Meaning of monopolistic competition.

Historical perspective: There existed only two forms of market in late 1920s and early 1930s - perfect competition and monopoly. There was an opposition against the use of both perfect competition and monopoly as the analytical models of business firms and market behavior.Piero Staff was among the first the limitations of competition or monopoly. He was followed by other writers.Hotelling remarked – “Between the perfect competition and monopoly theory lie the actual cases.” Similarly; Zeuthen observed – “Neither monopoly nor competition are absolute nor the theories about them deal only with the outer margins of reality. Which is always to be sought between remarked?”

In the late 1920s and early 1930s, he economists began turning their attention to the middle ground between monopoly and perfect competition. The most notable achievements were made by two economists working independently. The American economist Edward H. Chamberlain ‘The theory of monopolistic competition and Imperfect competition in the same year, 1933. These economists thus gave a new shape to the market structure, price determination and business organization.

The terms imperfect competition and monopoly are used in the same sense, but a distinction exists between them.

The perfect competition is not found in reality, nor is monopoly found in reality. The reality is, however, found these two extremes. The market where neither perfect competition nor monopoly exist is called imperfect competition. The two imperfect conditions are to be fulfilled for perfect competition:

A) Large number of firms

B) Homogeneous product

If one or both of these conditions are unfulfilled, it is imperfect competition. Hence, imperfect competition is a wide term which includes a variety of market firms, viz, monopolistic competition, oligopoly, duopoly and even monopoly.

Comparition of Monopoly with Perfect Competition.

Perfect competition and monopoly are two extremes of market structure. They are polar opposites. Both of them cannot be found in the real world. So many differences can be found
Between then is that a firm gets equilibrium when MR equals Mc is both the markets. The competition between these markets has been presented below.
• Numbers of sellers. There are number of sellers in perfect competition. Each firm produces a small part of the total industry output.Hence; an individual firm cannot influence the price. In fact, an individual firm is only a price-taker, not the price-maker. On the other hand, there is only one firm or seller in monopoly. He has full control over the supply of the commodity he produces.
• Difference between firm and industry: There is large number of sellers or producer firms in perfect competition.So; there is destination between firm and industry. A group of firms producing homogeneous goods is called an industry. The cross elasticity between the products of the firms is infinite. The average revenue curve of the firm and industry is also different. But since there is only one seller in monopoly, there is no difference between a firm and an industry. The monopolist produces and sells the good which has no close substitutes. In monopoly, the cross elasticity between the product of the monopolist and other producers is very small if not zero. The average revenue curve of both firm and industry is same.
• Price and marginal cost :In perfect competition, the equilibrium price to marginal cost.Because,in perfect competition, the AR curve is a horizontal straight line and the MR curve coincides with AR curve, or average revenue equal marginal revenue.Hence,at the point of equilibrium not only the MR and MC are equal but also MC is equal to AR or price. On the other hand, in perfect competition, the price is higher then marginal cost. Since in monopoly, the AR curve is downward sloping the MR curve lies below the AR curve.Hence, at point equilibrium, the price is higher than marginal cost. In perfect competition, price = MR =MC whereas in monopoly p > MC.
• Rising marginal cost: In perfect competition, for equilibrium it is required that the MR should be equal to MC and MC curve must cut the MR curve from below. For the second condition of equilibrium to be fulfilled, the MC curve must be rising at the point of equilibrium.Since, the MC curve is a horizontal straight line perfect competition, and the MC curve can cut the MR curve from below only. When MC curve is rising. But although both the condition has to be fulfilled in monopoly equilibrium, the firm can get equilibrium also in the situation when MC is raising constant and Falling. The second condition of equilibrium can be fulfilled even if the MC curve is rising. Constant and falling.Because, the MR curve is downward sloping in monopoly.Hence, the MC curve can cut the MR curve from below when the MC curve is rising, constant and falling.
• Position of average cost: In perfect competition, a firm gets equilibrium in the long run at the lowest point of long run average cost curve. In other worlds, the firm is of optimum size in the long run.Because, since MR and AR remain constant, it is profitable to increase the output till AC is falling.Hence; in the long run equilibrium, the marginal revenue or price is equal to both marginal cost and the minimum average cost. This situation does not exist in monopoly. In monopoly the firm gets equilibrium when average cost is decreasing or before reaching the minimum point.Because, it is not profitable to expand the output unto the minimum point of average cost.Usually, the MC curve cuts the MR curve when the AC is falling.
• Position of profit: In perfect competition, the firms may earn abnormal profit in the short run but not in the long run.Because, if the firms earn abnormal profit, the new firms enter into the industry. The abnormal profit is competed away and the firms earn only normal profit. But in monopoly, the firms are able to earn abnormal profit even in the long run. Because there is a strong barrier to the entry of new firm.Nevertheless, the monopolist may also incur loss in the short period due to low demand or high cost.
• Price and output position: In perfect competition, the price is lower and the output is higher.Because, since the demand is perfectly, it is profitable to sale more at lower price. On the contrary, in monopoly, the price is higher and the output is lower. In monopoly, the demand is inelastic.Hence, the monopolist charges high price and produces and sells lower quantity.
• Price discrimination: It is not possible different prices to different customers in perfect competition.Because, the demand curve is perfectly elastic in the existing price and the buyers have complete knowledge about the existing price.Hence, if a seller raises price, he will have to lose the customers. But the monopolist may discriminate the price in different markets having different elasticities.Because since there is no close substitute of the product produced by the monopolist; he has full control over the supply of the product. The demand for his products is less elastic.

Conditions or requirments for price discrimination.

A profitable and effective price discrimination needs the following conditions to be fulfilled :

1. Monopoly firm : The firm should be a monopolist.There is perfect knowledge and perfect mobility in perfect competition beside the existence of a large number of sellers.Hence,price discrimination is not possible on perfect competition.
2. Market segmentation :The seller must be able to segment the total market by segregating buyers into groups or sub markets according to elasticity.For example,if the buyers can be divided into rich and poor,national and foreigners,they can be changed different prices.
3. Market sealing :The resale of the commodity is not possible or is banned.The sellers must able to prevent any significant resale of goods form lower to higher prices bus-markets.Any leakage in the form of resale by buyers between sub-markets will tend to neutralise the effect of differential prices.For example,the services of doctors,lawyers cannot be resold.Likewise,the domestic buyers may not be allowed to sell some products in foreign markets buyers due to difference in income,location,available alternatives,tastes and other factors.In general,high price is changed in the market having inelastic demand and law price is changed in the market having elastic demand.
   

Discriminating Monopoly or Price Discrimination.

In simple monopoly,the seller changes uniform price for all of output or changes same price to all customers.But if he changes different prices to different bovers at the same time for the same product,it is called price discrimination or discriminating monopoly.According to J.I.Pappas and E.F.Brighm - "In a general sense,price discrimination can be said exist whenever different classes customers are charged different prices for the same product."
In the world of A. Koutsoyiannis - "Price discrimination exists when same product is sold at different prices to different buyers."
Likewise, Mrs.Joan Robinson observe -"The art of selling the same article under a single control at different prices to different buyers is known as price discrimination."
The example of price discrimination can be found in service industries of lawyers,doctors,.They may charge different prices to the poor and rich on the basis of economic condition also can discriminate price.since a monopolist has sole control over the supply of a commodity,he can easily discriminate price.The different types of discounts provided to the customers is also a kind of price discrimination.

The price discrimination is made with following objectives :

1. Profit maximisation :The business enterprises discriminate price to maximise profit from the sale of their outputs.
2. Social justice :Price discrimination may be made to protect some classes of people such as women,children,old and poor.
3. Capture the market : Sometimes price discrimination is made to capture the market and to crush the rivals.
   

Conditions necessary for pure monopoly.

The following conditions are necessary for pure monopoly :

1. Single seller : There exist only one seller or producer of the product.He has control over supply of the product.Monopoly may be in the form of individual owner or join stock company.
2. Absence of close substitutes : There should not exist any close substitute of the product.Because,if there are substitutes,competition prevail and monopoly disappears.Bober opined -"As the one seller,he may be a king without a crown.The cross elasticity between the product of the monopolist and any other producer must be small if not zero.
3. Restriction on the entry of new firms : There is strong barrier in the entry of new firms.Hence the existing firm has sole control over the supply.Due to this feature,the monopolist earns abnormal profit both in the short run as well as in the long run.

The pure monopoly existing only in economics theory.Because,there cannot be only firm producing a good.Similarly,a firm is not completely free from competition of close substitutes.In modern days of free enterprises economy,even in public utilities like electricity,postal service,telephone,water supply we can find some sort of competition.In Nepal as well different sectors which enjoyed traditional monopoly like airline,electricity,water supply,postal service are rapidly breaking up due to the liberalisation policy of the government.But the study of monopoly is necessary to know the economies of regulation which is signification for business mangers.

Meaning of monopoly.

Perfect competition and pure monopoly are two extreme forms of market structure.They are polar opposite.In perfect competition there are large number of buyers and sellers while in monopoly the seller is only one but the buyers are many.These both forms of market can be rarely found in the real world.The monopoly is a single seller or producer of his product.Since,there is only one firm there is no difference between a firm and industry in the monopoly market.
A monopoly refers to a single firm which has control over the supply which has no close substitutes.In the worlds of C.E. Ferguson -" A pure monopoly exists when there is only one producer in the market."
According to A.Koutsoyiannis -"Monopoly is a market structure in which there is a single seller, there are no close substitutes for the commodity it produces and there are barriers to sentry." For example a hotel or a bank in a remote village commands monopoly power.Likewise,public utilities like telecommunication,electricity supply,drinking water supply,postal service are the example of pure monopoly.This kind of monopoly has been called 'absolute monopoly' by Sraffa.In reality,pure monopoly is a myth which is found rarely in the real world.In the real world,only imperfect monopoly can be found where the monopoly has to face substitutes.For example,Nepal electricity authority may be called a imperfect monopoly since it has to face competition of distance substitutes like kerosene,petrol,gas,candle in different uses.