to foreign trade and in the context of the globalization of markets.

Monopoly competition and foreign trade

International trade enlarges the market, from the national market to the world market. Due to the "new" market size, the limitation of the previous production volume is no longer applicable. In addition to the quantity produced and sold, the variety of goods that can be offered to consumers is also expanding. In a bigger market there is more space for a higher number of ventures and the scope of the price changes. While there are no significant differences in resources or technology between companies, there are mutual benefits. These can arise within the scope of the opportunity costs, since one country may have lower production costs for a product than another. Further advantages of large markets are a larger number of companies on the supply side, which can also achieve higher sales. On the consumer side, lower prices and a greater variety of products are significant.

Effects of Market Expansion

Fig.[5]: Market expansion through foreign trade

A comparison of two markets with different total sales shows that the CC curve of the larger market is below that of the smaller market. This means that more providers can act on the market so that the variety of products increases and the price decreases at the same time. With the price, the average costs (AC) of the providers also decrease.

Since the formula for the price does not take total sales into account, the PP curve does not shift due to a market expansion .

conclusion

By expanding the market, companies have the opportunity to increase production while lowering average costs. This is made clear by the downward shift of the CC curve, from point GG1 according to GG2. The result is an increasing number of companies with simultaneously falling prices. The situation in point GG1, with little choice of products and relatively high prices, is worse for consumers than the situation in point GG2, with lower prices and more choices.

Examples

The automotive industry in Europe[6] corresponds to the market model of monopoly competition, as there are a large number of manufacturers, such as Ford, General Motors, Volkswagen, Renault, Peugeot, Fiat, etc., as well as a large number of vehicle models and classes. Further examples that can be assigned to monopoly competition due to product differentiation are:

  • Toothpaste market
  • Detergent market
  • Coffee market
  • retail trade

See also

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literature

  • Seidel, Temmen: Basics of economics. 18. revised Edition. Gehlen, Bad Homburg vor der Höhe 2000, ISBN 3-441-00194-X, pp. 123-127.
  • Pindyck, Rubinfeld: Microeconomics. 6th edition. Pearson, Munich 2005, ISBN 3-8273-7164-3, pp. 570-576.
  • Krugman, fruit field: International economy. 7th act. Edition. Pearson, Munich 2006, ISBN 3-8273-7081-7, pp. 167-174.
  • Joseph E. Stiglitz: Economics. 2nd Edition. Oldenbourg Verlag, Munich 1999, ISBN 3-486-23379-3.

Individual evidence

  1. ^ Pindyck / Rubinfeld (2005): Microeconomics, 6th edition. Munich: Pearson, p. 570.
  2. ↑ Seidel / Temmen (2000): Basics of economics, 18th revised Edition. Bad Homburg vor der Höhe: Gehlen, p. 126.
  3. Gabler Economic Lexicon.- Paperback cassette with 6 vol., 12th revised. and exp. Edition. Wiesbaden: Gabler, Volume 4, L-P, pp. 471 and 472.
  4. ↑ Krugman / Obstfeld, p. 170.
  5. ↑ Krugman / Obstfeld, p. 174.
  6. ^ Krugman / Obstfeld (2006): international economy, 7th act. Edition. Munich: Pearson, p. 167 ff.