Textbooks on economic theory discuss in detail the classical market structures - monopoly and perfect competition ( olipoly). These are ideal models that extremely rarely exist in reality. Real structures are located between these opposite poles, having to one degree or another the characteristics of each of them. One of the models that is commonly found in practice is monopolistic competition. Medium and small enterprises work according to this model.

What is monopolistic competition

Unlike a monopoly, which reigns supreme in a particular industry, with monopolistic competition there are many competing firms offering similar products operating simultaneously. This market system is characterized by the following main features:

1. Product differentiation. Products (or services) from different manufacturers are not identical, i.e. They are not perfect substitutes, but differ in technical characteristics and quality. Even if it is the same in this regard, each seller strives to stand out with advertising, packaging and other consumer properties. Differentiation exists in service and location. For example, different containers and weight dosages are used. That is, everyone sells a monopoly product among similar ones.
2. Lots of sellers. They do not allow a particular company to significantly increase its share and influence prices.
3. Low barriers to entry and exit. Associated with small initial capital and the size of existing enterprises; small economies of scale.
4. Fierce non-price competition. A company can produce goods with certain quality indicators and change sales promotion.

pros

• It is easy for a manufacturer to enter and exit the market.
• Unlike olipoly, a manufacturer can, within certain limits, set a monopoly price for its product regardless of the actions of competitors, although the opportunity to skim the cream is not as profitable as in the case of a pure monopoly.
• The average share occupied by a particular firm is relatively small, so most are forced to stick to the average price level.
• Abundance of competitors does not allow prices to deviate greatly from the minimum possible level, although it is higher than under perfect competition.
• Availability of a large number of sellers makes it impossible for them to collude to limit output and raise prices.
• Wide variety of substitutes beneficial to the consumer, who can choose them in accordance with their preferences and ideas about quality. The choice is influenced by conditions and additional services related to the sale, for example, more favorable purchase conditions or the availability of post-warranty service. Availability and placement can also have a significant impact on a buyer's decision. For example, he may become a regular not at the Magnit supermarket, located three blocks away, but at a small local chain store located in the next house, offering both food and non-food consumer goods.
• Continuous product improvement leads not only to the satisfaction of existing, but also to the emergence of new needs of people, as well as an increase in the quality of life.
• Most manufacturers don't want to be fly-by-night companies and for the long term, they produce conscientious advertising that can be trusted, and also highlight the finished products with trademarks, trademarks, beautiful design, and attractive packaging. They understand that otherwise they may lose their consumer.
• The introduction of an electronic payment system in Russia and the development of online commerce not only accelerate trade turnover and expand the niche, making it possible to compete with larger enterprises, but also lead to business consolidation. Entering the markets of other countries is simplified, which makes it possible to increase competitiveness.

Minuses

• Barrier to entry is higher than under perfect competition, due to product differentiation and consumer preference for a particular brand. A newcomer must not only produce competitive products, but also have the ability to lure buyers from existing firms.
• Limited opportunities for innovation and risk-taking, determined by the size of enterprises. The size of the firm is usually small both absolutely and relative to other economic entities. Its growth is hampered by the rapid emergence of losses due to negative economies of scale. It is not profitable to develop production to fully exploit economies of scale, since the profits generated in the long term will encourage new players to enter the industry and lead to an increase in aggregate supply. Total demand will be redistributed to a larger number of competitors, and the demand for a particular firm's products will decrease.
• A large number and variety of competing non-identical products, but similar in properties, as well as relatively free entry into the market does not allow the manufacturer to raise the price to the maximum benefit for him.
• Advertising becomes a mandatory attribute of activity business units not only to increase profits. In its absence, you can lose your place in the market. Moreover, this expense item can become a barrier to entry into the industry and reduce the intensity of competition.
• The cost of goods for the buyer is lower than with a pure monopoly. If he is not satisfied with the price, he can go to another seller, sacrificing his commitment to a specific variety, packaging and other properties of the product.
• Consumer buys products not at the lowest possible cost, because producers choose to produce fewer goods than necessary to meet demand, artificially creating shortages. This is done to ensure that supply and demand balance occurs at a higher price.

conclusions

So, being an intermediate type of olipoly and pure monopoly, monopolistic competition contains features of both. At the same time she is full-fledged structure, having its own properties. A monopolistic competitor can single-handedly raise product prices, creating an artificial shortage. But this does not happen because of barriers to entry into the market, but because of differentiation, so price increases are limited by the flow of consumers to substitute goods, and often, to increase business efficiency, entrepreneurs improve and differentiate the manufactured product.

Some resources are not used because the manufacturer does not strive to minimize losses, which is ineffective from the point of view of society. On the other hand, excess capacity creates the basis for differentiation, and consumers can choose from a wide variety of goods that suit their tastes. Therefore, the state and society need to compare the satisfaction of citizens' needs from diversity with overpayment due to less efficient use of resources.

This market is the most favorable not only for the buyer, but also small firms, which, in order to achieve profit maximization, do not necessarily follow the path of business consolidation, but can pay more attention to researching consumer preferences, correct positioning and improvement of their product, analyzing the achievements of competitors and following global trends.

Currency market

Various manifestations of monopolistic tendencies take place at all stages of the process of development of market relations. However, the beginning of their modern history should be considered the end of the 19th century, when the economic crisis broke out in 1873. In the interconnectedness of these phenomena - monopoly and crisis - one of the reasons for monopolization is visible, the attempt of firms to find salvation from the manifestation of the crisis in monopolistic practice. In the economic literature of that time, monopolies were called “children of the crisis.”

Various monopolistic formations at the end of the 19th century became a real threat to the functioning of competition, which is a necessary attribute of the market. Being actually the antipode of competition, monopoly has a double meaning:

Firstly, a monopoly is an enterprise that occupies a leading position in any industry (for example, Coca-Cola, General Motors, etc.);

Secondly, a monopoly refers to the position a firm occupies in the market, thanks to which the firm can control the market.

Although the essence of the concept of monopoly is the opposite of competition, it is monopoly that is a consequence of competition, as a result of which small and inefficient enterprises are forced out of the market, and production is concentrated in large enterprises.

At the same time, a small enterprise can act as a monopolist if it supplies the bulk of a certain type of product. At the same time, a large enterprise may not be a monopolist at all if its share in the total supply is small.

We should also not forget that although most often the seller plays the role of a monopolist, there are also cases when a buyer or group of buyers becomes it.

Types of monopolies

There are several types of monopolies:

Artificial. It is this type of monopoly, when entrepreneurs, trying to avoid competition, enter into various agreements on mergers, division of sales markets, establishing price levels and production volumes, which is considered classic. Many states are fighting manifestations of such a monopoly by creating antimonopoly organizations, such as the Federal Antimonopoly Service (Russia). One form of artificial monopoly is accidental monopoly;

Random or temporary. The seller can obtain such a monopoly due to a temporary coincidence in the ratio of demand to supply or due to the company’s monopoly of some scientific and technical achievement. Typically, the occasional economic benefits a company receives are quickly lost due to continuous competition. If the company consciously helps to consolidate the excess of demand over supply, then an accidental monopoly may become artificial;

Natural. Such a monopoly is most often possessed by business entities and owners who own rare elements of production (for example, metals or land plots with special conditions). This also includes companies protected from competition by the state (responsible for gas, electricity and water supply);

State. This type of monopoly includes exclusive rights to the production of money, nuclear weapons, narcotic drugs (certain drugs, for example) and others that are not transferred to private companies. Separately, it is worth considering monopolism that develops in a planned economy. This type of monopoly is often totalitarian in nature and is characterized by a very high level of concentration of production.

Advantages and disadvantages

Disadvantages of monopolies:

The ability to shift the costs of the manufacturing company to the final buyer, who does not have the opportunity to influence the manufacturer. This is achieved by increasing prices, which reduces the standard of living of the population;

Blocking scientific and technological progress due to lack of competition;

The monopolist saves its own funds by reducing the quality of products and services;

Replacement of the economic mechanism with a form of administrative dictatorship.

But a monopoly also has its positive sides:

Increasing the scale of production leads to lower costs and resource savings;

In the event of an economic crisis, monopolistic associations last longer than other companies and begin to emerge from the crisis before them. Due to this, the decline in production and unemployment is curbed;

Often the products of monopolistic firms are of high quality, due to which they gain a dominant position in the market;

Thanks to monopolization, production efficiency can increase. After all, only a large enterprise has enough funds to conduct various research and development.

Monopolization is a complex and controversial phenomenon. A merger of companies can not only create a monopoly, it often also brings benefits. For example, large associations are more interested in stimulating potential buyers than small individual producers, who most often do not count on an effect that covers the money spent and also brings benefits.

Government policy should be to use antitrust laws to prevent monopolies from gaining excessive market power.

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.

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-term total revenue (LTR) = long-term total cost (LTC).
2. 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.

test

3. Advantages and disadvantages of monopolistic competition

There are dynamic and static theories of monopolistic competition and monopoly. From the position of static theory, the following disadvantages of monopolistic competition are studied:

The average costs of the monopolist will be able to exceed the possible minimum level, since they are transferred to buyers;

Perhaps the formation and development of a closed cycle of production stagnation (reducing output to increase prices - reducing employment - decreasing consumption, income, demand; a new cycle of decreasing output, etc.)

In the dynamic approach of monopolistic competition, which was followed by economists of the Austrian school (founder - J. Schumpeter), the focus is on the superiority of the monopoly. Based on the dynamic theory, it is recognized that it is incorrect for supporters of the static approach to focus on price competition, since it is not considered characteristic of the industry. Companies destroy the very structure of economic sectors with their own innovations (hypercompetition and Schumpeterian competition). These conditions reveal the following advantages of monopolistic competition:

Sustainability of output growth during “creative destruction”, since a monopolist company is protected from competition in the long term and can improve development and research;

Innovations that are introduced by a monopolist, in the long term, lead to a reduction in costs to a level that is unattainable under conditions of perfect competition;

Advertising data is fair, at least in the long term, because buyers think intelligently and manufacturers are not considered fly-by-night companies. The static theory of monopoly is in most cases applicable to mature industries, and the dynamic theory is applicable to growing ones.

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Advantages of Monopolistic Competition:

1) in conditions of monopolistic competition, a wide range of goods is produced, which ensures the satisfaction of consumer preferences of various buyers;

2) when prices for certain products are inflated, the buyer has the opportunity to easily and quickly find a substitute product;

3) very high competition in the industry, which contributes to the improvement of manufactured products;

4) low capital investment to enter the market.

Disadvantages of Monopolistic Competition:

1) overpricing of products offered and underproduction of goods compared to perfect competition, although deviations from perfect competition in terms of the parameters under consideration are not as strong as in the case of a monopoly;

2) under monopolistic competition, production efficiency is not achieved, since the price of the products offered is higher than the minimum value of average total costs, which indicates incomplete utilization of production capacity;

3) in the case of monopolistic competition, there is no allocative efficiency (the price set under monopolistic competition is higher than marginal costs);

4) high economic profits contribute to the influx of new firms into the market, which reduces excess profits to zero;

5) diversity is expensive for enterprises, because Producing several units of each type of product does not produce economies of scale.

SELF TEST

1. Imperfect competition is:

a) the type of market structure when the firm is a price seeker;

b) the type of market structure when the firm is a price taker;

c) answers a) and b are correct);

d) there is no correct answer.

2. The amount of gross income as sales volume increases in conditions of imperfect competition:

a) only increases;

b) only decreases;

c) remains unchanged;

d) increases up to a certain point and then decreases.

3. In conditions of imperfect competition, the values ​​of average and marginal income:

a) match only for the first unit of product sold;

b) match only for the last unit of product sold;

c) always coincide;

d) do not match.

4. A type of market structure in which a company is identified with an entire industry that produces a unique, unparalleled product, while limiting the presence of competitors in the market with high, difficult-to-overcome barriers:

a) perfect competition;

b) monopoly;

d) oligopoly.

5. A characteristic feature of a monopoly is:

a) open access to information;

b) replaceable goods;

c) low entry and exit barriers;

d) the only giant company.

6. Under monopoly conditions the following is produced:

a) homogeneous goods;

b) differentiated product;

c) a unique product;

d) homogeneous and differentiated goods.

7. A market situation when one seller is opposed by only one buyer:

a) monopoly;

b) oligopoly;

c) monopsony;

d) bilateral monopoly.

8. An enterprise that, due to the novelty of the product, can become the only manufacturer for a certain time:

a) natural monopoly;

b) closed monopoly;

c) open monopoly.

9. Monopoly that arises in those industries in which, due to the peculiarities of the technology for the production of economic goods, the organization of production on the basis of only one enterprise is most effective:

a) natural monopoly;

b) closed monopoly;

c) open monopoly.

10. Monopoly arising as a result of restricting the activities of other firms in the market with the help of existing regulations:

a) natural monopoly;

b) closed monopoly;

c) open monopoly.

11. A situation where there are many manufacturers on the market and only one buyer who can, by manipulating the volume of purchases, reduce prices:

a) monopoly;

b) monopsony;

c) bilateral monopoly;

d) monopolistic competition.

12. If average variable costs are at the price level set by the monopolist, the firm:

a) receives excess profit;

b) receives economic profit;

c) incurs losses in the amount of fixed costs;

d) incurs losses in the amount of variable costs.

13. In Fig. 7.8. monopoly is represented.

In this case, the rectangle ATCP M AK indicates that the company receives:

a) excess profit;

b) only normal profit;

c) losses;

d) zero economic profit.

14. The state regulates natural monopolies by setting the price at:

a) average total production costs;

b) average variable production costs;

c) marginal costs;

D) higher than average total production costs.

15. Selling the same product to different consumers at different prices:

a) product differentiation;

b) price discrimination;

c) answers a) and b are correct);

d) there is no correct answer.

16. There are three main conditions for the implementation of price discrimination. Specify the redundant one:

a) the company must have a sufficiently high level of monopoly power;

b) the firm must be a price taker;

c) the buyer does not have the opportunity to resell the product or service to other consumers;

d) the seller can segment the market (divide consumers into groups according to certain characteristics).

17. Price discrimination, in which prices change depending on the quantity of goods purchased:

18. Perfect price discrimination, when different units of goods are sold at different prices to different buyers, facilitating the withdrawal of the entire consumer surplus (profit):

a) price discrimination of the first degree;

b) price discrimination of the second degree;

c) price discrimination of the third degree.

19. Price discrimination, which is based on the sale of goods at different prices for different groups of buyers:

a) price discrimination of the first degree;

b) price discrimination of the second degree;

c) price discrimination of the third degree.

20. The main advantage of a monopoly is that:

a) products produced by a monopolist company are, as a rule, of poor quality;

b) large scale production allows reducing production costs and saving resources;

c) the impressive profits of a monopolist firm do not contribute to investment in scientific and technological progress;

d) monopolistically high profits that persist for quite a long time do not contribute to the development of competition.

21. The main disadvantage of a monopoly is that:

a) the monopolist inflates the prices of goods produced;

b) the incentive to increase production efficiency increases;

c) low barriers to entry into a monopolized market;

d) a monopolist produces more output than under perfect competition.

22. A type of market structure that combines the features of perfect competition and monopoly:

a) monopsony;

b) bilateral monopoly;

c) monopolistic competition;

d) oligopoly.

23. A characteristic feature of monopolistic competition is:

a) closed access to information;

b) a unique product;

c) high entry and exit barriers;

d) differentiated products.

24. In conditions of monopolistic competition, the number of firms in the industry:

b) two or three;

c) from two to ten;

d) many.

25. In conditions of monopolistic competition:

a) allocative efficiency is achieved;

b) allocative efficiency is not achieved;

c) efficiency is achieved in resource allocation;

d) production efficiency is achieved.

26. In Fig. Figure 7.9 shows equilibrium under conditions of monopolistic competition in the long term.

In this case, the company will receive:

a) economic profit;

b) excess profit;

c) losses;

d) only normal profit.

27. Product differentiation under conditions of monopolistic competition lies in the fact that firms in the industry produce:

a) identical goods;

b) similar but not identical goods;

c) absolute substitute goods;

d) homogeneous products.

28. The use of non-price competition in conditions of monopolistic competition is predetermined:

a) significant control over prices;

b) little control over prices;

c) low level of dependence on the consumer;

d) insignificant control over prices and a low level of dependence on the consumer.

29. The main advantage of monopolistic competition is that:

a) a wide range of goods is produced;

b) it is not easy to find a substitute product;

c) low competition in the industry;

d) high capital investment to enter the market.

30. The main disadvantage of monopolistic competition is that:

a) with monopolistic competition, production efficiency is achieved;

b) high economic profits contribute to the influx of new firms into the market, which increases excess profits;

c) diversity is cheap for enterprises;

d) there is an overestimation of the price of products offered and underproduction of goods compared to perfect competition.

Control questions

1. What are the characteristic features of monopoly and monopolistic competition?

2. What types of monopolies are there?

3. What barriers does a monopolist use to limit the entry of other economic agents into the market?

4. How does a monopoly differ from monopolistic competition?

5. How are price and output determined under conditions of monopoly and monopolistic competition?

6. What are the advantages and disadvantages of monopoly and monopolistic competition?

7. What are the reasons for the existence of price discrimination?

8. What are the reasons for the emergence of natural monopolies?

9. What is the role of the state in regulating natural monopolies?

Chapter 8.