Google Answers Logo
View Question
 
Q: Economics Question # 4 ( Answered,   0 Comments )
Question  
Subject: Economics Question # 4
Category: Business and Money > Economics
Asked by: tom123-ga
List Price: $15.00
Posted: 30 Mar 2003 05:56 PST
Expires: 29 Apr 2003 06:56 PDT
Question ID: 183168
Please explain the key assumptions of monopolistic and oligopolistic
market structures

Criteria  
- all answers must be complete and length 600 - 700 words per 
question 
- the assumptions upon which the analysis is based must be stated at 
the outset. 
- Sources must be acknowledged and a list of references provided.
Answer  
Subject: Re: Economics Question # 4
Answered By: livioflores-ga on 30 Mar 2003 14:55 PST
 
Hi tom123!!

I will try to answer this question with the intention to HELP you
doing this task, it appears to be a homework, so if you need help is a
good thing to ask for it. I will give you some guidelines and links to
sites where you can find the graphics and/or more info about each
topic.


MONOPOLY:

Monopoly is a traditional form of market. It is a form opposed to a
competitive market structure. A competitive market is one with a large
number of firms or producers, but monopoly is a case where there is
only a single seller in the market. This is a theoretical concept, in
the real world a market with a few producers assumes the form of a
monopoly. The second important feature of a monopoly market is the
absence of substitutes for the goods produced and sold by the
monopolists; that means the buyers have no other option except to
purchase goods from the monopolist at whatever price he charges. The
consequence of this fact is that the monopolist has complete control
over market conditions. He can decide his own price and earn profits
without any fear of competition.
Though a monopolist has complete freedom in determining his own price,
there are some limits to his power. These are listed below:

1 _ The demand curve of a monopolist slopes downwards:
 A monopolist can´t determine both Price and Quantity to be sold. He
has to decide one of these quantities. If he prefers a higher price P1
he has to be satisfied with a smaller output Q1. If he prefers a
larger output Q2 he will have to sell products at a lower price P2.

2 _ The incomes of the consumers:
 If the monopolist attempts to charge a big price (higher than Pn in
the Demand curve) his sales will fall to zero. So even though a
monopolist has complete freedom to charge any high price this freedom
is restricted by the consumer’s ability to purchase goods.

3 _ The elasticity of the demand curve:
 If the demand curve is rigid or less elastic the monopolist has a
greater degree of control. As the demand curve becomes more flexible
or flatter the monopolist’s control starts declining. On a rigid
demand curve if the monopolist increases the price from P to P1 the
fall in the quantity sold is small. On a more elastic demand curve
with the same rise in price, a fall in the quantity sold is larger.

Monopoly is considered as an evil form of market, it is disliked by
buyers or consumers, by government agencies and by other fellow
producers. But under certain circumstances monopoly is unavoidable.
These circumstances are called sources of monopoly:
1 _ Natural resources: such as land, oil deposits, mines, etc.  When a
product is essential and not available anywhere then the owners of the
resources acquire monopoly powers.

2 _  The need of a large investment to start a business: Steel
production, railway construction etc. are examples of such
enterprises. Who possess the enough capital resources enjoy monopoly
powers. Other small investors cannot compete with them and the
monopoly survives unrivaled.

3 _ Specialized technical resources: Ship building, aeronautics, space
research are examples of these enterprises. Those who possess such
technical resources will have monopoly power.

4 _ Legal provisions: Copyright norms, patent norms, standardization,
etc. create monopoly rights and lead to monopoly power.

5 _ Public utilities: Road construction, postal services, water
supply, telecommunications, etc. are examples of services where it is
necessary to maintain a high quality and a uniformity of products or
services. This results in monopoly power.

Monopoly market is restrictive and hence considered as an evil form of
market. Monopoly is also a source of wastage. Under monopoly there is
higher price, lower output, underutilization of productive capacity or
wastage of resources and reduction in Consumer’s Surplus.
Such evils or wastage under monopoly are also present more or less in
every other imperfect market with a lower degree of competition.


OLIGOPOLY:

Between Monopoly and Competition there are other types of market such
as Oligopoly and Duopoly. When there are only a few producers or
sellers the market is said to be an oligopoly. When one or more
requirements of perfect competition are missed or weak the market
assumes some degree of imperfection. Oligopoly and Duopoly are the
result of a small number of producers. This is a quantitative
imperfection.
Characteristics of Oligopoly:  
• Few Firms 
• Barriers to entry 
• Substantial control over prices 
• Interdependence 

There are several models that try to analyze this kind of market, but
many of them use inappropriate assumptions about behaviors and
reactions of the rivals.
Actually the more popular model is the model created by Paul Sweezy.
This model is called Kinked Demand Curve model.
The Sweezy´s model assumptions:
i) If the firm reduces its price the producer expects other
competitors to introduce a similar price cut; the market demand will
increase but the share of the firm will remain unaltered.
ii) If the firm raises the price then other competing firms will not
follow the price rise. There will be a very small rise in demand but a
significant reduction in the sales of the firm.

Here we have that neither a fall nor a rise in price would benefit the
firm. Then oligopoly price is rigidly fixed. Moreover, such a price
rigidity causes a Kink in the demand curve with its lower segment
steeper or inelastic and its upper segment flatter and more flexible.
Consequently there is no incentive to alter price under oligopoly. The
demand curve is not a smooth straight line but has two segments with a
varying degree of flexibility or slope. The join of the two segments
is the kink. Once a Kink in the demand curve is known and given,
oligopoly equilibrium automatically follows. The point of Kink is
itself an equilibrium point.
Note: to see more about the Kinked Demand Curve such are grapphs or
more detailed explanations, please visit the page "Oligopoly" from
ECONOMICS FOR INTERNATIONAL STUDENTS by Chris Rodda:
http://www.cr1.dircon.co.uk/TB/2/oligopoly/kinkeddemand.htm

 
"However this theory has a couple of important criticisms: 
1) There is no good explanation for how the equilibrium price P0 came
to be. It does not show us how demand and supply determined P0 (Price
changes are infrequent).
2) The theory does not hold up to empirical evidence. Real world
oligopolies do change their prices frequently (especially upwards).
There are new theories developing based in the Game Theory.
  
Social Costs to Oligopoly:  
-Productive  Inefficiency:  Lack  of  competitive behaviour 
(collusion)  and  tendency  for  non-price competition  can  result 
in  productive  inefficiency.
-Allocative  Inefficiency:  For  the  same  reason, prices  charged 
in  oligopolies  generally  exceed marginal  costs,  thereby 
resulting  in allocative inefficiency.
-Excess Profits: widening gap in the distribution of income  among 
different  members  of  society  (an equity issue).
-Advantages:  Maybe  lower  costs  per  unit  due  to economies  of 
scale;  maybe  conducive  to innovation."
Taken and summarized from "Review Notes for Test 3" by FaZe 2002:
http://www.geocities.com/faze5552000/Notes.pdf

 

MONOPOLISTIC COMPETITION:

"It is a market structure of an industry in which there are many firms
and freedom of entry and exit but in which each firm has a product
somewhat differentiated from the others, giving it some control over
price.
The theory of Monopolistic Competition is based on 3 key assumptions:
1) Large number of sellers in a highly competitive market: Firms make
decisions based on their own demand and cost conditions, and do not
consider  the possible reactions of other firms.
2) Easy entry (and  exit) of new firms in the Long-run: If existing
firms are earning profits, new firms have an incentive to enter.
3) Product Differentiation: Products can be differentiated in several
ways (brand names, design, quality, composition, reputation, or even
by packaging). Product  differentiation gives each firm a degree of
monopoly power over its own product. With differentiated products,
each firm can raise its price, even if its competitors do not, without
losing all of its sales.

Because of product differentiation, the demand curve facing the firmin
a monopolistic competitive market environment is downward sloping. The
more successful a firm is at differentiating its product from other
firms selling
similar products, the more monopoly power it has, and the less elastic
is the  demand curve for the product.
The existence of a large number of sellers in a highly competitive
market has important implications for this market:
1.  Small share of market: With so many firms, each firm has only a
small share of the market hence, despite the differentiated products;
it only has a small degree of control over prices.
2.  Lack of collusion: With so many firms, it is very hard for all of
them to  gather  together and collude (setting a price through
cooperation). The large  number of firms makes detection of deviating
(cheating) very costly and extremely difficult.
3.  Independence: with such a large number of firms and since
collusion is almost impossible, everyone acts independently of the
others.

In monopolistic competition, goods are produced at a point where
average total costs are not at their minimum, in contrast to perfect
competition, where they are produced at their lowest possible cost;
then the market is also
productively inefficient.
Since product differentiation is characteristic of virtually all
modern industries, this statement suggests that modern market
economies are systematically inefficient.
The second implication of this statement is that there is a social
value to  variety, and the price of that greater variety is the higher
price per unit.
From society’s point of view, there is a trade-off from 
producing  more  brands to satisfy diverse tastes and producing fewer
brands at a lower cost per unit.
Monopolistic competition produces a wider range of products but at a
somewhat higher cost per unit than perfect competition."
Taken and summarized from "Review Notes for Test 3" by FaZe 2002:
http://www.geocities.com/faze5552000/Notes.pdf

Note: to see more info related to demand and/or other curves of the
monopolistic competition please take a look to the "Unit 11 -
Monopolistic Competition and Oligopoly" by Jay Kaplan at the
UNIVERSITY OF COLORADO:
http://spot.colorado.edu/~kaplan/econ2010/section11/section11-main.html


Sources: You can improve this answer by consulting the following
sources.

ECONOMICS by Paul A. Samuelson, Ed. McGraw Hill, chapter 9 "Imperfect
Competition and Its Polar Case of Monopoly".
To see the curves and graphics related to this topics please visit:
http://www.mhhe.com/economics/samuelson17/students/Ch9.mhtml


OUTLINE OF MICROECONOMIC THEORY by Dominick Salvatore, chapter 9
"Price and Output Under Pure Monopoly" and chapter 10 "Price and
Output Under Monopolistic Competition and Oligopoly".


`International Trade Theory & Policy` by Steven M. Suranovic, chapter
80 "Economies of Scale and International Trade" (see the section
80-5):
http://internationalecon.com/v1.0/ch80/ch80.html


"SWEEZY AND CARTEL OLIGOPOLY" by Francois Leroux from the École des
HEC de Montréal, it is an interesting exercise solved:
http://cetai.hec.ca/leroux/exercices/Exercise%2024%20Sweezy.pdf


"Oligopoly" from Biz/ed:
http://www.bized.ac.uk/stafsup/exams/revec_olig.htm#content


"Chapter 11 - IMPERFECT COMPETITION" from the FREE UNIVERSITY OF BOZEN
- BOLZANO:
http://www.unibz.it/archiv/objects/inf_downloads/1/Eco1A_Lect09.pdf


"Unit 3: Supply and Demand" by Rick Nelson at Lansing Community
College (see Lesson 4):
http://vcollege.lansing.cc.mi.us/econ201/unit_03/unit03.htm 


Ask Jeeves: Search Results for "Monopoly Demand Curves":
http://webster.directhit.com/webster/search.aspx?qry=Monopoly+Demand+Curves


"2002 Edition - Master of Science in Engineering Policy and Management
of Technology - Microeconomics" from the Instituto Superior Técnico of
Lisboa:
http://in3.dem.ist.utl.pt/master/02micro/lecture6.pdf


Search strategy:
monopoly market
monopolistic market
oligopoly market
oligopoly sweezy

Search engine:
Google


I hope this helps you in your research. Please remember that this
answer is not considered complete until you feel that is satisfy your
requeriments, so if you have troubles with some links or need a
clarification  please post a request for it. If not please let me know
what do you think about this answer (in this case is an useful thing
because I will try to answer your other questions).

Best Regards.
livioflores-ga

Clarification of Answer by livioflores-ga on 30 Mar 2003 15:17 PST
One more source:
"Quiz Answers and Explanations: Monopolistic Competition and
Oligopoly" based on the book Microeconomics by Roger A. Arnold:
http://www.swcollege.com/bef/arnold/quiz_monopolistic_competition/answers.html#1

Regards.
livioflores-ga

Request for Answer Clarification by tom123-ga on 01 Apr 2003 09:01 PST
Hi Livioflores,

Thanks for your help! Your guidelines are useful. By the way, these
questions are not homework. They're some parts of my research. I would
appreciate if you could also help me on other questions.

Regards,
Tom

Clarification of Answer by livioflores-ga on 01 Apr 2003 19:07 PST
Hi tom123!!

It is always a good new to know that the given answer is useful for
the asker; and don´t worry, I will try to answer the other questions
for you.

Thank you.
livioflores-ga
Comments  
There are no comments at this time.

Important Disclaimer: Answers and comments provided on Google Answers are general information, and are not intended to substitute for informed professional medical, psychiatric, psychological, tax, legal, investment, accounting, or other professional advice. Google does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service or service provider mentioned or any opinion expressed in answers or comments. Please read carefully the Google Answers Terms of Service.

If you feel that you have found inappropriate content, please let us know by emailing us at answers-support@google.com with the question ID listed above. Thank you.
Search Google Answers for
Google Answers  


Google Home - Answers FAQ - Terms of Service - Privacy Policy