What is monopolistic competition? Types of market structures: perfect competition, monopolistic competition, oligopoly and monopoly

Monopolistic competition presupposes a mixed type of market - in this market there are, as a rule, a number of large monopolists and a significant number of less powerful firms, but which occupy a prominent place.

The nature of pricing is competitive, with the priority of monopoly within the market of a differentiated branded product.

The dominance of large firms in one country in the market for individual goods is weakened by the onslaught of large monopolistic firms in another country, as well as more “lightweight” competitors seeking their share of high profits. In the event of price gouging by monopolies, there are always competitors who can provide more favorable offers, i.e. the best prices. Competition between monopolies representing different industries, offering goods with different product characteristics and different physical properties, but which are used for the same purpose, has a significant impact on prices. An example is the competition between manufacturers supplying metal and plastics to automotive concerns.

When setting prices, the competition of goods that replace traditional ones in their qualities is also taken into account. For example, companies in Australia and England, which traditionally supplied wool to the world market, face serious competition from manufacturers and suppliers of chemical fibers.

The market of competition of a few suppliers - an oligopoly is characterized by the presence of several large manufacturing-supplying companies with significant market segments that fully or almost completely provide the supply of goods to the world market.

As a rule, there are cooperation agreements between firms and importing countries (i.e., spheres of influence are divided); firms often have exclusive rights to purchase strategically necessary raw materials and invest huge amounts of money on advertising events.

The practice of pricing for supplied products shows that any major decision made by the exporter - setting prices, determining production volumes, purchases, investments, etc. requires weighing the likely reactions of competitors.

An important role in terms of companies maintaining the status quo is played by informal agreements of the main competitors that are not advertised to the general public. During special negotiations, agreements are reached on fixing prices, on dividing sales markets, and on production volumes.

The need for relative coordination of activities in the global market has led companies to create special mechanisms through which they could act with a greater degree of predictability. The simplest form of such a mechanism is a cartel, which involves a formal written agreement regarding production volumes and pricing policies. Companies agree to divide sales markets in order to maintain agreed price levels. The most famous cartel that until recently regulated the world oil market was OPEC (Organization of Petroleum Exporting Countries). For a long period of time, the cartel managed to coordinate oil markets quite successfully.

Companies participating in the operation of such mechanisms are characterized by a tendency to maximize profits, i.e. their behavior to a certain extent resembles the action of pure monopolies.

The magnitude of the impact of oligopolistic market entities on the price level depends mainly on the degree of monopolization of the market, on how strong is the control over the production and sale of goods, sources of raw materials and other equally important factors. It is noted that the higher the degree of monopolization, the higher the level of monopoly prices and the less their fluctuations.

At the same time, pricing in the markets of machinery and equipment, for example, in comparison with raw materials and semi-finished products, is a significantly different process, and analysis of the formation of prices for specific products supplied to the international market is difficult due to differences in design, variety of equipment, etc. . However, suppliers of similar products to the world market have a certain understanding of the competitor’s prices. As a rule, the price level reflects specific production costs with the addition of a certain percentage, taking into account a specific sales market, partner, region, etc.

Market of monopolistic competition

Monopolistic competition is a market structure in which many firms in an industry producing a differentiated product compete with each other, with each seller acting as a monopolist, setting its own price. But since there are many sellers of similar products, that is, there are many substitutes, and the sales volume of an individual firm is small, the firm's control over prices is limited, and the large number of sellers practically eliminates the possibility of collusion.

There are many examples of monopolistic competition - these are the markets for washing powders, soft drinks, toothpaste, shoes, clothing, etc. The main methods of competition in monopolistic competition markets are non-price methods, that is, trademarks, advertising and other methods that emphasize the differences of the product. Entry into a monopolistic competition market is relatively free because economies of scale are not very important and the initial capital required to start a business is relatively small.

Externally, monopolistic competition is similar to perfect competition, but the presence of monopoly (albeit limited) power and the ability to influence prices reduce the efficiency of using society's resources. In this way, it has similarities with a monopoly market; in addition, the demand curve of a company in conditions of monopolistic competition is downward, but at the same time elastic. Factors in the elasticity of demand are the number of competitors and the degree of product differentiation. To differentiate a product means to distinguish it from other similar products on some basis: quality, advertising, brand, terms of sale, packaging, etc. The additional costs associated with product differentiation can become a barrier to entry for new firms in the industry.

In the short run, each firm in a monopolistic competition market is in many ways similar to a pure monopoly: it can set a price and thereby receive additional profits due to the buyer's attachment to the special characteristics of the firm's product.

In the long run, profits attract competitors into the industry, while losses encourage exit. In this case, the process of migration of firms continues until economic profit reaches zero. This situation is similar to perfect competition: in the long run, firms make neither profits nor losses.

Production costs in a monopolistic competition market are higher than in conditions of perfect competition, but a wide choice of brands, types, styles, as well as different quality of products make it possible to better satisfy the diverse needs of customers, thereby compensating for the losses to society from higher production costs.

A firm in a monopolistic market

Perfect competition, as we have already noted, is rather an abstract model, convenient for analyzing the basic principles of the formation of a company’s market behavior. In reality, purely competitive markets are rare; as a rule, each company has “its own face,” and each consumer, choosing the products of a particular company, is guided not only by the usefulness of the product and its price, but also by his attitude towards the company itself, towards quality products that are unique to her. In this sense, the position of each company in the market is somewhat unique or, in other words, there is an element of monopoly in its behavior.

This element leaves its mark on the company’s activities, forcing it to take a slightly different approach to both the formation of a pricing strategy and the determination of the volume of output that is most effective from the point of view of profits and losses.

The concept of pure monopoly is also usually an abstraction. Even the complete absence of competitors within the country does not exclude their presence abroad. Therefore, one can imagine a pure, absolute monopoly rather theoretically. A monopoly presupposes that one firm is the only producer of any product that has no analogues. At the same time, buyers do not have the opportunity to choose; they are forced to purchase such products from a monopolist company.

One should not equate pure monopoly with monopoly (market) power. The latter means the ability for a firm to influence price and increase economic profits by limiting the volume of production and sales. When they talk about the degree of monopolization of a market, they usually mean the strength of the market power of individual firms present in this market.

A monopolist in the market completely controls the entire volume of output of a product; if he decides to increase the price, he is not afraid of losing part of the market or giving it to competitors who set lower prices. But this does not mean that he will endlessly increase the price of his products.

A monopolist company, like any other company, strives to obtain high profits; when deciding on the selling price, it takes into account market demand and its costs. Since the monopolist is the only producer of a given product, the demand curve for its product will coincide with the market demand curve.

Deciding on the volume of output that should maximize profits for the monopolist is based on the same principle as in the case of perfect competition: the equality of marginal revenue and marginal costs. As is already known, a firm in conditions of perfect competition is characterized by equality of average and marginal revenues and prices. For a monopolist the situation is different. The average income and price curve coincides with the market demand curve, and the marginal income curve lies below it. Since the monopolist is the only producer and represents the entire industry, sales volume can only be increased by lowering the price, marginal revenue is always lower than the price value, except for a unit volume of output: if the monopoly increases production volume, then the price decreases and all products are now sold at this price (and the one that was released earlier). Therefore, if one additional unit of output is produced, then the monopolist receives an increase in income equal to the price of this unit of output minus what it will lose due to the sale of previously produced products at this lower price.

Features of a monopolistic market

As practice shows, in real life the conditions inherent in perfect competition and pure monopoly are rarely met. Pure monopoly and perfect competition can be considered as ideal market structures that are at opposite poles. Real market structures occupy an intermediate position, combining certain features of both pure monopoly and perfect competition. One such market structure is monopolistic competition, to describe which it is useful to know both the theoretical model of a perfectly competitive market presented above and the model of pure monopoly.

Monopolistic competition is a market structure where the features of perfect competition prevail and there are certain elements characteristic of a pure monopoly.

Features of monopolistic competition:

1. There is a fairly significant number of small firms operating in the industry, but they are fewer in number than under perfect competition. Firms create similar but not identical products.

It follows that:

An individual firm owns only a small share of the market for a given product;
the market power of an individual firm is limited, therefore, the control of the market yen of a product by an individual firm is also limited;
there is no possibility of collusion between firms and cartelization of the industry (creation of an industry cartel), since the number of firms competing in the market is quite large;
Each firm is practically independent in its decisions and does not take into account the reaction of other competing firms when changing the price of its goods.

2. The product sold in the industry is differentiated.

In monopolistic competition, firms in the market have the opportunity to produce goods that are different from those produced by competitors. Product differentiation takes the following forms:

Different quality of products, i.e. products may differ in many parameters;
various services and conditions related to the sale of the product (quality of service);
differences in the location and availability of goods (for example, a small store in a residential neighborhood may compete with a supermarket, despite a narrower range of goods offered);
Sales promotions (advertising, brands and marks) and packaging create often imaginary differences that are forced on consumers.

Cosmetics, perfumes, pharmaceuticals, home appliances, services, etc. are examples of differentiated products. Firms producing a differentiated product have the opportunity, within certain limits, to change the price of the goods sold, and the demand curve of an individual firm has, as in the case of a monopoly, a “falling” character. Each monopolistic competitor firm controls a small share of the industry market. However, product differentiation leads to the fact that the single market breaks up into separate, relatively independent parts (market segments). And in such a segment, the share of an individual, perhaps even small, company can be very large. On the other hand, goods sold by competitors are close substitutes for the given one, which means that the demand for the products of an individual firm is quite elastic and does not decrease as sharply as in the case of a monopoly.

3. Freedom of entry into the industry (market) and exit from it. Since in conditions of monopolistic competition firms are usually small in size, there are most often no financial problems when entering the market. On the other hand, with monopolistic competition, additional costs may arise associated with the need to differentiate your product (for example, advertising costs), which may become an obstacle to the entry of new firms. The existence of free entry of firms into the industry leads to the fact that, as a result of competition, a typical situation becomes when enterprises do not receive economic profits in the long run, operating at the break-even point.

4. The existence of non-price competition. The situation of lack of economic profit, functioning at the break-even point in the long term cannot satisfy the entrepreneur for long. In an effort to obtain economic profit, he will try to find reserves for increasing revenue. The possibilities for price competition in conditions of monopolistic competition are limited, and the main reserve here is non-price competition. Non-price competition is based on using the advantages of individual firms in the technical level, design, and reliability of operation of the products they produce. A decisive role is played by such parameters of manufactured products as environmental friendliness, energy intensity, ergonomic and aesthetic qualities, and operational safety.

There are several methods for implementing non-price competition:

Product differentiation associated with the appearance at a given time of a significant number of types, types, styles of the same product;
improving product quality over time, which is necessary due to the existence of competition in the industry;
advertising. The peculiarity of this form of non-price competition is that consumer tastes are being adapted to existing types of products. The purpose of advertising is to increase the company's market share of this product. To be successful, each monopolistic competitor company must take into account not only the price of the product and the possibility of changing it, changing the product itself, but also the possibilities of the advertising and propaganda company.

Monopolistic competition is a fairly common type of real market structures. This market structure is typical for the food industry, shoe and clothing production, furniture industry, retail trade, book publishing, many types of services and a number of other industries. In Russia, the state of the market in these areas can clearly be characterized as monopolistic competition, especially considering the fact that product differentiation in these industries is very high.

Perfect and monopolistic competition markets

Competition is the driving mechanism of the market, a factor of internal development, the struggle of market participants for better conditions for the production and sale of products.

Perfect competition is an economic model, an idealized state of the market, when individual buyers and sellers cannot influence the price, but form it through their input of supply and demand.

A perfectly competitive market has the following features:

1. Numerous market entities characterized by small scale of activity, small volumes of supply and demand and having a small market share.

2. Homogeneous products are produced and circulated on the market. Products from different companies are completely interchangeable. Under these conditions, no buyer will pay a higher price to the firm than he will pay to its competitors. Subjects have complete information about the market situation and choose a counterparty at their own discretion.

3. Market subjects are not able to influence the market price. Each firm produces such a small portion of the total output of a particular product that an increase or decrease in that firm's output will have no effect on the overall supply or price of the product. The behavior of each subject of demand in this market will also not affect the parameters of the market price due to its small share in the overall scale of market demand.

Therefore, market prices for products are formed under the influence of general supply and demand. Although each seller is free to set his own price for the goods sold, or even give the goods for free, the desire of the market agent to receive benefits from his activities forces him to focus on the market price. As a result of the impossibility of individual influence on the parameters of the market price, the demand for the products of a competitive company is absolutely elastic (that is, the market price will not change, even if the volume of demand from an individual entity changes significantly).

4. Absence of barriers to entry and exit from the market. There are no restrictions for either sellers or buyers to enter this market. Access to the market is free due to the small amounts of capital and funds required. There are no difficulties with cessation of activity in the market. Conditions do not force anyone to remain in the industry if it is not in their best interests.

Monopolistic competition is a type of imperfectly competitive market structure. This is a common type of market that is closest to perfect competition.

Peculiarities:

1. A large number of buyers and sellers, each satisfying a small share of the market demand for a common type of product. The number of sellers determines the fact that the latter do not take into account the reaction of their rivals when choosing sales volumes and setting prices for their products, in contrast to the situation of an oligopoly, when only a few large sellers operate in the market for one product.
2. Low barriers to entry into the industry. With monopolistic competition, it is easy to found a new company in an industry or leave the market - entry into a given industry market is not hampered by the barriers that monopoly and oligopoly structures put in the way of a newcomer. However, this entry is not as easy as under perfect competition, since newly entered firms often experience difficulties with their new brands for buyers (markets for women's, men's or children's clothing, jewelry, shoes, soft drinks).
3. Production of differentiated products with many substitutes. Although an industry market sells goods (or services) of the same type, under monopolistic competition, each seller's product has specific qualities or characteristics that cause some buyers to prefer his product to the product of competing firms. This is called product differentiation as opposed to standardized products that are characteristic of perfect competition. Product specificity gives each seller a certain degree of monopoly power over price.
4. Presence of non-price competition. Often, in conditions of monopolistic competition, firms competing with each other do not use price competition, but actively use various methods of non-price competition, and especially advertising. In non-price competition, the epicenter of rivalry between manufacturers becomes such non-price parameters of the product as its novelty, quality, reliability, prospects, compliance with international standards, design, ease of use, after-sales service conditions, etc. Firms in markets with monopolistic competition strive by all means to convince the consumer that that their products differ from those of competitors for the better.

Restrictions on monopolistic activity in commodity markets

Monopolistic activity in the commodity market is the abuse by an economic entity, a group of persons of its dominant position, agreements or concerted actions prohibited by antimonopoly legislation, as well as other actions (inactions) recognized in accordance with federal laws as monopolistic activities.

Types of monopolistic activities

Classification of monopolistic activities is carried out on various grounds.

Depending on the form of manifestation, there are:

Treaty;
- non-contractual type of monopolistic activity.

The classification may be based on the number of participants in monopolistic activities. In this case, we talk about individual and collective anti-competitive practices.

Individual monopolistic activity is manifested in the form of actions (inaction) of an economic entity occupying a dominant position, the result of which is or may be the prevention, restriction, elimination of competition and (or) infringement of the interests of other persons.

The Law on Protection of Competition provides a non-exhaustive list of such abuses, which can be divided into two types:

A) actions (inactions) in respect of which an absolute prohibition has been established. These, in particular, include: establishing and maintaining a monopolistically high or monopolistically low price for a product; withdrawal of goods from circulation if the result of such withdrawal was an increase in the price of the goods; economically, technologically and otherwise unjustified establishment of different prices (tariffs) for the same product, unless otherwise established by federal law; setting by a financial organization an unreasonably high or unreasonably low price for a financial service; violation of the pricing procedure established by regulatory legal acts;
b) actions (inactions) that may be considered acceptable if such actions (inactions) do not create the opportunity for individuals to eliminate competition in the relevant product market, and restrictions are not imposed on their participants or third parties that are inconsistent with achieving the goals of such actions (inactions) ), and also if their result is or may be:
1) improving production, sales of goods or stimulating technical and economic progress or increasing the competitiveness of Russian-made goods on the world commodity market;
2) receipt by buyers of advantages (benefits) commensurate with the advantages (benefits) received by business entities as a result of actions (inaction).

This category, in particular, includes: economically or technologically unjustified reduction or cessation of production of a product, if there is demand for this product or orders have been placed for its supply if there is the possibility of its profitable production, and also if such a reduction or such cessation of production of the product is direct not provided for by federal laws, regulatory legal acts of the President of the Russian Federation, regulatory legal acts of the Government of the Russian Federation, regulatory legal acts of authorized federal executive bodies or judicial acts; creation of discriminatory conditions; creating obstacles to access to the product market or exit from the product market for other economic entities.

Collective monopolistic activity in the form of agreements (concerted actions) of economic entities, if such agreements or concerted actions lead or may lead to the establishment or maintenance of prices (tariffs), discounts, surcharges (surcharges), markups; increasing, decreasing or maintaining prices at auctions; division of the commodity market according to the territorial principle, the volume of sales or purchase of goods, the range of goods sold or the composition of sellers or buyers (customers); economically, technologically and otherwise unjustified establishment of different prices (tariffs) for the same product; reduction or cessation of production of goods for which there is a demand or for the supply of which orders have been placed if it is possible to produce them profitably; creating obstacles to access to the product market or exit from the product market to other economic entities, etc.

The Law on the Protection of Competition provides a non-exhaustive list of agreements (concerted actions) that qualify as monopolistic activity.

Conditions of a monopolistic market

In this section, we look at a market structure in which there are numerous firms selling close but imperfect substitute products. This market structure is usually called monopolistic competition - monopolistic in the sense that each manufacturer has a monopolist over its own version of the product and competition - since there are a significant number of competitors selling similar products.

The basics of the model of monopolistic competition and the name itself were developed by Edward H. Chamberlain in his work “The Theory of Monopolistic Competition”.

Main features of monopolistic competition:

Product differentiation;
A large number of sellers;
Relatively low barriers to entry and exit from the industry;
Fierce non-price competition.

PRODUCT DIFFERENTIATION

Product differentiation is a key characteristic of this market structure. It assumes the presence in the industry of a group of sellers (manufacturers) producing goods that are similar, but not homogeneous in their characteristics, i.e. goods that are not perfect substitutes.

Product differentiation can be based on:

Physical characteristics of the product;
location;
“imaginary” differences associated with packaging, brand, company image, advertising.

In addition, differentiation is sometimes divided into horizontal and vertical:

The vertical one is based on dividing goods by quality or some other similar criterion, conventionally into “bad” and “good” (the choice of TV is “Temp” or “Panasonic”);
the horizontal one assumes that, at approximately equal prices, the buyer divides goods not into bad or good, but into those that correspond to his taste and those that do not correspond to his taste (the choice of a car is Volvo or Alfa-Romeo).

By creating its own version of the product, each company acquires a limited monopoly. There is only one manufacturer of Big Mac sandwiches, only one manufacturer of Aquafresh toothpaste, only one publisher of the Economic School magazine, etc. However, they all face competition from companies offering substitute products, e.g. operate in conditions of monopolistic competition.

Product differentiation creates the possibility of limited influence on market prices, since many consumers remain committed to a particular brand and company even with some price increases. However, this impact will be relatively small due to the similarity of the products of competing firms. The cross elasticity of demand between the goods of monopolistic competitors is quite high. The demand curve has a slight negative slope (in contrast to the horizontal demand curve under perfect competition) and is also characterized by high price elasticity of demand.

LARGE NUMBER OF MANUFACTURERS

Similar to perfect competition, monopolistic competition is characterized by a large number of sellers so that an individual firm has a small share of the industry market. As a consequence, a monopolistically competitive firm is usually characterized by both absolute and relatively small size.

Large number of sellers:

On the one hand, it excludes the possibility of collusion and concerted actions between firms in order to limit output and increase prices;
on the other hand, it does not allow the company to significantly influence market prices.

Entry into the industry is usually not difficult, due to:

Small economies of scale;
small initial investment;
small size of existing enterprises.

However, due to product differentiation and consumer brand loyalty, market entry is more difficult than with perfect competition. The new firm must not only produce competitive products, but also be able to attract buyers from existing firms.

This may require additional costs for:

Strengthening the differentiation of its products, i.e. providing it with such qualities that would distinguish it from those already available on the market;
advertising and sales promotion.

NON-PRICE COMPETITION

Severe non-price competition is also a characteristic feature of monopolistic competition.

A company operating in conditions of monopolistic competition can use three main strategies to influence sales volume:

Change prices (i.e. carry out price competition);
produce goods with certain qualities (i.e., strengthen the differentiation of your goods by technical characteristics, quality, services and other similar indicators);
reconsider the advertising and sales strategy (i.e., strengthen the differentiation of your product in the field of sales promotion).

The last two strategies relate to non-price forms of competition and are more actively used by companies. On the one hand, price competition is difficult due to product differentiation and consumer commitment to a specific product brand (a price reduction may not cause such a significant outflow of customers from competitors to compensate for losses in profits), on the other hand, a large number of firms in the industry leads to that the effect of a single company's market strategy will be spread across so many competitors that it will be virtually insensitive and will not provoke an immediate and targeted response from other firms.

It is usually assumed that the model of monopolistic competition is most realistic in relation to the services market (retail trade, services of private doctors or lawyers, hairdressing and cosmetic services, etc.). As for material goods such as various types of soap, toothpaste or soft drinks, their production, as a rule, is not characterized by small size, large numbers or freedom of entry into the market of manufacturing firms. Therefore, it is more correct to assume that the wholesale market for these goods belongs to an oligopoly structure, and the retail market to monopolistic competition.

CONDITIONS FOR MAXIMIZING PROFIT IN THE SHORT PERIOD

Under monopolistic competition, an individual firm faces a downward-sloping demand curve (as opposed to perfect competition), which is explained by product differentiation.

Because each of a firm's products has distinctive characteristics, the firm has some influence over market prices. By charging prices slightly lower than competitors' prices, a firm can expect some increase in sales because its product is a good substitute for its competitors' products. Conversely, by raising prices, a firm may experience a reduction in sales as its customers switch to cheaper products.

In addition, the availability of a large number of good substitutes makes the demand curve of an individual firm highly elastic over the relevant price range.

The degree of price elasticity is determined by the degree of differentiation of competitors' products and the number of firms operating in the industry. Other things being equal, the greater the number of competitors and the less product differentiation, the higher the price elasticity of demand for the products of an individual firm in the corresponding price range (high price elasticity is indirectly indicated by the fact that monopolistic competitor firms usually behave as if They would believe that their demand curves are highly price elastic (they usually sell their products at almost the same price and do not allow significant price increases compared to their competitors).

If the demand for the company’s products is weak and total income does not cover the company’s variable costs, as can be seen in the last case, the most reasonable solution would be to stop the enterprise, since only in this case the company will be able to minimize its losses (losses will be equal to total fixed costs firms).

An important note: in monopolistic competition, it is impossible to represent market conditions by industry supply and demand curves. Due to product differentiation, products from different firms are not comparable with each other.

This implies the difficulty of constructing a sales volume axis for industry curves:

Slightly different production costs and the magnitude of demand for individual goods lead to the fact that prices among different firms also differ.
The different prices and large number of varieties of the same product make it difficult to determine the number of units offered by all firms or purchased by all consumers at a given price.

Thus, the market in this model is described in words rather than graphically. Supply and demand curves are used primarily to describe the market conditions of an individual firm.

Tendency to smooth out profits in the long run

If in the short term a company can have both profits and losses, then in the long term the situation changes. Fairly free entry and exit of firms into the market, just as it happens in a perfectly competitive market, gives rise to a tendency to average the profits received by firms at the level of normal profits.

The process of profit adjustment in a monopolistic competition market is similar to the same process in perfect competition.

If the industry is profitable in the short term, i.e. profits are higher than normal, then in conditions of low barriers to entry, new firms will try to start production in this industry.

If we assume that the market demand for the industry's products remains unchanged, then the emergence of new firms in the industry and increased competition between them will shift the demand curve for the products of an individual firm to the left, and the elasticity of demand will increase. As a result, opportunities for earning economic profit will be significantly reduced.

If firms in an industry do not earn normal profits in the short term, then the least efficient enterprises will most likely begin to leave the industry.

The remaining firms will try to reduce their costs, stimulate demand, and increase the efficiency of their production. Individual demand curves will shift to the right, and their elasticity will decrease due to a decrease in the number of substitute goods. As a result, the remaining firms in the industry will be able to earn at least normal profits.

Thus, in the long run, in the market of monopolistic competition, there is a tendency for the profits of individual firms to equalize at the level of normal profits.

Leveling mechanism under monopolistic and perfect competition

The market equalization mechanism does not operate as strongly under monopolistic competition as under perfect competition.

On the one hand, individual firms can make economic profits in the long run if they:

Have a patent for a product with unique characteristics;
located in a geographically advantageous location (motels, service stations, cafes, restaurants);
developed new products and applied new technology.

On the other hand, entry into the market may be difficult due to the need for additional investments associated with product differentiation and the need for sales promotion, which also provides the opportunity for long-term profit.

At the same time, conditions may exist for quite a long time under which profits turn out to be lower than normal (the habit of the existing lifestyle, love for one’s occupation can lead to reluctance to change the scope of one’s activity even under unfavorable market conditions).

Advantages of the monopolistic competition market:

Product differentiation expands consumer choice;
strong competition keeps prices close to marginal costs, which are at the lowest possible level for differentiated products (albeit slightly higher than in a perfectly competitive market);
the bargaining power of an individual firm is relatively small, so that firms mostly obtain rather than set prices;
This is the most favorable market for buyers.

Disadvantages of the monopolistic competition market:

As a rule, firms operating in conditions of monopolistic competition are small, both relatively and absolutely. The size of firms is strictly limited by the rapid emergence of diseconomies of scale in production (diseconomies of scale in production). And if existing firms fully exploit the possibilities of economies of scale, then industry supply will increase due to the entry of new firms into the industry, and not due to the expansion of the activities of old ones.

The small size predetermines the main disadvantages of this market structure:

Unstable market conditions and uncertainty for small businesses. If market demand is weak, this can lead to financial losses, bankruptcy, and exit from the industry. If market demand is strong, this increases the flow of new firms into the industry and limits the earning of higher than normal profits by existing ones.
The small size of firms and the rigidity of market forces limit the financial capacity to take risks and undertake R&D and innovation activities (since R&D requires a fairly high minimum enterprise size). While there are exceptions (the Apple personal computer was first developed in a garage), most small firms are not technologically advanced or innovative.

Equilibrium in a monopolistic market

A monopoly firm usually has high profits, which naturally attracts other producers to the industry. In the case of a pure monopoly, the barriers to entry into the industry are high enough that it virtually blocks competitors from entering the monopolized market. Here are the really significant barriers to possible monopoly competitors: Economies of scale.

Highly efficient, low-cost production is achieved under conditions of the largest possible production resulting from market monopolization. Such a monopoly is usually called a “natural monopoly”, i.e. an industry in which long-term average costs are minimal if only one firm serves the entire market (for example, the production and distribution of natural gas: it is necessary to develop fields, build gas pipelines, local distribution networks, etc.).

It is extremely difficult for new competitors to enter such an industry as it requires large capital investments. The dominant firm, having lower production costs, is able to temporarily reduce the price of products in order to destroy a competitor. In general, any monopoly can exist only with imperfect competition. A monopoly market assumes that a given product is produced by only one firm (the industry consists of one firm) and it has very high control over prices.

Equilibrium of a monopolist firm: Unlike perfect competition, a monopolist can determine prices for goods. At the same time, he selects the volume of production and deliberately limits it and forms a pricing strategy.

The monopoly price provides excess profits (it is stable). It will exist as long as the monopoly restricts entry into the industry, until demand changes significantly. From the point of view of society, the consumer receives less output than under perfect competition; unit price increases; Fewer factors of production are involved (not full use of resources); consumer surplus is reduced, producer surplus is increased.

Demand in a monopolistic competition market

Monopolistic competition is a type of market structure consisting of many small firms producing differentiated products, and characterized by free entry into and exit from the market.

The concept of “monopolistic competition” dates back to the book of the same name by the American economist Edward Chamberlin (1899-1967), published in 1933.

Monopolistic competition, on the one hand, is similar to the position of a monopoly, because individual monopolies have the ability to control the price of their goods, and on the other hand, it is similar to perfect competition, since it assumes the presence of many small firms, as well as free entry into and exit from the market, i.e. i.e. the possibility of the emergence of new firms.

A market with monopolistic competition is characterized by the following features:

A) the presence of many sellers and buyers (the market consists of a large number of independent firms and buyers);
b) free entry into and exit from the market (no barriers keeping new firms from entering the market, or obstacles to existing firms leaving the market);
c) heterogeneous, differentiated products offered by competing firms. Moreover, products may differ from one another in one or a number of properties (for example, in chemical composition);
d) perfect awareness of sellers and buyers about market conditions;
e) influence on the price level, but within a fairly narrow framework.

Determination of production volume under conditions of monopolistic competition

The demand for a product is reflected by a demand curve, which shows the total volume of products supplied by the firm at each price. The demand curve for a product, like that of a monopolist firm, is downward sloping, with the only difference being that it is more elastic, since the seller, in conditions of monopolistic competition, encounters a relatively large number of competitors producing substitute goods. The more competitors and less product differentiation, the more elastic the demand curve. Under conditions of monopolistic competition, the marginal revenue curve is located below the producer's demand curve, and its slope will be half the angle of the demand line.

In the short run, under conditions of monopolistic competition, a profit-maximizing firm will seek to produce at a combination of price and output that equalizes marginal cost and marginal revenue. In this case, the company can make excess profits.

In the long run, profit maximization involves the level of output at which marginal revenue equals long-run marginal cost. In the long run, excess profits stimulate new firms to enter the market, which causes a decrease in the demand curve for established firms, i.e., shifts the demand curve to the left. This means less sales at each price level. The entry of new firms will continue until the additional profits disappear.

The firm still maximizes profit at the combination of price and output where marginal cost equals marginal revenue. However, in this case the company makes only normal profits. Equilibrium at the level of normal profit in the long run is similar to the equilibrium of a firm under perfect competition with the difference that monopolistic competition causes less efficient market operation. Under conditions of monopolistic competition, a firm produces less product and sells it at a higher price compared to perfect competition. Since the demand curve has a negative slope, it touches the long-run average cost curve to the left of the latter's minimum point. Consequently, each firm is less than optimal in size, resulting in excess capacity in the market.

What are the economic consequences of monopolistic competition? First, resources for the production of goods are underutilized, i.e., excess production capacity arises. Secondly, consumers do not receive goods at the lowest price, i.e., the products needed by the consumer are underproduced. Third, tailoring the product to consumer demand requires product differentiation and improvement. Fourthly, the adaptation of consumer demand to the product causes the improvement of advertising. The above two types of adaptation to a certain extent compensate for monopolistic competition, but maximum economic and social efficiency is not achieved.

Features of a monopolistic market

Monopolistic competitors are considered to be small chains of grocery stores, clothing stores, cafes and markets such as the network communications market. This is not a complete list. Of course, a monopolistic market is essentially reminiscent of a monopoly, since certain firms allow themselves to dictate the price conditions for their goods or services. At the same time, such competition resembles its perfect type, because many enterprises are engaged in the sale of such goods or services, despite the fact that there is such a concept as “entry” and “exit” in the market.

This type of market is characterized by the following features:

Quite a large number of sellers and buyers. In a market with monopolistic competition, there must be a sufficient number of sellers who satisfy the needs of the industry in terms of volumes of products sold by enterprises and their competitors. If we talk about percentages, then in the case of monopolistic competition, each company accounts for from one to five percent of the sales market. At the same time, if we are talking about perfect competition, then this figure does not exceed one percent.
No significant difficulties when entering the market. In this case, the founding of a new company does not involve any Herculean efforts that are necessary to achieve success. The same applies to exiting the market. However, it is worth remembering that the appearance of a new player on the market creates certain difficulties for it, because the buyer will have to believe in the new brand. Examples of industries in which this type of competition predominates are children's clothing stores, men's or women's clothing stores, hairdressers, jewelry stores, and so on.
Production of products that have plenty of analogues on the market. This is another feature of monopolistic competition, because it is characterized by a product of one type, but each company has its own unique characteristics, thanks to which it retains its 1-5% in the market. The presence of a so-called differentiated product is considered one of the main features of a monopolistic market. For example, in conditions of perfect competition, the presence of a standardized product prevails, which is almost identical for each of the firms. For example, the popularity of a trademark allows its owner to set a higher price for their products.
Presence of non-price competition. Often this market is characterized by the fact that competitors compete with each other not by adjusting pricing policies, but by marketing, advertising, and so on. In these ways, the company is trying to convince its potential buyer that its product is the highest quality, reliable, prestigious, albeit not as affordable as that of its competitors, but this is completely justified. In such a market, differentiated products are constantly improved. New ones also appear and, as a rule, other competitors follow the one who launches them on the market, supposedly “inventing” their own version of the new product that has appeared.

Signs of a monopolistic market

Signs of monopoly:

1. one seller on the market;
2. sale of a unique product without substitutes;
3. inaccessible information;
4. prices on the market are dictated by the monopolist;
5. the presence of uncertain barriers to entry into the market.

Depending on the reasons for their formation (social or natural), types of monopolies are distinguished. As a result, random, artificial and natural monopolies are distinguished.

Social reasons determine the emergence of random and artificial monopolies.

Accidental monopolies are the result of a temporary significant excess of demand over supply. Such monopolies develop under the condition of a company's targeted marketing strategy to segment the market to create a market niche.

An accidental monopoly can develop into an artificial one.

Artificial monopolies arise when large commodity producers, who are potential or actual Competitors, collude, aimed at establishing and maintaining a certain price level, dividing spheres of influence in markets or eliminating other competitors.

In order to prevent the formation of artificial monopolies, legislative restrictions on mergers and acquisitions are being introduced, and antimonopoly legislation is being developed and improved.

In addition to social reasons, there are also natural reasons for the formation of monopolies. Creating a competitive environment in some product markets is impossible or extremely unprofitable: the effect of scale of production is so great that one enterprise satisfies demand at lower costs than several.

A natural monopoly is a state of the goods market in which the satisfaction of demand is more effective in the absence of competition due to the technical features of production (due to a significant decrease in production costs per unit of goods as production volume increases), and goods produced by subjects of a natural monopoly cannot be replaced in consumption by other goods, and therefore the demand for goods produced by subjects of natural monopolies depends less on changes in the price of this product than the demand for other types of goods.

Natural monopolies can be state-owned or privately owned.

The main areas of activity of natural monopolies include:

Transportation of oil and petroleum products via main oil pipelines;
- gas transportation through pipelines;
- services for the transmission of electrical and thermal energy;
- rail transportation;
- services of transport terminals, ports and airports;
- public telephone and postal services. Methods of state regulation of natural monopolies are divided into direct and indirect. Direct regulation is associated with program-targeted management of state-owned natural monopolies. Methods of indirect regulation of natural monopolies under the control of private entrepreneurs are: the formation of competitive conditions when entering the monopoly market (in the form of competitions, auctions when concluding lease, concession, supply agreements); regulation of the rate of profit (by determining current costs, assessing investments, acceptable profits).

Monopoly market model

In order for the marketing department to successfully carry out its activities in selling the product, it is necessary to understand what type of market the company operates in.

The classification of markets was developed by economists and, from the seller’s point of view, the following types of markets were identified:

Monopoly;
pure competition;
oligarchy;
monopolistic competition.

As you know, the market consists of sellers and buyers. The main determinants that determine the type of market in which an entrepreneur operates are the product, the type and number of buyers, and the opportunities available to the buyer or seller in the market. It is extremely important to understand the market model because it determines the nature of the actions that must be taken to compete successfully.

In some market models, competition is practically impossible, while in others, competition may be of a specific nature. We will consider market models from the point of view of the seller, although it should be noted that each seller is also a buyer of certain products, and in the markets of all four of the above models.

So, let's consider a monopoly market model. A monopoly is a condition where a company has a unique product. There are natural monopolies caused by natural factors, but most monopolies are encouraged by the state - through the issuance of patents, copyrights, trademarks and franchises. Thus, in many countries there is a patent system to protect the rights of someone who has developed a unique technological device.

After a number of years, the patent expires and the technology enters the public domain. Copyright is usually associated with a unique creative work, such as computer programs. Trademarks are unique symbols that identify a specific company or product.

One of the ways to create monopolies is through the distribution of franchises by the government. A franchise is the right to operate a business, produce a product, or provide a service, granted by the government to only one company within a specific geographic region. An example is utility companies in the United States, many of which would like to provide electricity to a large city such as Washington or San Francisco.

However, their activities would not be successful if they were all trying to supply electricity to this particular city, since they would have to install several power lines. The same can be said about gas supply, sewerage and other utilities. It would be impractical to have several electricity, gas and heat supply networks for a group of consumers in one area. For this reason, the government gives the right to serve consumers in a certain region to only one company. But along with this, it also retains the right to comprehensive control over the company’s operations, and especially over its pricing policy.

Without these controls, a manufacturer granted a monopoly by the government would be able to charge monopoly prices for its services. And since there is no alternative, prices for services would increase immeasurably. Therefore, the government regulates these franchises through various commissions that meet periodically to review utility service prices and other issues related to the franchise.

It is generally believed that a company or individual who has a monopoly on the production of any product or service is guaranteed profit. But a company's ability to produce a product profitably under a monopoly is not very different from the same process under any other market model. The reason for this is the nature of the market system: the monopolist faces the same demand problems as other producers.

If there is no demand for his product and there are difficulties in selling, then he cannot make a profit. However, if the market demand for a product is very significant, the monopolist will usually charge a price much higher than the cost of producing the product, thereby creating a level of profit that encourages it to continue producing.

As can be seen from the graph of the monopoly demand curve presented in Fig. And, if the price P1 is set for a product, then the demand for it on the market will be (quantity of product). If a lower price is set for this product, then more of it will be consumed if demand has such a dependence on price as indicated in the graph.

Let's give an example. Someone received a patent for a new product. Although he was given the exclusive right to sell it, this did not affect the suppliers from whom he must purchase inputs to produce the product, including metal, plastic, labor, electricity, equipment, etc.

Thus, the monopolist is limited in its activities by cost considerations, like any other producer. He also needs that there is exceptional demand for his product: only this will allow him to set a price above the normal level.

Types of monopolistic markets

Monopolies, by their nature, driving forces and forms of manifestation, can be divided according to various criteria:

By the nature of occurrence;
- by the nature of the driving forces;
- by form of ownership;
- on a territorial basis.

Based on the nature of the driving forces, natural, open (product) and closed (protectionist) monopolies are distinguished.

The existence of natural monopolies is economically justified. This is a situation in which satisfying demand in a particular market is much more effective in the absence of competition. In such industries, economies of scale are so great that a product produced by one firm can be produced at a lower average cost, and the goods produced by a given manufacturer have no substitutes, so that demand in such a market is less dependent on changes prices. The technological features of the functioning of companies in such markets create a situation in which, with increasing demand, average costs are constantly decreasing, but competition will lead to an increase in the total costs of production, and at the same time to an increase in prices. Such a market will be inefficient.

Natural monopolies exist on the basis of barriers caused by the characteristics of production and sales of products. This economic situation is typical for the collective consumption market: housing and communal services (water, electricity, gas), railway transport, oil and gas transportation, etc.

These include the following forms of monopolistic organizations:

A) patent system. A patent is a certificate issued by the government of a country to an inventor for the exclusive use of an invention. A patent is also a document issued for the right to engage in fishing or trade;
b) copyright, according to which authors receive the exclusive right to sell or reproduce their works for their entire life or for a certain period;
c) trademarks - special designs, names, symbols that allow you to identify (identify) a product, service or company (competitors are prohibited from using registered trademarks).

In Russia, according to the Federal Law, several areas are classified as natural monopolies:

Transportation of oil and petroleum products via main pipelines;
gas transportation through pipelines;
electric energy transmission services;
rail transportation;
services in transport terminals, ports, airports;
public telecommunications and public postal services;
services for operational dispatch control in the electric power industry;
thermal energy transmission services;
services for the use of inland waterway infrastructure. Commentary to the Code of Civil Procedure of the Russian Federation, Federal Law No. 147-FZ “On Natural Monopolies”.

A monopoly position can be the result of the proprietary achievements of the company itself, as a result of the active implementation of scientific and technological progress, the development and creation of fundamentally new goods and services, an effective business strategy, or as a result of the skillful use of technological innovations, successful consideration of the dynamics of market conditions and the creation of effective and enjoyable consumption modes. Such a monopoly is always motivated to concentrate its efforts to maintain productivity and production efficiency in the presence of potential competitors. Due to the fact that the achievement of a monopoly position is achieved thanks to innovative ideas, this monopoly will be open. As a rule, product monopolies accumulate their financial resources for the implementation of promising research programs, the introduction of innovations and the latest achievements of scientific thought, the implementation of large-scale marketing projects and the creation of intangible branding assets. Monopolies of this type are temporary.

The existence of closed monopolies is associated with active government protection of such firms. It prevents the emergence of competitors or creates significant administrative barriers for this. The main elements of such assistance are direct subsidies and benefits, including tax exemptions, the absence of a competitive system for the distribution of government orders, loans guaranteed by the state or loans provided by the state at interest rates below market rates, etc.

Closed monopolies are inefficient, and although their products are of low quality, they can achieve high economic results through price manipulation. Monopolies of this type are provided with administrative immunity - this is a fundamentally important factor that predetermines their behavior strategy.

Monopolies by form of ownership are either private or public.

Private monopolies operate within the framework of private entrepreneurial interests of market agents who have private property rights and mechanisms for protecting these rights. Their goal is to achieve a competitive advantage and strengthen a monopoly position in the market.

State monopolies are the property of the state, and their activities are fully regulated by authorities. The existence of such monopolies is due to concern for the welfare of society and consumers: the state controls and regulates prices, quality of products and services, volumes of products, as well as import and export tariffs. A striking example of the activities of state monopolies is the Soviet Union.

Based on the territorial basis, which is based on the geographical boundaries of the market, monopolies are divided into four types: extraterritorial, national, regional and local (local). The scale of activity, strategic interests, company assets, the scope of economic priorities and the scale of markets will differ fundamentally.

Extraterritorial, or transnational, monopolies operate at the international level. Such companies include, for example, De Beers, which operates in the market of diamond mining, processing, and diamond processing.

National monopolies dominate federal markets. For example, in Russia - Gazprom, AvtoVAZ, etc.

Monopolies operating within the boundaries of one or more territorial entities are regional. Such agents have a fairly strong influence on the sphere of production and the process of circulation of goods in the region.

Local (local) monopolies exist within the boundaries of a district, city and other local territorial entities. Such monopolies are more often found in service markets and are very closed. In the Saratov region, for example, there is only one airline, Saravia OJSC.

The nature of the emergence of monopolies can also be different. There are organizational, technological and economic monopolies.

Organizational monopolies arise as a result of an agreement between several large firms.

The following types of monopoly associations are distinguished:

1) A cartel is a monopolistic association where producers agree on sales markets, prices, who and where to sell. Such an agreement does not affect production and commercial independence.
2) Syndicate - a monopolistic association when producers produce themselves, but are deprived of commercial independence, they sell products through syndicate offices.
3) Trust - a monopoly association where joint ownership of entrepreneurs is formed for the means of production and for. In this case, manufacturers are deprived of both commercial and production independence.
4) Concern - a union of forms of independent entrepreneurs is created in various industries, but within the framework of which the parent company organizes financial control over all participants.

Concerns are considered to be modern holding companies, financial and industrial groups, and integrated business groups.

Technological monopolies are considered when there is a universal production technology, a universal product or limited demand. The duration of their existence is limited: it can be determined by the achievements of scientific and technological progress, fashion, the need for a product on the market, or the emergence of a substitute.

Economic monopoly arises as a result of mergers and acquisitions of smaller producers by larger ones. Such transactions activate the processes of concentration of market power through the pooling of economic assets.

There is another market structure in which a single firm can contribute to inefficient allocation of resources. Monopsony is a market situation when a firm (or other organization), called a “monopsonist,” completely controls the demand for a certain good (good or service), being its only possible buyer. This concept is symmetrical to the concept of monopoly. The purchasing company can influence the price of the product and the conditions for its purchase. It mainly operates in the raw materials market. A striking example is the purchase by a food industry enterprise of raw materials from agriculture (meat, milk, grain, etc.).

A market is called bilateral when a monopolist opposes a monopsonist. This situation is rare in reality, although during the Soviet period the phenomenon was very common. The optimal output and price in this case are not determined either in practice or in theory, and there is no unambiguous solution to this problem.

In the actions of an enterprise, when it can influence the price of a product by changing its quantity, monopolistic behavior and monopoly power are possible even in a competitive market.

Due to the growing influence of certain groups of firms in the competitive market, monopolistic behavior may increase.

This is facilitated by:

Increased centralization of capital, mergers of firms;
- strengthening product differentiation;
- uniqueness of the product or service;
- increasing restrictions on the use of resources;
- scientific and technical progress;
- competent company management and successful strategies;
- increasing the role of infrastructure;
- expanding the role of transnational corporations;
- market growth rate;
- active government support;
- coordination of the behavior of individual firms.

A company has monopoly power when, through its actions (changes in price and output volumes), it forces the entire market as a whole to react to a greater or lesser extent. The degree to which a firm has market power is determined using the Lerner index.
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Monopolistic competition- type of market structure of imperfect competition. This is a common type of market, closest to perfect competition.

Monopolistic competition is not only the most common, but also the most difficult to study form of industrial structures. For such an industry, an exact abstract model cannot be built, as can be done in cases of pure monopoly and pure competition. Much here depends on specific details characterizing the manufacturer's product and development strategy, which are almost impossible to predict, as well as on the nature of the strategic choices available to firms in this category.

Thus, most enterprises in the world can be called monopolistically competitive.

Properties of monopolistic competition

Abstract model of monopolistic competition in the short run

A market with monopolistic competition is characterized by the following features:

• The presence of many sellers and buyers (the market consists of a large number of independent firms and buyers), but no more than with perfect competition.

• Low barriers to entry into the industry. This does not mean that starting a monopolistic competitive firm is easy. Difficulties such as problems with registrations, patents and licenses do occur.

• To survive in the market in the long run, a monopolistically competitive firm needs to produce heterogeneous, differentiated products that differ from those offered by competing firms. Moreover, products may differ from one another in one or a number of properties (for example, in chemical composition);

• Perfect awareness of sellers and buyers about market conditions;

• Predominantly non-price competition can have an extremely small effect on the overall price level. Product advertising is important for development.

Determining the price and production volume of a monopolistic competitor. Efficiency and profitability

This type of firm has a negatively sloping demand curve. In monopolistic competition, output volume is set at the level of profit maximization (marginal revenue equals marginal cost:). However, when deciding to set a price for a product or service, a monopolistic competitor acts like a monopolist: the price for the product is set at the highest possible level, that is, at the level of the demand curve for the product.

Abstract model of monopolistic competition in the long run

Just as in a perfectly competitive market, a monopolistically competitive firm relies on average total costs () when deciding whether to stay in the industry or leave the market. Thus, if a firm consistently makes losses, meaning that the average total cost of production exceeds the set price per unit, it will exit the market in the long run. It should be noted that since a monopolistic competitor is dynamic in decision-making, it is not able to allocate resources effectively, which leads to the inefficiency of such a firm in the long run; In a monopolistic competition market, it is almost impossible to have positive profits in the long term.

Characteristics of monopolistic competition

Monopolistic competition is characterized by the fact that each firm, in conditions of product differentiation, has some monopoly power over its product: it can increase or decrease its price regardless of the actions of competitors. However, this power is limited both by the presence of a sufficiently large number of producers of similar goods and by significant freedom of entry of other firms into the industry. For example, “fans” of Reebok sneakers are willing to pay a higher price for its products than for products from other companies, but if the price difference turns out to be too significant, the buyer will always find analogues from lesser-known companies on the market at a lower price. The same applies to products from the cosmetics industry, clothing, footwear, etc.

Sources

• Nureyev R. M.; "Course of Microeconomics", ed. "Norm"
• D.Begg, S. Fischer, R. Dornbusch: "Economics"
• F. Musgrave, E. Kacapyr; Barron's AP Micro/Macroeconomics
• Mikhailushkin A.I., Shimko P.D. Economy. Textbook for technical universities.- M.: Vyssh. school, 2000.- P. 203

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See what “Monopolistic competition” is in other dictionaries:

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Monopolistic competition- a situation of market behavior of firms, intermediate between the situations of a free market and a monopoly. According to the theory of monopolistic competition, developed by E. Chamberlin, J. Robinson and other Western economists,... ... Economic-mathematical dictionary

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Monopolistic competition is not only the most common, but also the most difficult to study form of industrial structures. For such an industry, an exact abstract model cannot be built, as can be done in the cases of pure monopoly and pure competition. Much here depends on specific details characterizing the manufacturer's product and development strategy, which are almost impossible to predict, as well as on the nature of the strategic choices available to firms in this category.

Thus, most enterprises in the world can be called monopolistically competitive.

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✪ Monopolistic competition and economic profit

✪ Lesson - 29# - Monopolistic competition

✪ Oligopolies and monopolistic competition

✪ Video lecture Monopolistic competition

✪ “Monopolistic competition. Oligopoly. Monopsony"

Subtitles

In this video, we'll look at why, over time, it becomes difficult for monopolistic competitors to make money. Let me remind you that such conditions are much closer to pure competition than to a monopoly. This means that there is a monopoly on a differentiated product, but other players are planning to produce similar products. They cannot produce exactly the same product, but this may reduce the demand for our product. To understand this, let's draw a demand curve for a monopolistic competition market. So, the demand curve for a monopolistic competition market. On this axis, here, there will be dollars per unit, the price is the income per unit of goods. We will also have a cost price. And here will be the amount of goods produced per unit of time. We will talk about all this in general terms. So, let's say our competitor is Apple and their iPad tablets. Apple and iPad. Let me emphasize again that I am not saying that Apple is a monopoly. There is a differentiated product, so they are a monopoly in this case - in iPads. They don't have a monopoly on tablets and computers, but only they can sell iPads. Let's draw a graph of short-term demand for iPads and, for simplicity, make it linear. Let's draw it a little better. Let's say the demand schedule looks something like this. And we know that if this is a demand curve... let me remind you, we are talking about the market for iPads, not tablets or computers, and Apple is a monopolist in the market for iPads... Therefore, the slope of the marginal revenue curve is twice as large as the demand curve . It looks something like this. This is Apple's marginal revenue curve. Let's look at short-term profit in a given period of time, regardless of the quantity of goods. Let's start... Let's draw the marginal cost, it will look like this. To calculate the average total cost, here, when the quantity is small, most of the costs are fixed, but we divide them by a small quantity, which means the average total cost will be very large. But they will be lower and lower until the cost of each new unit of goods is reduced to below average levels, and the cost of each additional unit is reflected on the marginal cost curve. As long as average total cost is higher than marginal cost, there will be a downward trend, but at some point they will become equal. Then each new unit of goods will increase average total costs, since its cost will be higher than average costs, which will lead to an increase in average values. But this point should be the minimum... the minimum of our average cost curve. Based on what's in the picture, what is Apple's short-term profit? The optimal quantity of goods is important here. We will definitely produce 1 unit, which means marginal revenue is much higher than marginal cost, which will bring profit from this unit. This will repeat throughout the curve, up to this point. But there is no point in producing more, since the opportunity cost per unit has become greater than the income, which will lead to economic losses. That production is justified here, at this volume. Let's label it here. For a given quantity of goods, such a price can be set on the market. Here we move directly to the demand curve. Here's the price. This is the average, let's say, average income per unit. Then the unit cost will be here. Average total costs. This is the average profit per unit of goods. By multiplying the total quantity of goods, we get the area of ​​this rectangle or the total profit. Total economic profit. This is this rectangle. Total economic profit. And then, if everyone else sees what the economic profit is, people will think that market participants have profits that exceed opportunity costs. And then other competitors will realize that they can produce the same goods. And then companies like Samsung appear, which entered the market in 2012, and the process of interaction between these companies is still ongoing. Samsung, HTC, HP, all tablet and computer manufacturers. They work in tandem with operating system manufacturers such as Microsoft and Google Android, and their products compete with each other. In addition, they are actively involved in promoting and selling their products. Implementation and promotion. Their marketing strategies can be called tough. And as their products become comparable to iPads, and sometimes surpass them in quality, or price, or, perhaps, characteristics... then sales are actively developing. What will happen to Apple's demand curve in the long run? At a given price, demand will fall, the demand curve will shift to the left, and we will end up with a new demand curve. Let's take another shade of blue. It will look something like this. Here is the new demand curve or, in other words, the long-term demand curve as a result of product line development and sales development. If this is the new long-run demand curve, then the slope of the marginal revenue curve will be twice the demand curve, and it will look something like this. If the slope is twice as large, then the graph will go like this. It probably won't work out better. So, the new limit curve... let's make it a different color - pink. So our new curve will look something like this. This is the long-run marginal revenue curve. So what is the optimal quantity for Apple? Now the company will make an economic profit, but will not reach this point, right here. So we have a new quantity in the long run. Let's make it a different color, too much pink. Quantity in the long run. Now, to find out the unit revenue or price for a given quantity, we need to look at the new demand curve. Let me remind you that our long-term demand curve is here. Judging by the way we drew it, the price hasn't changed much. The price remains the same, but what is the profit per unit then? Based on the figure, the average total cost here is essentially equal to the price. Then the average profit per unit tends to zero. Here we had such distance, but now we don’t have it. Despite the fact that a lot of goods are sold, the average profit is zero. Instead of this area, we will have to calculate the area of ​​the line, and this is zero. So we have zero economic profit. Zero economic profit. This is important for market participants in monopolistic competition to understand. Some will point out that Apple is still making an economic profit as of early 2012. But it's important to understand that this is not the same as accounting profit. It can be positive, but the economic profit can be zero. We can even incur losses while having accounting profits. Some might say that Apple is still making profits in excess of their opportunity costs and that the shift in the demand curve to the left has continued since 2012. However, all economic profits will disappear, and there will be less incentive to be more aggressive in the market. In the case of monopolistic competition, it is important to understand that the curves, of course, resemble a monopoly, but there is no competition of iPads, because no other player can supply them. Neither Samsung nor everyone else. Competition begins when it comes to producing substitute products, aggressive marketing, and trying to gain a share of demand. Subtitles by the Amara.org community

Definition

The foundations of the theory of monopolistic competition were laid by Edward Chamberlin in his book “The Theory of Monopolistic Competition” published in 1933.

Monopolistic competition is characterized by the fact that each firm, in conditions of product differentiation, has some monopoly power over its product: it can increase or decrease its price regardless of the actions of competitors. However, this power is limited both by the presence of a sufficiently large number of producers of similar goods and by significant freedom of entry of other firms into the industry. For example, “fans” of Reebok sneakers are willing to pay a higher price for its products than for products from other companies, but if the price difference turns out to be too significant, the buyer will always find analogues from lesser-known companies on the market at a lower price. The same applies to products from the cosmetics industry, clothing, footwear, etc.

Market Properties

A market with monopolistic competition is characterized by the following properties:

• The market consists of a large number of independent firms and buyers, but no more than in perfect competition.
• Low barriers to entry into the industry. This does not mean that starting a monopolistic competitive firm is easy. Difficulties such as problems with registrations, patents and licenses do occur.
• To survive in the market in the long run, a monopolistic competitive firm needs to produce heterogeneous, differentiated products that differ from those offered by competing firms. Differentiation can be horizontal or vertical. Moreover, products may differ from one another in one or a number of properties (for example, in chemical composition);
• Perfect awareness of sellers and buyers about market conditions;
• Predominantly non-price competition can have an extremely small effect on the overall price level. Product advertising is important for development.

Product differentiation

Product differentiation is a key characteristic of this market structure. It assumes the presence in the industry of a group of sellers (manufacturers) producing goods that are similar, but not homogeneous in their characteristics, that is, goods that are not perfect substitutes.

Product differentiation can be based on:

• physical characteristics of the product;
• location;
• “imaginary” differences associated with packaging, brand, company image, advertising.

In addition, differentiation is sometimes divided into horizontal and vertical:

• vertical is based on dividing goods by quality or some other similar criterion, conventionally into “bad” and “good” (the choice of TV is “Temp” or “Panasonic”);
• the horizontal one assumes that, at approximately equal prices, the buyer divides goods not into bad or good, but into those that correspond to his taste and those that do not correspond to his taste (the choice of a car is Volvo or Alfa-Romeo).

By creating its own version of the product, each company acquires a limited monopoly. There is only one manufacturer of Big Mac sandwiches, only one manufacturer of Aquafresh toothpaste, only one publisher of the Economic School magazine, etc. However, they all face competition from companies offering substitute products, that is, they operate in a monopolistic environment. competition.

Equilibrium of a monopolistic competitor firm

In the short term

Monopolistic competitors do not have significant monopoly power, so demand dynamics will differ from those of the monopoly. Due to the fact that there is competition in the market, if the price of the products of the first company increases, consumers will turn to the other, so the demand for the products of each company will be elastic. The level of elasticity will depend on the degree of differentiation, which is a factor of attachment to the products of each of the firms. The optimal production volume of each firm is determined similarly to the case of a pure monopoly. Based on the graph, it should be noted that the price is determined by the demand curve. The presence of profit or loss depends on the dynamics of average costs. If the ATC curve passes below Po, then the firm makes a profit (shaded rectangle). If the ATC curve goes higher, then this is the amount of loss. If the price does not exceed average costs, then the company stops operations.

In the long run

In the long run, as in the case of perfect competition, the presence of economic profit will lead to an influx of new firms into the industry. In turn, supply will increase, the equilibrium price will decrease, and the amount of profit will decrease. Ultimately, a situation arises where the last firm to enter the market does not make any economic profit. The only way to increase profits is to increase product differentiation. However, in the long term, in the absence of legal barriers to the firm, competitors will be able to copy those areas of differentiation that increase profits. Therefore, it is assumed that firms will be in relatively equal conditions. Because the demand schedule is sloping, equilibrium between price and average cost will be reached before the firm can minimize costs. Therefore, the optimal volume of a monopolistic competitor will be less than the volume of a perfect competitor. This equilibrium allows us to come to the conclusion that in the long run the main goal of the company is to achieve break-even.

Monopolistic competition and efficiency

As in the case of a monopoly, a monopolistic competitor has monopoly power, which allows it to increase prices for products by creating artificial scarcity. However, unlike a monopoly, this power arises not from barriers but from differentiation. A monopolistic competitor does not try to minimize costs, and because the average cost (AC) curve denotes a particular technology, this suggests that the firm is underutilizing its existing equipment (that is, it has excess capacity). From the point of view of society, this is ineffective, since some of the resources are not used. At the same time, the presence of excess capacity creates conditions for differentiation. As a result, consumers have the opportunity to buy a variety of goods in accordance with their tastes, so society needs to weigh the satisfaction of variety against the cost of less efficient use of resources. Most often, society approves of the existence of monopolistic competition.

(Russian) = The Monopolistic Competition Revolution // Microeconomics: Selected Readings: Collection. - New York, 1971.

Chamberlin E. Theory of monopolistic competition (Reorientation of the theory of value) / trans. from English E. G. Leikin and L. Ya. Rozovsky. - M.: Economics, . - 351 p. - Series “Economic Heritage”. - ISBN 5-282-01828-8.

Competition is a type of imperfectly competitive market structure. This is a common type of market that is closest to perfect competition.

Monopolistic competition is a type of industry market in which there are many sellers selling a differentiated product, which allows them to exercise some control over the selling price of the product (or service).

Monopolistic competition is not only the most common, but also the most difficult to study form of industrial structures. For such an industry, an exact abstract model cannot be built, as can be done in cases of pure monopoly and pure competition. Much here depends on specific details characterizing the manufacturer's product and development strategy, which are almost impossible to predict, as well as on the nature of the strategic choices available to firms in this category.

Examples of monopolistic competitors are small chains of stores, restaurants, the network communications market, and similar industries. Monopolistic competition is similar to a monopoly situation because individual firms have the ability to control the price of their goods. It is also similar to perfect competition because each product is sold by many firms and there is free entry and exit in the market.

Features of monopolistic competition

A market with monopolistic competition is characterized by the following features:

A large number of buyers and sellers. In a monopolistic competitive market, there are a relatively large number of sellers, each of whom satisfies a small share of the market demand for a common type of product sold by the firm and its competitors. In monopolistic competition, the market shares of firms average from 1 to 5% of total sales in a given market, which is more than in conditions of perfect competition (up to 1%). The number of sellers determines the fact that the latter do not take into account the reaction of their rivals when they choose sales volumes and set prices for their products, in contrast to the situation of an oligopoly, when only a few large sellers operate in the market for one product.
Low barriers to entry into the industry. With monopolistic competition, it is easy to found a new company in an industry or leave the market - entry into a given industry market is not hampered by the barriers that monopoly and oligopoly structures put in the way of a newcomer. However, this entry is not as easy as under perfect competition, since new firms often experience difficulties with their brands, which are new to customers.

Examples of industries with a predominance of monopolistic competition include markets for women's, men's or children's clothing, jewelry, shoes, soft drinks, books, as well as markets for various services - hairdressing salons, etc.
Production of differentiated products with many substitutes. Although an industry market sells goods (or services) of the same type, under monopolistic competition, each seller's product has specific qualities or characteristics that cause some buyers to prefer his product to the product of competing firms. This is called product differentiation as opposed to standardized products that are characteristic of perfect competition. The specificity of the product gives each seller a certain degree of monopoly power over the price: for prestigious goods (for example, Rolex watches, Mont Blanc pens, Chanel perfumes) prices are always set higher than for similar goods that do not have such a famous brand name or not so brilliantly advertised.
Presence of non-price competition. Very often, in conditions of monopolistic competition, firms competing with each other do not use price competition, but actively use various methods of non-price competition, and especially advertising. In non-price competition, the epicenter of rivalry between manufacturers becomes such non-price parameters of the product as its novelty, quality, reliability, prospects, compliance with international standards, design, ease of use, after-sales service conditions, etc. Firms in markets with monopolistic competition strive by all means to convince the consumer that that their products differ from those of competitors for the better. Monopoly competitive markets continually develop new products and improve existing ones. Product improvements may be small, but many consumers do respond to changes in product characteristics, allowing the firm to make additional profits until the improvements are adopted by its competitors.

Short term

The essence of monopolistic competition is that each firm sells a product for which there are many close but imperfect substitutes. As a result, each firm faces a downward sloping demand curve for its product. In the short term, the behavior of a firm under conditions of monopolistic competition is in many ways similar to the behavior of a monopoly. Since the product of a given firm differs from the goods of competing firms by special quality characteristics that appeal to a certain category of buyers, then the firm can raise the price of its product without a drop in sales, because a sufficient number of consumers are willing to pay a higher price. Like a monopoly, the firm somewhat underproduces its products and overprices them. Thus, monopolistic competition is similar to a monopoly situation in that firms have the ability to control the price of their goods.

Long term

In the long run, monopolistic competition is similar to perfect competition. In conditions of free access to the market, the potential for profit attracts new firms with competing brands of goods, reducing profits to zero. The same process works in the opposite direction. If demand in a market with monopolistic competition were to decline after reaching equilibrium, firms would exit the market. This is because a reduction in demand would make it impossible for firms to cover their economic costs. They will exit the industry and shift their resources to more profitable ventures. When this happens, the demand and marginal revenue curves of the remaining sellers in the market will shift upward. Firms will continue to exit the industry until a new equilibrium is reached.

The impact of monopolistic competition on society

With monopolistic competition, production efficiency is not achieved. In addition, accusations of unreasonable and unjustified expenditure on product differentiation and advertising are often heard. The following arguments are put forward.

1. Society uselessly wastes limited scarce resources on creating meaningless differences in products of the same type. Thus, aspirin remains aspirin, although for some of its patented and advertised brands the consumer has to pay double or more. Consumers don't really need, say, 50 different brands of soap or toothpaste that are essentially the same. As a result, consumers pay for both unnecessary product differentiation and advertising. Advertising costs sometimes amount to 50% or more of the selling price of a product.
2. Differentiation and advertising seek to influence the tastes and preferences of consumers, change them, create new needs, thus, it turns out that people exist to satisfy the needs of the company, rather than companies serving people. Society has lost its original target orientation - the development of production to meet people's needs.
3. The information contained in advertising is at least minimal and insufficient, and is often deliberately deceptive.
4. Advertising of its product becomes mandatory for a company that does not want to lose in competition. Firms are forced to spend enormous amounts of money unproductively: these expenses do not increase the demand for their product in the market, but their absence will lead to loss of place in the market.
5. Advertising costs are so high that they can become a barrier to entry into the industry and thereby reduce the intensity of competition.
6. Advertising becomes a form of tax on society. For every 15 minutes of news on television there are up to 20 minutes of advertising. When buying a newspaper or magazine, the consumer, along with 50 pages of text of interest to him, is forced to pay for 75 pages of advertisements.

However, it would be unfair to see only the negative sides of monopolistic competition. So, the same product differentiation and advertising are not so clearly bad.

Their supporters note that:

1. Product differentiation helps to most fully satisfy people's needs in all their diversity.
2. Continuous improvement of the product leads to an increase.
3. Product differentiation develops in the direction of improving its quality and increasing .
4. Advertising provides the consumer with valuable information about the quality of the product, its price, method of use, etc.
5. Differentiation and advertising stimulate competition and give impetus to the development of the entire market system. A comparison of two opposing opinions about the role of advertising and product differentiation shows once again that there are no absolute truths and correct answers for all cases of life.

Be that as it may, monopolistic competition is very close in many respects to perfect competition, which practically does not occur in real life. Monopolistic competition is the most common type of market relations. It dominates in the catering industry, book publishing, production and sale of furniture, pharmaceuticals, etc. The number of firms in these industries ranges from 500 to 10,000. Monopolistic tendencies in this model are quite weakly expressed, and therefore it is believed that the state can practically not regulate a market of such a structure.
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Anna Sudak

Bsadsensedinamick

# Business nuances

Types and characteristics of monopolistic competition

A striking example of this type of competition in Russia is the mobile communications market. There are many companies in it, each of which is trying to lure clients to them through various promotions and offers.

Article navigation

• Market of monopolistic competition
• Signs of monopolistic competition
• Product differentiation
• Advantages and disadvantages of monopolistic competition
• Conditions for obtaining the maximum possible profit in the short-term period of monopolistic competition
• Maximum profit in the long run of monopolistic competition
• Efficiency and monopolistic competition

Monopolistic competition (MC) is one of the market structures with a large number of enterprises that produce differentiated products and control their cost for the end consumer. Although this market model refers to imperfect competition, it is very close to perfect competition.

To put it simply, MK is a market (a separate industry) that brings together many different companies that produce similar products. And each of them has a monopolist over its product. That is, the owner who decides how much, how, for how much and to whom to sell.

Market of monopolistic competition

This definition, or rather the basis of the concept itself, was presented back in 1933 in his book “The Theory of Monopolistic Competition” by Edward Chamberlin.

To properly characterize this market model, Let's look at this symbolic example:

The consumer likes Adidas sneakers and is willing to pay more money for them than for competitors' products. After all, he knows what he pays for. But suddenly the company that produces his favorite shoes raises prices three, five, eight... times. At the same time, similar shoes from another company are several times cheaper.

It is clear that not all Adidas fans can afford this expense and will look for other, more profitable options. What happens next? The company's customers are slowly but surely migrating to competitors who are willing to carry them in their arms and give them what they want for the price they can pay.

Let's figure out what MK really is. Let's try to convey it briefly. Yes, of course, the manufacturer has some power over the product he produces. However, is this so? Not really. After all, a monopolistic market model means a huge number of producers in each niche, which may turn out to be faster, more efficient and of better quality.

An unreasonably high cost of goods that satisfy the same need can either play into the hands or ruin the manufacturer. Moreover, competition in niches is becoming tougher. Anyone can enter the market. It turns out that all companies are sitting on a powder keg, but it can explode at any moment. So firms have to act in conditions of monopolistic competition using their full potential.

Signs of monopolistic competition

• The market is divided between companies in equal parts.
• The products are of the same type, but are not a complete replacement for anything. It has common features, similar characteristics, but also significant differences.
• Sellers set a price tag without taking into account the reaction of competitors and production costs.
• The market is free to enter and exit.

In fact, MK includes signs of perfect competition, namely:

• A large number of manufacturers;
• Failure to take into account competitive reactions;
• No barriers.

The monopoly here is only regulation of the price of products for the end user.

Product differentiation

At the beginning of the article, we already said that under monopolistic competition, manufacturers sell differentiated products. What is it? These are products that satisfy the same user need, but have some differences:

• quality;
• manufacturing materials;
• design;
• brand;
• technologies used, etc.

Differentiation is a marketing process used to promote products in the market, increase their value and brand equity. In general, this is a tool for creating competitiveness between manufacturers of certain things.

Why is a differentiation strategy useful? Because it makes it possible for absolutely all companies on the market to survive: both “established” enterprises and new companies that create products for a specific target audience. The process reduces the impact of resource endowment on companies' market share.

For stable operation, it is enough for an enterprise to determine its strengths (competitive advantage), clearly identify the target audience for which the product is being created, identify its need and set an acceptable price for it.

The direct function of differentiation is the reduction of competition and production costs, difficulty in comparing products and the opportunity for all manufacturers to take their “place in the sun” in the chosen niche.

Advantages and disadvantages of monopolistic competition

Now let’s look at the “medal” from both sides. So, in any process there are both advantages and disadvantages. MK was no exception.

Positive	Negative
A huge selection of goods and services for every taste;	Advertising and promotion costs are increasing;
The consumer is well informed about the benefits of the product items he is interested in, which gives him the opportunity to try everything and choose something specific;	Overcapacity;
Anyone can enter the market and bring their ideas to life;	A huge amount of unreasonable expenses and ineffective use of resources;
New opportunities, innovative ideas and a constant source of inspiration for large corporations. The emergence of competitors spurs large companies to make better products;	“Dirty” tricks are used, such as pseudo-differentiation, which makes the market less “plastic” for the consumer, but brings super-profits to the manufacturer;
The market does not depend on the state;	Advertising creates unreasonable demand, due to which it is necessary to rebuild the production strategy;

Conditions for obtaining the maximum possible profit in the short-term period of monopolistic competition

The goal of any enterprise is money (gross profit). Gross profit (Tp) is the difference between total revenue and total costs.

Calculated by the formula: Тп = MR - MC.

If this indicator is negative, the enterprise is considered unprofitable.

In order not to go broke, the first thing a seller needs to do is understand what volume of products to produce to obtain maximum gross profit, and how to minimize gross costs. In this scenario, under what conditions will the company receive maximum earnings in the short term?

1. By comparing gross profit with gross costs.
2. By comparing marginal revenue with marginal cost.

These are two universal conditions that are suitable for absolutely all market models, both imperfect (with all its types) and perfect competition. Now let's start the analysis. So, there is a market with crazy competition and an already formed price for the product. The company wants to enter it and make a profit. Quickly and without unnecessary nerves.

To do this you need:

• Determine whether it is worth producing products at this price.
• Determine how much product you need to produce to be profitable.
• Calculate the maximum gross profit or minimum gross costs (in the absence of profit) that can be obtained by producing the selected volume of output.

So, based on the first condition, where revenue is greater than costs, we can argue that the product needs to be produced.

But not everything is so simple here. The short term has its own characteristics. It divides gross costs into two types: fixed and variable. The company can bear the first type even in the absence of production, that is, be in the red by at least the amount of costs. In such conditions, the enterprise will not see any profit at all, but will be “covered” by a wave of constant losses.

Well, if the amount of the total loss in the production of a certain amount of goods is less than the costs for “zero production”, the production of products is 100% economically justified.

Under what circumstances is it profitable for a company to produce in the short term? There are two of them. Again…

1. If there is a high probability of making a gross profit.
2. If the sales profit covers all the variables and part of the fixed costs.

That is, the company must produce enough goods so that revenue is maximum or loss is minimal.

Let's consider three cases to compare gross profit with gross costs (the first condition for obtaining maximum profit in the shortest possible time):

• profit maximization;
• minimizing production costs;
• closure of the company.

Profit maximization:

Three in one. Maximizing profits, minimizing losses, closing the company. The diagram looks like this:

Let's move on to comparing marginal revenue (MR) with marginal costs (MC) (the second condition for obtaining maximum profit in the short term):

MR = MC is the formula that determines the equality of marginal revenue with marginal cost.

This means that the product produced gives maximum profit with minimum costs. Characteristics of this formula are:

• High income at minimal costs;
• Profit maximization in all market models;
• In some cases, production price (P) = MS

Maximum profit in the long run of monopolistic competition

A distinctive feature of the long-term period is the absence of costs. This means that if the company ceases to function, it will not lose anything. Therefore, by default there is no such concept as “loss minimization”.

Playing according to this scenario, the monopolist chooses one of the following lines of behavior:

• profit maximization;
• limits on price formation;
• rent.

To determine the behavior of an enterprise, two approaches are used:

1. Long-run marginal revenue (LMR) = long-run marginal cost (LMC).

In the first case, total expenses are compared with total income in various variations of the production of a good and its price. The option where the difference between income and investments is maximum is the optimal behavior for the enterprise.

In the second, the totality of the optimal cost of production and profit is equal to production costs.