Prerequisites for imperfect competition

Starting from the second half of the 19th century V. imperfect competition is gradually gaining ground. It is associated with the emergence of large economic entities (associations), which gradually began to subjugate an increasingly large part of industry markets. All this was accompanied by a process of concentration of production (concentration large number work force and production volumes at large enterprises). Under these conditions, the number of commodity producers is reduced and it becomes possible to influence the market price.

To a large extent, this was facilitated by the development of a corporate form of private ownership in the form of joint stock companies.

The emergence of various types of monopolistic type associations has qualitatively changed competitive relations.

New interpretation of monopoly

Non-price competition

Product differentiation acts as a kind of compensation for those disadvantages that are inherent in monopolistic competition and are associated primarily with the costs of functioning of such a market structure. At the same time, product differentiation, taken to the extreme of its manifestation, on the one hand, confuses the consumer, complicating the selection process, on the other hand, it can give rise to false guidelines in choice. Quite often, preference for some goods over others is given not on the basis of the actual quality and consumer properties of the product, but on the price, believing that the latter serves as the best indicator of the quality of the goods and services offered.

Product Improvement

Types of Relationships

Based on the concentration of sellers in the same market, oligopolies are divided into dense and sparse. Dense oligopolies conventionally include those industry structures that are represented on the market by 2-8 sellers. Market structures that include more than 8 business entities are classified as sparse oligopolies. This kind of gradation allows us to evaluate the behavior of enterprises in conditions of dense and sparse oligopoly differently. In the first case, due to the very limited number of sellers, various types of conspiracies are possible regarding their coordinated behavior on the market, while in the second case this is practically impossible.

Based on the nature of the products offered, oligopolies can be divided into ordinary and differentiated. An ordinary oligopoly is associated with the production and supply of standard products. Many standard products are produced in oligopoly conditions - steel, non-ferrous metals, Construction Materials. Differentiated oligopolies are formed on the basis of the production of a diverse range of products. They are typical for those industries in which it is possible to diversify the production of goods and services offered. The level of density of an oligopolistic market structure is measured by the number of enterprises in a particular industry and their share of total industry sales within the national economy. Thus, by varying the number of enterprises, it is possible to determine the degree of concentration of production, and therefore supply, in the branch of social production under study.

At the same time, it should be emphasized that it would be imprudent to focus only on the scale national economy. Oligopolistic structures can be formed both at the regional and local levels of management. Thus, due to the specificity of the opportunities for consumption of ready-made concrete in local markets (district, small city), oligopolistic structures are also formed, as well as at the regional level in the supply of, for example, bricks.

However, no matter what level we consider oligopolies, we should not forget about two important points: interindustry competition and import of products. The strength of oligopoly decreases under the influence of the supply of products by enterprises in other industries that have approximately the same consumer properties as the products of oligopolists (for example, gas and electricity as a source of heat, copper and aluminum as raw materials for the manufacture of electrical wires). The weakening of the oligopoly is also facilitated by the import of similar goods or their substitutes. Both of these factors can contribute to the formation of more competitive structures compared to purely sectoral market structures.

The emergence of an oligopoly

The historical tendency for the formation of oligopolies is based on the mechanism of market competition, which with inevitable force forces weak enterprises out of the market through either their bankruptcy or absorption and merger with stronger competitors. Bankruptcy can be caused either by weak entrepreneurial activity of the enterprise's management, or by the impact of efforts made by competitors against a particular enterprise. A takeover is carried out on the basis of financial transactions aimed at acquiring a particular enterprise, either in whole or in part by purchasing a controlling stake or a significant share of capital. It is the relationship between strong and weak competitors. A merger is usually voluntary. Although this kind of centralization of capital and production may be economically forced, as a choice of the third of two evils: either a complete loss of independence, or an exhausting economic war.

Acquisition and merger processes allow companies to significantly increase their sales shares in the relevant market. The growth of the market power of several corporations makes price competition meaningless, which can turn into a price “war” and lead to exhaustion of all its participants.

Another significant factor in the formation of oligopolistic market structures is the desire of enterprises to realize economies of scale in production. In the process of improving technology and the emergence of new technologies optimal sizes production has reached such a scale that it has become a significant obstacle to the entry of new enterprises into the industry. These obstacles are associated both with limited finances, achieving low production costs, and more rational use resources by several economic entities, rather than by many competitors with insignificant production volumes.

The specifics of the oligopolistic market structure determine the characteristics of the market behavior of economic entities and pricing. Pricing in an oligopolized market is characterized by a variety of forms of its manifestation, but their grouping allows us to identify four basic principles: price competition; secret price collusion; price leadership; price cap.

Price competition

When there are a limited number of suppliers of a particular product, their behavior can be described in two ways. An increase or decrease in the price of a product by one of the producers causes an adequate reaction from competitors. IN in this case the actions of competitors neutralize the price advantage that one of the business entities was trying to achieve. As a result, there is virtually no redistribution of total sales volumes between competitors; each competitor does not experience the loss of its customers. If there is an outflow or influx of buyers, this is felt by the industry as a whole under the influence of lowering or raising prices by all commodity producers. Depending on the direction of price movements, buyers will look for ways to satisfy their needs by increasing the volume of purchases of goods in this industry or in other industries.

In reality, depending on the specific circumstances, the behavior of competitors in response to the actions of one of the oligopolists can be very diverse. However, the most reliable reaction can be considered that a price reduction by one of the competitors will cause the others to try to equalize their prices, i.e. lower them in order to prevent the expansion of the sales market of the initiating competitor. At the same time, price increases by one of the commodity producers, as a rule, are ignored by competitors. This ignoring of price increases by competitors is associated with the hope of increasing their shares in total sales at the expense of the oligopolists who risked raising the price of their product. For clarity, let's look at Fig. 22.3, which shows the demand curves of an oligopolist.

Rice. 22.3. Broken demand curve of oligopoly

If we imagine that the demand curve C 1 C 1 expresses the position of the oligopolist in conditions when its competitors equalize their prices according to its prices, and the demand curve C 2 C 2 corresponds to competitors ignoring price changes for this oligopolist, then we can conclude that there is a broken demand curve With 2 AS 1 for an oligopolist in conditions of price competition. This kind of conclusion follows from the ambiguous reaction of competitors to a price increase or decrease by one of the oligopolists. If the price and output volume corresponding to point A are established, the position of the enterprise is characterized by an equilibrium state. However, if an enterprise decides to increase the price of its products, and its competitors do not react to this in any way, then the market position of the enterprise that decided to increase prices will be characterized by a segment of the demand curve C 2 A (the upper part of the demand curve C 2 C 2 ). As a result of the fact that demand has a relatively high elasticity in this segment, an increase in price will lead to a reduction in the company's sales volume, while its competitors will receive additional buyers.

But if the enterprise makes an attempt to lower the price, then the remaining oligopolists will immediately respond by correspondingly lowering the prices for their products. In this case, the state of demand will be characterized by segment AC 1 (the lower part of the demand curve C 1 C 1, which has lower elasticity). And, therefore, lowering the price will not significantly increase sales volumes.

It should be noted that the marginal income curve also has an unusual shape: it also consists of two segments. First segment of the curve marginal income corresponds to the demand curve C 2 C 2, the second - C 1 C 1. Availability turning point in the elasticity of demand at point A causes a break in the marginal income curve, i.e. a vertical segment BE of the marginal income curve appears D 2PREV VED 1PREV. This gap in the marginal revenue curve suggests that virtually any changes in marginal costs between the marginal cost curves AND 1PRED and AND 2PRED will not affect price and production volume, since the point of intersection of the vertical segment of the marginal revenue curve ( BE) with the marginal cost curve will indicate the invariance of the scale of production (Q A), maximizing profit.

The restrained nature of price competition is associated, firstly, with weak hopes of achieving market advantages over competitors, and secondly, with the risk of unleashing a “war” of prices.

Imperfect market behavior

The variant of the oligopolistic market structure considered above, which allows for the possibility of price competition, characterizes a sparse oligopoly, within which it is very problematic to coordinate the behavior of competitors due to their relatively large number. However, in cases where the market is characterized by a dense oligopoly, preference is given to non-price competition and there is a real possibility of producers of certain goods entering into a secret conspiracy.

IN modern conditions When, on the one hand, antitrust legislation is in force, and on the other hand, there are shortcomings and uncertainty in the market behavior of oligopolists based on price competition, there is a temptation for competitors to directly or tacitly agree to unidirectional market behavior. Establishing secret price controls allows oligopolists to reduce uncertainty, generate economic profits, and prevent new competitors from entering the industry.

Collusion

Due to the fact that many countries have antimonopoly (antitrust) legislation, open cartelization based on written agreements becomes impossible. In such cases, agreements are concluded informally and verbally in confidential meetings. In this case, sophisticated forms of camouflage for the coordinated actions of oligopolists are used. As a result, consumers, observers and regulatory authorities create the illusion of price competition between oligopolists.

The most sophisticated form of secret conspiracies are the so-called gentleman's agreements, which are concluded verbally in a relaxed atmosphere outside of working hours and which are very difficult to identify for the purpose of bringing a claim. Of course, secret price agreements require their participants to have mutual trust and a willingness to make compromises and concessions in order to balance the interests of the participants. Differences in costs and differences in target settings determine the far from identical market behavior of oligopolists. Within the framework of secret agreements that actually block price competition, non-price forms of competition may develop, accompanied by the provision of hidden discounts and additional services, improving forms of customer service, and providing the best after-sales service.

Leadership in prices

Price leadership is one of the forms of market behavior of oligopolists, in which all competitors in a given market follow in the wake pricing policy leading or dominant oligopolist. It's about that the largest or most efficient company in the industry chooses the right moment and place to change the price, while all other oligopolists automatically follow this change.

When we talk about price leadership, we assume that there are no agreements or agreements between enterprises. And yet, the coordination of the actions of oligopolists, despite its camouflaged nature, in a certain sense occurs openly. The price leader, publicly expressing certain intentions regarding the proposed price change, seems to provoke a reaction from other commodity producers. The response of competitors to the industry leader's probing serves as a kind of signal to implement or refrain from certain activities.

The peculiarity of the behavior of a price leader is that, as a rule, it does not react to minor fluctuations in the conditions of costs and demand. Price changes occur only if there are noticeable deviations in the cost of certain factors of production or changes in the operating conditions of the enterprise or production output.

Price cap

Finally, the price in an oligopolized market can be formed based on the average total costs production, to which a markup is usually added in the amount of a certain percentage. In the future, we will use the term “average costs”, which in the long term should be understood as the totality of costs, since dividing them into constant and variable is acceptable only for the short term.

The estimated price, formed on the basis of average production costs and a certain percentage mark-up as economic profit, serves as a kind of standard price for conducting a pricing policy, which is designed to take into account actual or possible competition, financial, economic and market conditions, strategic goals and other circumstances. This kind of pricing form is mainly characteristic of enterprises with a high degree of differentiation and diversification of their products, which become a significant obstacle to accurately determining demand and costs for each individual product.

The preference given to oligopolies and the deployment of non-price competition over price competition is due to the fact that product renewal, modification, improvement production technologies, successful advertising allows you to create sustainability and stability in the market compared to price competition. The latter can lead to significant costs and exhaustion of competitors, and sometimes to an increase in monopolistic tendencies in the market. In extreme cases, the consequence of price competition may be a transition from a sparse oligopoly to a dense one, which opens the way to direct collusion among competitors. Another reason for preferring non-price competition is due to on a large scale production of oligopolists, significant financial resources that allow them to carry out activities caused by non-price competition.

General assessment of oligopolistic structures

Assessing the significance of oligopolistic structures, it is necessary to note, firstly, the inevitability of their formation as an objective process arising from open competition and the desire of enterprises to achieve optimal scales of production. Secondly, despite both positive and negative assessments of oligopolies in modern economic life, one should recognize the objective inevitability of their existence.

Positive and negative aspects of oligopoly

A positive assessment of oligopolistic structures is associated primarily with the achievements scientific and technological progress. Indeed, in recent decades, in many industries with oligopolistic structures, significant progress has been made in the development of science and technology (space, aviation, electronics, chemical, oil industries). Oligopolies have enormous financial resources, as well as significant influence in the political and economic circles of society, which allows them, with varying degrees of accessibility, to participate in the implementation of profitable projects and programs, often financed from public funds. Small competitive enterprises, as a rule, do not have sufficient funds to implement existing developments.

The negative assessment of oligopolies is determined the following points. This is first of all that an oligopoly is very close in structure to a monopoly, and therefore, one can expect the same negative consequences as with the market power of a monopolist. Oligopolies, by concluding secret agreements, escape the control of the state and create the appearance of competition, while in fact they seek to benefit at the expense of buyers. Ultimately, this results in a decrease in the efficiency of using available resources and a deterioration in meeting the needs of society.

Oligopolies and small business

Despite significant financial resources concentrated in oligopolistic structures, most new products and technologies are developed by independent inventors, as well as small and medium-sized enterprises carrying out research activities. However, only large enterprises that are part of oligopolistic structures often have the technological capabilities to practically implement the achievements of science and technology. In this regard, oligopolies use the opportunity to achieve success in the field of technology, production and market based on the developments of small and medium-sized businesses that do not have sufficient capital for their technological implementation.

In general, when attention is paid to assessing the effectiveness of oligopolies, it is noted that the latter are often interested in restraining scientific and technological progress, since they are in no hurry to introduce the emerging “new products” until the necessary profit on the previously invested large capital is achieved . This policy prevents obsolescence of both machinery and equipment, as well as technologies and products.

conclusions

3. On the market monopolistic competition In addition to price competition, there is also non-price competition, which is expressed in product differentiation, its improvement and advertising. Product differentiation is manifested in the offer of the same product with a diverse combination of its consumer properties, which allows expanding the class of buyers. Product improvement is associated with maintaining the price level for it while simultaneously improving technical, economic, quality characteristics and consumer properties. Advertising is the most pronounced form of non-price competition in conditions of monopolistic competition compared to other types of market structures.

4. Oligopoly is a market structure that occupies an intermediate position between monopoly and monopolistic competition (the number of participants is from 2 to 24). Oligopolies are characterized by varying degrees of density: from 2 to 8 enterprises - a dense oligopoly, from 9 to 24 - a sparse oligopoly. The formation of oligopolistic structures is the result of competition, accompanied by acquisitions and mergers.

5. Within the framework of price competition between oligopolistic enterprises, their behavior is characterized by two specific points: when one of the oligopolists lowers the price, all the others also jointly lower prices in order to retain their “fixed” market segment; when prices increase, the remaining oligopolists maintain the same price level and thereby can squeeze out the enterprise that has risked raising prices in the market.

6. Among the types of non-price competition, it is worth highlighting secret collusion, price leadership, and price markup. The secret conspiracy of oligopolists is aimed at implementing a single pricing policy by its participants, at dividing markets, or at simulating price competition. Price leadership means that all oligopolists, following the leading company (leader) in a given industry, increase or decrease prices. The price cap is used by those oligopolists whose products are quite differentiated, which makes it difficult to conduct separate cost calculations for each individual product. Therefore, they add the corresponding amount of profitable premium to average costs.

In this section we will look at the market structure under which numerous companies, selling close but not perfect substitute products. This is usually called monopolistic competition — monopolistic in the sense that each manufacturer is superior to its own version of the product and - 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 in 1933 by Edward H. Chamberlain in his work “The Theory of Monopolistic Competition.”

Main features of monopolistic competition:

• Product differentiation
• Large number of sellers
• Relatively low barriers to entry and exit from the industry
• Fierce non-price competition

Product differentiation

Product differentiation — key characteristic given 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:
• 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, e.g. operate in conditions of monopolistic competition.

Product differentiation creates the opportunity limited impact on market prices , since many consumers remain committed to a particular brand and company even with a slight increase in prices. 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 when 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 big amount sellers, so that an individual firm has a small share of the industry market. As a consequence, monopolistically competitive firms are typically characterized by both absolute and relatively small sizes.

Large number of sellers:

• On the one side, eliminates the possibility of collusion and concerted action between firms to limit output and raise prices;
• with another - doesn't allow the company in a significant way influence market prices.

Barriers to entry into the industry

Entering the industry usually not difficult, due to:

• small;
• 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

Tough non-price competition- Also characteristic monopolistic competition. A firm operating under conditions of monopolistic competition may use three main strategies influence on sales volume:

• change prices (i.e. implement price competition);
• produce goods with certain qualities (i.e. enhance differentiation of your product by technical specifications , quality, services and other similar indicators);
• review 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), with another- the large number of firms in the industry leads to the fact that the effect of the market strategy of an individual company will be distributed among such a large number of competitors that it will be practically insensitive and will not cause 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, services of private practicing doctors or lawyers, hairdressing and cosmetic services, etc.). As for material goods such as various varieties soap, toothpaste or soft drinks, their production is generally not characterized small in size, the number 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.

7.4. PRICING IN CONDITIONS
MONOPOLY COMPETITION

Perfect competition and monopoly are opposite extreme models of market structures. However, there may be intermediate models that are not fully competitive, are not controlled by a single seller, and are much more common. Monopolies, even owning 99% of the market, cannot maintain their power for long. Over time, multiple divisions or mergers occur, which ultimately leads to competition between strong rivals.

A. Marshall, due to his reluctance to distinguish between perfect and less perfect competition, practically delayed the development of both the theory of competition and the theory of monopoly. However, the discrepancies between theory and reality were so obvious that the model of monopolistic competition was an immediate success in the 1930s. and extremely quickly entered the mainstream of microeconomic theory.

In monopolistic competition, firms have some control over price. Unlike conditions of perfect competition, each individual producer, by changing the volume of products produced, can influence the price of his goods.

This is possible if competing firms sell non-standardized products. Possibilities differentiation product quality, appearance, reputation (trademark) and other characteristics give each seller a measure of monopoly power over price.

On the market detergents, for example, many varieties are offered. Monopolistic competition is the confectionery market, household appliances and so on. At the same time, firms face competition from existing firms or new firms entering the industry; the market is open for entry and exit.

Monopolistic competition A market structure in which many sellers compete to sell a differentiated product in a market where new sellers may enter.

Main features of a market with monopolistic competition:

• The product of each firm trading on the market (differentiated product) is an imperfect substitute for the product sold by other firms, but it cross elasticity must be positive and relatively large. Product differentiation occurs due to differences in consumer properties, quality, service, advertising. Often the consumer pays not only for quality, but also for the brand.
• There are a relatively large number of sellers in the market, each of which satisfies a small, but not too small, share of the market demand for general type goods sold by the firm and its competitors. The company's share must be more than 1%. In a typical case, from 1 to 10% of market sales during the year. None of the firms has a decisive advantage over the others.
• Market sellers do not consider the reactions of their rivals when choosing what price to set or how much to produce. This is a consequence of the fact that the number of sellers is large and the decision of one of them has little impact on the position of the others.
• The market has conditions for free entry and exit. New firms can freely come, but existing firms have an advantage and new ones will experience difficulties, since they will gain the reputation of a new trademark or new services are not easy.

Thus, monopolistic competition is similar to a monopoly, since individual firms can control the price, but it is also similar to perfect competition, since each product is sold by many firms and there is free entry and exit in the market.

7.4.1. DEMAND CURVE FOR THE PRODUCTS OF A MONOPOLISTIC COMPETITIVE ENTERPRISE

Since each competitor sells a different variety of a certain good from all others, he acts as a monopolist in relation to his group regular customers. Therefore, the demand curve for his products has a negative slope and he himself determines the volume of his supply and price. But since the products produced by monopolistic competitors are easily interchangeable, the demand for the products of an individual competitor depends not only on the price of its products, but also on the prices of the products of other competitors.

Schedule for rice. 7.28 demonstrates differences in the behavior of enterprises under conditions of monopoly and monopolistic competition. rice. 7.28 line AB is the demand curve under complete monopoly, while the broken line CDEK is the demand curve under monopolistic competition.

The manufacturer feels like a monopolist only in the interval Q 2 Q 3. If he decides to reduce the volume to Q 1 so that the price is P 1 ", some buyers will go to

Rice. 7.28. Broken demand curve for products under monopolistic competition

competitors and the price will be set at the level P 1. Accordingly, when setting a low price P 4, the manufacturer expects to produce Q 4 ", but his competitors also reduced prices and he has to increase the volume to Q 4.

7.4.2. SHORT-TERM EQUILIBRIUM OF A FIRM UNDER MONOPOLISTIC COMPETITION

At what part of its demand curve a monopolistic competitor will choose the combination P, Q is determined by the Cournot point, and, most likely, the company will receive a monopoly profit if P>AC.

Thus, a firm with monopolistic competition behaves like a monopolist in the short term, as shown in rice. 7.29. The firm will produce Q MK units of output, focusing on the profit maximization condition for the monopoly MC=MR, at the demand price for a given output P MK. The shaded area above the firm's average cost AC is the profit that the firm will earn in the short run.

7.4.3. LONG-RUN EQUILIBRIUM UNDER MONOPOLISTIC COMPETITION

However, in a market of monopolistic competition this cannot last long. Economic profit will attract other firms to this industry, which will begin to produce a similar product, or the firm itself, in the long term, trying to increase profits, can expand by building new facilities. This will lead to increase in supply this type of product and price reduction.

For example, if one firm offers whitening toothpaste, after determining profitability, other firms will offer similar toothpastes in the market. In the long run, the D and MR curves will shift downward for a given firm.

The long-run equilibrium in a market with monopolistic competition is similar to the equilibrium in perfect competition in that no firm earns more than normal profits ( rice. 7.30).

Thus, under conditions of monopolistic competition, as well as under perfect competition, the equilibrium price in the long run is equal to the average

costs and firms do not receive economic profit. However, under conditions of monopolistic competition, products will not be produced at the minimum average cost, as under perfect competition. Because of the negative slope of line D, it touches the LAG curve to the left of the LAG minimum.

Therefore, in long-run equilibrium, monopolistic competitors have excess production capacity, and because of this, differentiated goods are more expensive than standard ones. Shaded area on rice. 7.30- "payment for diversity." If the product were standardized and produced under perfect competition, then the condition P = MC = LAC min would be satisfied.

From the discrepancy between the estrus of long-term equilibrium and the point of minimum average costs, the following follows:

• The market structure of monopolistic competition forces the buyer to overpay for the product. The payment for product differentiation is equal to the difference between the equilibrium price established under monopolistic competition and the price under perfect competition;
• with monopolistic competition, a volume is established that is smaller than the volume of production with perfect competition;
• Since at the point of long-run equilibrium the demand price is higher than the firm's marginal cost, there will be buyers who would agree to pay more for an additional unit of goods than the firm's costs would be. From the buyers' point of view, the industry is underutilizing resources to produce the volume of goods they need. However, increasing output will reduce firms' profits, so they will not do it.

Thus, the higher the degree of product differentiation, the more imperfect the competition in the market and the greater the deviation of the used capacities, production volumes and prices from the most efficient ones.

Free entry into the market prevents firms from making economic profits in the long run. If, after reaching equilibrium in the market with

Rice. 7.29. Equilibrium of a firm under monopolistic competition in the short run

Rice. 7.30. Equilibrium of a firm under monopolistic competition in the long run

monopolistic competition, demand will decrease, then firms will leave the market, since P

Advertising and other promotional activities are attempts by firms to increase demand for their product. If for a company in conditions of perfect competition advertising is not important due to the inability to influence the price, for a monopolist - due to the lack of competitors, then for a company in conditions of monopolistic competition it is the main weapon in the struggle for existence.

For example, according to Financial Newspaper, more than 10 domestic firms spend more than 1 million rubles on advertising in the press alone. These are companies such as Party, Vist, Samos, etc. Among the product groups, the most frequently advertised are: computers, electrical household goods, office equipment, audio, video equipment, cars, furniture, building materials, communications equipment.

Schedule for rice. 7.31 shows how a monopolistic competitor can increase its market share through advertising expenditures. Advertising costs increased the cost per unit of output (AC 1, AC 2), but at the same time the demand for the company's products increased (D 1, D 2), and as a result its revenue increased.

TR 2 = P 2 Q 2 > TR 1 = P 1 Q 1 .

Schedule for rice. 7.32 shows the profit received by the company after advertising in a short period. As already noted, significant costs are associated with advertising and other activities to promote a product to the market, therefore, the average cost for any release after an advertising campaign will be AC ​​2, respectively

The profit-maximizing output is now the one for which MR 2 = MC 2. On the graph this is point K 2, the output volume is Q 2, and the price is P 2, which corresponds to the demand curve D 2. In the absence of any advertising, this firm would earn zero economic profit, as shown in the graph (point E at which P 1 = AC 1). Advertising allows a firm to generate positive economic profit (shaded area). However, this is only possible in short term.

But since entry into the market of monopolistic competition is free, the positive profit received by the company as a result of additional advertising costs will attract new producers to the market who will produce similar products and imitate the marketing program of the successful company. As a result, the demand and marginal revenue curves will shift downward. The combination of increased costs and reduced demand over a long period will reduce the resulting economic profit to zero ( rice. 7.33).

However, since advertising served to increase demand for all sellers in a market with monopolistic competition and contributed to the emergence of new producers in the market, the total quantity consumed of the product increases and excess capacity is lower than it would be in the absence of advertising.

Anna Sudak

# Business nuances

Types and characteristics of monopolistic competition

A striking example of this type of competition in Russia – market mobile communications. 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 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 has collected a lot different companies, producing 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 for them more money 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 strong point(competitive advantage), clearly identify 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 uninterruptible source 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 minimal 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 investment is maximum is best option behavior for the enterprise.

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

Efficiency and monopolistic competition

To identify the effectiveness of a monopolistic (and any market model) you need to know three indicators:

1. Cost of the finished product;
2. Average costs;
3. Marginal costs.

If we compare all these indicators, we can observe the instability of monopolistic competition, and all because:

• Often the price of the finished product is much higher than the marginal manufacturing cost (MC). This leads to a decline in supply and an increase in the cost of products. Of course, clients don’t like this and go to competitors in search of better conditions.
• Monopolists have more resources. In fact, a huge amount of the production material base is idle. And society believes that such irrational use of resources has a negative impact on the economic situation as a whole. Although this is not an entirely correct opinion. If we talk about the material resources of monopolists, then it is they who allow such a phenomenon as product differentiation to exist. Thanks to this, the consumer has the opportunity to choose. And this is a huge plus.

Therefore, to say that monopolistic competition is ineffective is not entirely objective, because it is thanks to the appearance of MK on the market that we can now get what we really need for the money we want to pay. But it's not so bad, right?

Monopolistic competition. The behavior of a company in conditions of monopolistic competition

Monopolistic competition - this is a type of market imperfect competition , in which sellers of differentiated products compete with each other for sales volumes. The products of firms in a monopolistic competitive market are closely but not completely substitutable, that is, each of the many small firms produces a product that is somewhat different from the products of its competitors.

The number of companies on the market can reach 25, 40, 60, etc. This includes restaurants, bakeries, service stations, production of toothpaste, soap, deodorants, washing powder, drug market, etc.

The monopolistic competition market is characterized by the following main features :

• The presence of many sellers and buyers (the market consists of a large number independent firms and buyers), but less than under perfect competition.
• Production of differentiated products that have many close but imperfect substitutes. Product differentiation can be based not only on differences in the quality of the product itself, but also on the services that are associated with its maintenance. Attractive packaging, more convenient location and store opening hours, best service visitor, the presence of a discount - all this can attract a buyer.
• Low barriers to entry into the industry. This does not mean that opening a monopoly competitive firm easily. Difficulties such as problems with registrations, patents and licenses occur in the market of monopolistic competition.
• Awareness of sellers and buyers about market conditions.
• The presence of both price and non-price competition. In non-price competition, such non-price parameters of the product are used as its novelty, quality, reliability, prospects, compliance with international standards, design, ease of use, after-sales service conditions, etc.

In the short run, the behavior of a firm under conditions of monopolistic competition much the same behavior monopolies . Since the product of this company differs from the products of competing companies in special quality characteristics, which appeal to a certain category of buyers and a sufficient number of consumers are willing to pay a higher price, then the company can raise the price of its product without a drop in sales.

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.

In the long run, monopolistic competition similar 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 monopolistic competition market were to decline after equilibrium was reached, 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. As a result, 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.