The characteristic of monopolistic competition is. Monopolistic competition: product definition and differentiation

Monopolistic competition is a type of imperfect competition in a market in which many producers sell products that are different from each other. The company monitors the prices set for other products, but at the same time tries to ignore the influence of the cost of other goods. Patterns of monopolistic competition can often be seen in light manufacturing. Typically, such a system is valid for firms in various industries in the market structure: restaurants, clothing, footwear, as well as the service sector (usually in large cities), etc. The “founding father” of the concept is considered to be Edward Hastings Chamberlin, who wrote groundbreaking book “The Theory of Monopolistic Competition” (1933). Joan Robinson published The Economics of Imperfect Competition, in which she compared two types of competition in the market.

Characteristics

Monopoly competitive markets have the following characteristics:

1. There are many producers and many consumers in the market, and no one business has complete control over the market price.
2. Consumers believe that there are non-price differences between competitors' products.
3. There are several barriers to entry and exit.
4. All producers collectively have a certain degree of control over price.

In the long run, the characteristics of monopolistic competition are essentially the same as those of perfect producer rivalry. The differences between them are that in the first type the market produces heterogeneous products. The firm makes a profit in the short run, but may lose it in the long run as demand decreases and average total cost increases.

Features of a monopolistic competition market

So, the market of monopolistic competition has 6 distinctive features, This:

1. Product differentiation.
2. Lots of companies.
3. There are no major barriers to entry and exit into the market in the long term.
4. Independent decision making.
5. A certain degree of market power.
6. Buyers and sellers do not have complete information(imperfect information.

Let's look at the features of monopolistic competition in more detail, talking about each separately.

Product differentiation

Firms in monopolistic competition sell products that have real or perceived non-price differences. However, they are not so large as to exclude other goods as substitutes. Technically, the cross elasticity of demand between products in such a market is positive. They perform the same basic functions, but have differences in qualities such as type, style, quality, reputation, appearance, which are usually needed to distinguish them from each other. For example, the main task Vehicle for the movement of people and objects from point to point is the rationality of design, comfort and safety. However, there are many different types of vehicles, such as scooters, motorcycles, trucks and cars.

Many companies

Monopolistic competition exists when there are a large number of firms in each product group, as well as a number of companies on the so-called lateral line that are ready to enter the market. The fact that there are a large number of participants gives each of them the freedom to set prices without participating in the strategic decisions regarding the prices of other firms, and the actions of each of the companies are virtually irrelevant.

How many firms must there be in a market structure of monopolistic competition to maintain equilibrium? The answer to this question depends on factors such as fixed costs, economies of scale, and the degree of product differentiation. In addition, the higher the degree of product differentiation, the more a company can separate itself from other competitors, and the fewer participants there will be in a state of market equilibrium.

No major barriers to market entry in the long term

You don't need to spend a lot of money to enter and exit the market. There are numerous firms that are poised to become new entrants, each with their own unique product. Any company that is unable to cover its costs can exit without the financial cost of liquidation. Another thing is that it is necessary to create a company and a product that will be able to withstand the conditions and stay afloat.

Independent decision making

Each monopolistic competition firm independently sets the terms of exchange for its product. The company does not look at the impact the decision may have on competitors. The idea behind this approach is that any action will have such a small impact on the market as a whole that the firm can act without fear of serious competition. In other words, every business entity feels free to set prices.

Market power

Firms in monopolistic competition have some degree of market power. This means that participants have control over the terms and conditions of the exchange, namely they can raise prices without losing all their clients. And the source of such power is not a barrier to entry into the market. Monopolistic competition firms can also reduce the cost of a product without triggering a potentially disastrous price war with competitors. In such a situation, the demand curve is very elastic, although not flat.

Inefficiency

There are two sources in which a monopolistic competition market is considered inefficient. First, at optimal output, the firm sets a price that exceeds marginal cost, resulting in the company maximizing profit, in which marginal revenue equals marginal cost. Since the demand curve is downward sloping, this means that the participant will absolutely set a price that exceeds marginal cost. A second source of inefficiency is the fact that firms operate with excess capacity. That is, the company will first maximize profits when entering the market. But in both pure and monopolistic competition, players will operate at the point where demand or price equals average cost. For a firm in a purely competitive market, this equilibrium is where the demand curve is perfectly elastic. Thus, in the long run, it will be tangent to the average cost curve at the point to the left of the minimum. The result is excess production capacity and monopolistic competition, the balance of which will be disrupted.

The type of market structure that is characterized by the presence of imperfect competition is called monopolistic competition.

It is the most common and, accordingly, the closest to the type of perfect competition in the market.

In general, monopolistic competition is a certain type of industry market, the main feature of which is a fairly large number of sellers of a particular product, which allows them to dictate price conditions. Such competition, while very common, is also the most difficult to study. It is a more complex type than simple pure monopoly or pure competition. That is why building a specific and universal abstract model is not an easy task. Almost everything in this case depends on the most seemingly insignificant details, which in one way or another characterize the development strategy of a particular enterprise and its products. They are almost impossible to predict. However, like the company’s strategic decisions, which directly depend on the behavior of potential buyers and many other factors.

Features of a monopolistic market:

Monopolistic competitors are considered to be small chains of grocery stores, clothing stores, cafes and markets such as the network communications market. This is far from full list. Of course, a monopolistic market is essentially reminiscent of a monopoly, since certain firms allow themselves to dictate the price conditions for their goods or services. At the same time, such competition resembles its perfect type, because many enterprises are engaged in the sale of such goods or services, despite the fact that there is such a concept as “entry” and “exit” in the market.

This type of market is characterized by the following features:

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

Short-term monopolistic competition

It can be emphasized that the essence of monopolistic competition is that each representative of such a market sells products very similar to those of the competition. At the same time, there are no perfect substitutes, which allows each company to maintain its market share. However, such a market is characterized by a downward sloping demand curve.

For a short-term period, the behavior of a particular company in such a market is characterized by the behavior of a monopoly. This concerns such a point as free regulation of prices for their products, which is determined by the best indicators of quality, durability and functionality. Thus, overall sales on the market do not fall, but even increase, but such an initiative company attracts a larger number of consumers, changing the proportions of the market share.

A common feature of monopolistic competition and monopoly is precisely the possibility of free regulation of prices for each respective firm.

Long-term monopolistic competition

In this case, this type of competition is similar to the perfect type. Since “entry” to such a market actually remains free, the emergence of new players deprives those already present of part of the profit. Especially if new firms can boast of having truly competitive products or services. However, there is also back side medals. Due to the excessively large number of companies on monopolistic market, the weakest of them often simply leave the game, deciding to move the remaining funds in a more profitable direction. This happens when the market demand for a good decreases after reaching equilibrium. The process of reducing the number of players will continue until this equilibrium is restored.

Factors influencing monopolistic competition

Negative factors

It is worth understanding the fact that the presence of such competition does not affect positive influence to improve production efficiency. Moreover, very often we hear about exorbitant amounts of money that are spent on marketing techniques and advertising, on attempts to make similar products more special and unique. This directly affects society itself:

• In monopolistic competition, resources are spent on achieve greater uniqueness of your product. Because of this, we see a huge amount of advertising, both on TV and radio or on the Internet. Advertising of virtually the same product, but from different companies who are trying to convey to the consumer that their product is unique and inimitable.
• Moreover, advertising and marketing moves are often designed change preferences and tastes potential consumer on a subconscious level. At the same time, there is a possibility that a person who does not need a specific product at all will hear enough advertising, fall under the influence of marketing tricks, and become its ardent supporter. Thus, people's needs are not satisfied, but changed or created.
• Deceptive and lack of constructiveness of advertising misleads potential consumers.
• In a monopolistic market advertising becomes an integral part activities of the company and the higher its market share, the more money it spends on it. This leads to increased costs, which forces the company to either increase prices for its product or introduce new analogues and developments to the market.
• Advertising costs sometimes reach such volumes that they naturally turn into serious barriers that hinder free entry into the market. It also reduces competitive tension.
• Do not forget that advertising by these companies is very often the consumer pays. This applies to magazines, newspapers and other things that should contain constructive information, but in reality we get a lot of advertising pages with advertisements.

Positive factors:

• This product is quite capable satisfy a huge part of the needs potential consumer due to its diversity.
• Since such a product constantly reaches a new level of its functionality, this causes an increase in the level of customer satisfaction. As a rule, directions for improving a product correspond to social trends and even the hidden desires of the buyer. For example, people used to want to see on store shelves household appliances the most powerful vacuum cleaners at reasonable prices, but their preferences soon shifted to robot vacuum cleaners that do not require constant monitoring.
• The product is developed exclusively in better side. His quality is increasing as well as functionality.
• Advertising tells the consumer about the main advantages of a particular product. It is clear that not a single company will talk about the disadvantages of its products, although there are always some. Therefore, the main thing here is precisely the advantages and characteristics that are emphasized in advertising.
• Both advertising and continuous improvement of the market product are the result of “raising” the market.

Taking all this into account, it can be argued that there are no universal truths in economic matters. They require constant analysis. Also, with regard to monopolistic competition itself, it is in many ways similar to perfect competition and at the same time, in its essence, is close to a monopoly. It is a kind of hybrid of these two types of market, which has its own unique characteristics.

It is known that the state itself is against monopoly as such. But monopolistic competition is at the same time characterized by rather weak monopoly tendencies. Therefore, representatives of such a market reserve the right from time to time to dictate the pricing policy for their product, without attracting significant attention from the state itself to their activities, because there can be as many as five hundred or ten thousand such firms in the industry.

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 long term 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 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 a constant source of inspiration for large corporations. The emergence of competitors spurs large companies to make better products;	“Dirty” tricks are used, such as pseudo-differentiation, which makes the market less “plastic” for the consumer, but brings super-profits to the manufacturer;
The market does not depend on the state;	Advertising creates unreasonable demand, due to which it is necessary to rebuild the production strategy;

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

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

Calculated by the formula: Тп = MR - MC.

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

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

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

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

To do this you need:

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

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

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

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

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

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

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

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

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

Profit maximization:

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

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

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

This means that the product produced gives maximum profit with 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 goods and their prices. 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- type of market structure of imperfect competition. This is a common type of market, closest to perfect competition.

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

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

Properties of monopolistic competition

Abstract model of monopolistic competition in the short run

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

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

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

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

• Perfect awareness of sellers and buyers about market conditions;

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

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

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

Abstract model of monopolistic competition in the long run

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

Characteristics of monopolistic competition

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

Sources

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

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Perfect competition and pure monopoly are two extreme cases of market structure. Both are extremely rare. An intermediate and much more realistic stage is monopolistic competition. In this case, firms, although they face competition from other firms within the industry or existing entities. sellers, but have some power over the prices of their goods. This market structure is also characterized by differentiation of goods, i.e. Many companies offer similar but not identical products.

Difference between pure monopoly and perfect competition.

Not perfect competition exists when two or more sellers, each with some control over price, compete for sales. This occurs in two cases:

Firms sell non-standardized products

When price control is determined by the market share of individual firms (in such markets, each seller produces a large enough portion of the product to significantly influence supply, and therefore prices.

Also, in many cases, price control in the market can be explained by a combination of these two factors.

Monopolistic competition occurs when many sellers compete to sell a differentiated product in a market where new sellers may enter.

A market with monopolistic competition is characterized by the following:

1. The product of each company trading on the market is an imperfect substitute for the product

sold by other companies.

Each seller's product has exceptional qualities and characteristics that cause some buyers to choose his product over that of a competing company. Product differentiation means that an item sold on the market is not standardized. This may occur due to actual qualitative differences between products or due to perceived differences that arise from differences in advertising, brand prestige or “image” associated with owning the product .

2. There are a relatively large number of sellers on the market, each of which

satisfies a small, but not microscopic, share of market demand for a general type

goods sold by the firm and its competitors.

Under monopolistic competition, the market shares of firms generally exceed 1%, i.e. percentage that would exist under perfect competition. Typically, a firm accounts for 1% to 10% of market sales during the year.

3. Sellers in the market do not take into account the reaction of their rivals when choosing which

set the price for your goods or when choosing guidelines for annual volume

sales

This feature is a consequence of the relatively large number of sellers in a market with monopolistic competition, i.e. If an individual seller cuts his price, it is likely that the increase in sales will not come at the expense of one firm, but at the expense of many. As a result, it is unlikely that any single competitor will incur a significant loss of market share due to a decrease in selling price any individual firm. Consequently, competitors have no reason to respond by changing their policies, since the decision of one of the firms does not significantly affect their ability to make profits. The firm knows this and, therefore, does not take into account any possible competitors' reactions when choosing their price or sales target.

4.The market has conditions for free entry and exit

With monopolistic competition, it is easy to start a company or leave the market. Favorable conditions in a market with monopolistic competition will attract new sellers. However, entry into the market is not as easy as it was under perfect competition, since new sellers often have difficulty reaching new buyers. trademarks and services. Therefore, existing firms with an established reputation can maintain their advantage over new producers. Monopolistic competition is similar to a monopoly situation because individual firms have the ability to control the price of their goods. It is also similar to perfect competition because Each product is sold by many firms, and there is free entry and exit in the market.

Existence of an industry under monopolistic competition .

Although in a market with monopolistic competition each seller's product is unique, between various types Enough similarities can be found between products to group sellers into broad categories similar to their industry.

Product group represents several closely related but not identical products that satisfy the same buyer need. Within each product group, sellers can be considered as competing firms within an industry. Although there are problems with defining the boundaries of industries, i.e. When defining an industry, it is necessary to make a number of assumptions and make a number of corresponding decisions. However, when describing an industry, it may be useful to estimate the cross-elasticity of demand for goods of rival firms, because in an industry with monopolistic competition, the cross elasticity of demand for the goods of rival firms must be positive and relatively large, which means that the goods of competing firms are very good substitutes for each other, which means that if a firm raises its price above the competitive price, it can expect a loss significant sales volume in favor of competitors.

Typically, in markets with the greatest monopolistic competition, the four largest firms account for 25% of total domestic supplies, and the eight largest firms account for less than 50%.

Short-run equilibrium of a firm under monopolistic competition.

The demand curve, as seen by a monopolistic-competitive firm, is downward sloping. Let us assume that the seller strives to maximize profits and his product differs from its competitors in some characteristics. Then the seller can raise the price without a fall in the level of sales, because there will be buyers willing to pay a higher price for this product. (The rest depends on the elasticity of demand for this product, that is, whether the profit from an increase in price will cover the losses from a decrease in sales or not). Demand and marginal revenue also depend on the prices set by competing firms, because if they lowered their prices, the seller would receive less profit from the price reduction/increase. But, as mentioned earlier, a monopolistically competitive firm does not take into account the reaction of competitors to its actions.

The firm's short-run equilibrium is shown in Figure 1.

Price and cost.

The profit-maximizing quantity of goods = Q. This output corresponds to the point at which MR = MC. To sell this quantity, the firm will set a price equal to P1, at this price the quantity of goods for which there is demand corresponds to t. A on the supply curve and constitutes the profit-maximizing output. When setting a price equal to P1, the firm receives a profit from a unit of goods equal to the segment AB, and from the entire output equal to the area of ​​the shaded rectangle.

Equilibrium of the firm in the long run

But making a profit is only possible in the short term, because... in the long term, new firms will come into the industry that will copy the achievements of the seller, or the seller himself will begin to expand and profits will drop to normal, because As the quantity supplied of a good increases, the price per unit that each individual seller can charge will fall. The seller who first puts the good on the market will find that both the demand curve and the marginal revenue curve for the good sold by the firm will be shift downward. This means that the price and marginal revenue that a firm can expect will fall in the long run due to the increased supply of the good. Plus, the demand for each individual firm's good will also tend to become more elastic at a given price, i.e. To. an increase in the number of rival firms increases the number of substitutes. New firms enter the market until it is no longer possible to make a profit. Therefore, the long-run equilibrium in a market with monopolistic competition is similar to a competitive equilibrium in that no firm makes more than normal profits.

Figure 2 shows the long-term equilibrium of the industry under monopolistic competition.

Price and cost.

Q1 Q2 Quantity

An industry cannot be in equilibrium as long as firms can charge more for a product than the average cost of profit-maximizing output, i.e. the price must be equal to the average cost of this output. In long-term equilibrium, the demand curve is tangent to the long-term average cost curve. The price that must be set to sell Q1 of the product is P, corresponding to t.A on the demand curve. In this case, the average cost is also are equal to P per piece, and therefore the profit is zero both from one piece and in general. Free entry into the market prevents firms from making economic profits in the long run. The same process works in the opposite direction. If demand in the market were to decrease after reaching equilibrium, then firms would leave the market, since the reduction in demand would make it impossible to cover economic costs. As shown in Figure 3, at output Q1, at which MR = LRMC after a reduction in demand, a typical seller finds that the price P1, which he must establish. In order to sell this quantity of goods, it is less than the average cost of AC1 for its production. Because Under these circumstances, firms cannot cover their economic costs; they will exit the industry and shift their resources to more profitable enterprises. When this happens, the demand curve and the marginal revenue curves of the remaining firms will shift upward. This will happen because the reduction in the quantity of goods available will increase maximum prices and marginal revenues characteristic of any of its outputs. and which the remaining sellers could receive. The exit of firms from the industry will continue until a new equilibrium is reached, in which the demand curve is again tangent to the LRAC curve, and firms receive zero economic profits. The process of exit of firms from the market could would also result from firms overestimating the marginal revenue possible from sales in the market. An excess number of firms could make the good so abundant that firms in the market would not be able to cover their average costs at the price at which marginal revenue equals marginal cost .

Rice. 3. (Monopolistically competitive firm suffering losses)

Price and cost

The shaded rectangle represents the company's losses.

Comparison with the original competitive equilibrium .

Consumers pay higher prices when products are differentiated compared to the prices they would pay if the product were standardized and produced by competitive firms. This is true even if the LRMC of a monopolistically competitive firm is identical to the curve of a perfectly competitive firm. The additional price increase has a place where additional costs arise for product differentiation. Consequently, under monopolistic competition, economic profit falls to zero before prices reach a level that allows them to cover only their marginal costs. At a level of output for which price equals average cost, price exceeds marginal cost. The reason for this discrepancy between average and marginal cost is price control, which allows for product differentiation (it causes demand to slope downward, causing marginal revenue does not reach the price for any volume of output). In equilibrium, the firm always adjusts the price until it establishes the equality MR = MC. Since the price always exceeds MR, then in equilibrium it will exceed MC. As long as the product is differentiated among firms, it is impossible for in long-run equilibrium, the average cost of production has reached its maximum possible level. The disappearance of economic profit requires that the demand curve be tangent to the cost curve. This can only happen at output corresponding to LRAC min if the demand curve is a horizontal line, as in perfect competition. Monopoly competitive firms do not achieve all possible long-term cost reductions. As shown in Figure 2, in equilibrium, a typical monopolistically competitive firm produces Q1 products, however, LRACmin is achieved when producing Q2 products, therefore Q1-Q2 = excess capacity. Therefore, the same output could could be offered to the consumer at lower average costs. The same quantity of goods could be produced by fewer firms, which would produce a larger quantity of goods at the lowest possible costs. But equilibrium under these conditions can only be achieved if the product is standardized. Hence differentiation goods is incompatible with saving unused resources. Other things being equal, the higher the price in equilibrium, the greater the excess capacity.

Conclusion .:

A monopolistic competitive equilibrium is similar to a pure monopoly equilibrium in that prices exceed the marginal cost of production. However, in a pure monopoly, price may also exceed in the long run average costs due to barriers to entry for new sellers. In monopolistic competition, free entry into the market prevents the continued existence of economic profit. Profit is a lure that attracts new firms, and keeps prices below the level that would exist under a pure monopoly, but prices exceed those that would exist for standardized goods under pure competition.

Costs of non-price competition.

In addition to the costs associated with excess capacity, there are also costs incurred by firms in monopolistic competition markets when the firm seeks to convince consumers that its products are different from those of competitors. Monopolistically competitive markets are characterized by trademarks and continuous development new products and improvement of old ones. Many consumers were convinced that the quality of goods with famous brands superior to the quality of competitive products. It is likely that firms in markets with monopolistic competition will compete by improving products or developing new ones to increase sales rather than by lowering prices. Improvements to a product by an individual firm will allow it to make profits until other firms copy these improvements Often these improvements are superficial and unimportant. But once a product is improved, the company usually begins advertising to inform consumers about these changes.

Sales costs

Advertising and sales of goods are processes that require costs. Sales costs - these are all the costs that a company incurs in order to influence the sales of its product. By incurring advertising and other sales-related expenses, the company hopes to increase revenues. Advertising can affect the level of demand for the company's product and the price elasticity of this demand. It may also affect cross elasticity demand for a product in relation to the prices of goods from competing firms. Advertising can also increase the demand for goods everyone sellers in a product group. In fully competitive markets there is no incentive to bear sales costs, because the goods are perfect substitutes and buyers are fully informed. Therefore, under these circumstances, advertising is useless. Firms engage in advertising and other promotional activities when they can point out the unique aspects of their products and when the information is not readily available to buyers.

Selling cost curves and profit-maximizing advertising.

There are significant costs associated with advertising and other promotional activities. To coordinate all these efforts, you need staff who must be paid. Sales costs are discrete, which means that they are not always necessary to produce the product. When a company advertises its product, it misses an opportunity sell more of a product, keeping costs and therefore price at a higher level. Advertising is an attempt to have more sales at any price. The same increase in sales could perhaps be achieved by reducing the price.

It is likely that average sales costs (per unit of output) first decrease and then increase. They increase as actual sales increase. Average fixed costs decrease with increasing sales, because costs advanced for sales are distributed over a larger number of units of goods. Sales costs per unit. Products also decline when more advertising is given, if the price per advertisement falls as the number of advertisements increases. It is also possible that higher total advertising expenditures, meaning more advertisements, lead to proportionately larger increases in sales. Repeated advertisements in different media may have an impact on increasing sales.

You can imagine the average cost of sales (ACs) curve, which shows how the costs of selling units change. goods at different levels expected demand. The greater the demand for a product, the lower the average sales costs associated with selling a given quantity of a product on the market. Therefore, a change in demand for a product can shift the sales cost curve. A change in any factor influencing the demand for a firm’s product will shift the curve of average selling costs either up or down. The U-shaped curve of average selling costs is shown in Fig. 4. This curve shows the cost of selling a unit of goods sold, if the demand for the company’s product and the amount of advertising costs of competing firms are given. A reduction in demand shifts the average sales cost curve upward, as does an increase in advertising costs for competing firms. Thus, the average sales cost associated with a given release, the lower the stronger the demand for the product and the lower the sales costs borne by competitors.

Selling price per unit.

P`,Q`,MR1,D1 - price, quantity, marginal income and demand before advertising

Pa, Qa, MR2, D2 - price, quantity, marginal income and demand after advertising.

MC + MCs - marginal production costs + prev. sales costs

AC+ACs - medium ed. production + medium ed. implementation.

Shaded. rectangle - profit in the short term after advertising.

The firm, thanks to advertising expenses, shifts its demand curve from D1 to D2 and the curve before. income from MR1 to MR2. The profit-maximizing output is the one for which MR2 equals the marginal cost of production plus the marginal cost of sales. Without advertising, the firm would earn zero economic profit.Advertising allows a firm to earn positive economic profit in the short run.Advertising implies that a firm can increase demand and marginal revenue by incurring greater costs.An increase in demand, if constant, reduces the sales costs required to sell a given quantity of a product and, therefore, induces the firm to reduce advertising expenditures again. The interdependence between MR and MC when advertising is successful makes it impossible to predict the equilibrium level of advertising expenditures.

P and sebest.

Long-term balance with the implementation of advertising activities when

monopolistic competition.

Advertising that generates profits in a monopolistically competitive industry sets in motion a process that will destroy those profits. Since there is free entry into an industry under monopolistic competition, advertising that generates economic profits can be expected to attract new sellers to the market. Therefore, the AC curve shift upward due to increased advertising costs of competitors, and the D and MR curves will shift downward. The combination of these factors will negate economic profit. But, because advertising served to increase demand for all sellers on the market and contributed to the emergence of new manufacturers, then the total quantity of goods consumed increases.

Each firm's demand curve must be tangent to the AC+ACs curve at profit-maximizing output Ql. At price P1, the firm receives zero economic profit. The equilibrium quantity of Ql is greater than Q`, which would exist in the absence of advertising. Consequently, excess capacity in the industry decreases .(segment Q`Ql). This helps to reduce average production costs, which, however, does not bring benefits to the consumer, because the price does not decrease, but on the contrary, increases, because it reflects the average sales costs required to sell Ql product. Advertising also diverts resources from the production of other goods. In the long run, the company does not benefit from advertising, because what about it, that without it the company makes zero profit. Advertising, however, can serve an important social purpose by providing consumers with information and reducing transaction costs when purchasing. If advertising provides recognition for a product and leads to consumer addiction, then it allows sellers to raise prices without losing sales to competitors. A positive relationship is also found between profits and advertising. This is interpreted as an indication that advertising increases monopoly power. However, other studies show that the information provided by advertising tends to reduce consumer commitment to a particular product. This implies that advertising increases the price elasticity of demand for the profits of each individual firm.

Rice. 6 depicts equilibrium in the long run with real. advertising activities.

Oligopoly

Oligopoly is a market structure in which very few sellers dominate the sale of a product, and the emergence of new sellers is difficult or impossible. Products sold by oligopolistic firms can be both differentiated and standardized.

Typically, oligopolistic markets are dominated by two to ten firms, which account for half or more of total product sales.

In oligopolistic markets, at least some firms can influence price due to their large shares of total output. Sellers in an oligopolistic market know that when they or their rivals change prices or output, the consequences will be on profits of all firms in the market. Sellers are aware of their interdependence. Each firm in an industry is assumed to recognize that a change in its price or output will cause a reaction from other firms. The reaction that any seller expects from rival firms in response to changes in its price , the volume of output or changes in marketing activities, is the main factor determining his decisions. The response that individual sellers expect from their rivals affects the equilibrium in oligopolistic markets.

In many cases, oligopolies are protected by barriers to entry similar to those that exist for monopoly firms. Natural An oligopoly exists when a few firms can supply an entire market at lower long-term costs than many firms would have.

The following features of oligopolistic markets can be distinguished:

1.Only a few companies supply the entire market .The product can be either differentiated or standardized.

2. At least some firms in an oligopolistic industry have large market shares Therefore, some firms in the market are able to influence the price of a product by varying its availability on the market.

3.Firms in the industry are aware of their interdependence .

There is no single model of oligopoly, although a number of models have been developed.

Conscious competition: oligopolistic price wars.

If we assume that there are only a handful of sellers in the local market selling a standardized product, then we can consider the model of “conscious competition.” Each firm in the market strives to maximize profits and, let’s say, each assumes that its competitors will stick to the original price.

Price war- a cycle of successive price reductions by firms competing in an oligopolistic market. It is one of many possible consequences oligopolistic rivalry. Price wars are good for consumers, but bad for sellers' profits.

It is easy to see how firms are drawn into this war. Since each seller thinks that the other will not respond to his price reduction, each is tempted to increase sales by cutting prices. By lowering the price below the price of his competitor, each seller can capture the whole the market - or so he thinks - and can thereby increase profits. But the competitor responds by lowering the price. The price war continues until the price falls to the level of average cost. In equilibrium, both sellers charge the same price P = AC = MC. Total market output is the same as it would be under perfect competition. Assuming that each firm always maintains its current price, another firm can always increase profits by demanding 1 ruble less than its rival. Of course, the other firm will not maintain the same price , because she realizes that she can make more profit by demanding 1 kopeck less than her competitor.

Equilibrium exists when no firm can any longer benefit from a price reduction. This occurs when P = AC and economic profits are zero. A price reduction below this level will result in a loss. Because each firm assumes that other firms will not change the price, then it has no incentive to increase prices. To do so would mean losing all sales to competitors, which is assumed to keep its price constant at the level P = AC. This is the so-called Bertrand equilibrium. In general, in an oligopolistic market, the equilibrium depends from the assumptions firms make about how their rivals will react.

Unfortunately for consumers, price wars are usually short-lived. Oligopolistic firms are tempted to cooperate among themselves to set prices and divide markets so as to avoid the prospect of price wars and their unpleasant impact on profits.

Strategy of behavior in oligopoly and game theory

Game theory analyzes the behavior of individuals and organizations with opposing interests. The results of firm management decisions depend not only on these decisions themselves, but also on the decisions of competitors. Game theory can be applied to the pricing strategy of oligopolistic firms. The following example illustrates the capabilities of game theory.

In the previous price war model, they assume that the competitor will keep the price unchanged. They calculate the profit from their price decision, assuming that the rival will not respond by lowering the price. Assume that management is more realistic. They do not stubbornly hold the view that the competitor will keep its price unchanged, but realize that the enemy will either respond by lowering the price or keep it at the same level. That is. the profit that a firm can get depends on the reaction of its rival. In this case, managers calculate their profits both for the case in which the competitor keeps the price unchanged, and for the case of price changes. The result of this is a matrix of results, which shows the gain or loss from each possible strategies for each possible response of the opponent in the game. How much a player can win or lose depends on the opponent's strategy.

Table 1 shows the matrix of the results of the decisions of managers of companies A and B.

Matrix of results of management decisions in a price war

STRATEGY B

Reduce price Maintain price Maximum

for 1 r/piece losses

Maximum loss - X - Z

Therefore, if both firms maintain prices, then there will be no change in their profits. If the comp. And she lowered the price, and the comp. B would maintain it at the same level, then A’s profits would increase by Y units, but if B also reduced the price in response, then A would lose X units. , but if A left the price the same and B lowered it, then A would lose Z units, which is more than in the previous case. Therefore, the maximin (best) strategy of company A: reduce the price. Because Firm B makes the same calculations, then its maximin strategy is also to reduce the price. Both companies receive less profit than they could get by agreeing to maintain the price. However, if one maintains the price, then it is always more profitable for the rival to reduce it.

Collusion and cartels .

A cartel is a group of firms that act together and agree on output decisions and prices as if they were a single monopoly. In some countries, such as the United States, cartels are prohibited by law. Firms accused of colluding to jointly set prices and control over the volume of products produced are subject to sanctions.

But a cartel is a group of firms, therefore it faces difficulties in establishing monopoly prices, which do not exist for a pure monopoly. The main problem of cartels is the problem of coordinating decisions between member firms and establishing a system of restrictions (quotas) for these firms.

Formation of a cartel.

Suppose in a certain area several producers of a standardized product want to form a cartel. Let us assume that there are 15 regional suppliers of a given product. Firms set a price equal to average costs. Each firm is afraid to raise the price for fear that others will not follow it and its profits will become negative. Let us assume that output is at a competitive level Qc (see Fig. 7, graph A), corresponding to the size of output at which the demand curve intersects the MC curve, which is the horizontal sum of the marginal cost curves of each seller. The MC curve would be a demand curve if The market was completely competitive. Each firm produces 1/15 of the total output Qc

The initial equilibrium exists at T. Competitive price = Рс. At this price, each producer receives a normal profit. At a cartel price Pm, each firm could receive maximum profits, setting Pm=MC/If all firms do this, then there will be an excess amount of cement equal to QmQ units. per month. The price would drop to Rs. To maintain the cartel price, each firm must produce no more than the quota value qm.

To establish a cartel, the following steps must be taken.

1. Make sure that there is a barrier to entry to prevent other firms from selling the product after the price increases. If free entry into the industry were possible, then an increase in price would attract new producers. Consequently, supply would increase and the price would fall below the monopoly level that the cartel seeks to maintain.

2. Organize a meeting of all manufacturers of this type of product to establish joint guidelines for general level product release This can be done by estimating market demand and calculating the marginal revenue for all levels of output. Select an output for which MC = MR (assuming that all firms have the same production costs). Monopoly output will maximize profits for all sellers. This is depicted in graph .A fig. 7. The demand curve for a product in the region is D. The marginal revenue corresponding to this curve is MR. Monopoly output is equal to Qm, which corresponds to the intersection of MR and MC. The monopoly price is equal to Pm. The current price is equal to Rs, and the current output is Qс. Therefore, The current equilibrium is the same as the competitive equilibrium.

3.Set quotas for each cartel member Divide the total monopoly output, Qm, among all members of the cartel. For example, you can instruct each firm to supply 1/15 Qm every month. If all firms had the same cost functions, then this would be equivalent to recommending balance production until their marginal costs are equal to the market marginal revenue (MR`). As long as the sum of the monthly outputs of all sellers is equal to Qm, the monopoly price can be maintained.

4. Establish a procedure for implementing approved quotas . This step is decisive in order to make the cartel operational. But it is very difficult to implement, because... Each firm has incentives to expand its production at a cartel price, but if everyone increases output, then the cartel is doomed, because the price will return to its competitive level. This is easy to show. Graph B (Fig. 7) shows the marginal and average costs of a typical producer. Before the cartel agreement is implemented, the firm behaves as if the demand for its output at the price Pc is infinitely elastic. It is afraid raise the price for fear of losing all its sales to a competitor. It produces a quantity of product qc. Since all firms do the same, industry output is Qc, which is the amount of output that would exist under perfect competition. At the newly established cartel price, the firm is allowed release qm units product, resp. point at which MR` equals the marginal cost MC of each individual firm. Let us assume that the owners of any of the firms believe that the market price will not fall if they sell more than this quantity. If they perceive Pm as the price that lies outside their influence, then their profit-maximizing output will be q`, for which Pm = MC. Provided that the market price does not decrease, the firm can, by exceeding its quota, increase profits from PmABC to PmFGH.

An individual firm may be able to exceed its quota without appreciably reducing the market price. Suppose, however, that all producers exceed their quotas to maximize their profits at the cartel price Pm. Industry output would increase to Q`, at which Pm=MC.B As a result, there would be an excess of product, because demand is less than supply at this price. Therefore, the price will fall until the surplus disappears, i.e. up to the level of Rs. and the producers would return to where they started.

Cartels usually try to impose penalties on those who circumvent quotas. But the main problem is that once the cartel price is set, individual firms seeking to maximize profits can earn more by cheating. If everyone cheats, then the cartel breaks up, i.e. To. economic profits fall to zero.

Cartels also face a problem when deciding on monopoly price and output levels. This problem is especially acute if firms cannot agree on an estimate of market demand, its price elasticity or if they have different production costs.i.e. Firms with higher average costs achieve higher cartel prices.

In oligopolistic markets, individual firms consider the possible reaction of their competitors before they begin advertising and make other promotional expenditures. An oligopolistic firm can significantly increase its market share through advertising only if rival firms do not retaliate. by starting their own advertising campaigns.

In order to better understand the problems that an oligopolistic firm faces when choosing a marketing strategy, it is useful to approach it from a game theory perspective. firms must develop a maximin strategy for themselves, and decide whether it is profitable for them to start advertising campaigns or not. If firms do not start advertising campaigns, then their profits do not change. However, if both firms want to avoid the worst outcome by pursuing a maximin strategy, then they both prefer advertise their product. Both are chasing profits and both end up with losses. This happens because each chooses the strategy with the least losses. If they agreed not to advertise, then they would make large profits.

There is also evidence that advertising in oligopolistic markets is carried out on a larger scale than is necessary to maximize profits. Often, advertising by competing firms only leads to higher costs without increasing sales of products, because Rival firms cancel each other's advertising campaigns.

Other studies have shown that advertising increases profits. They indicate that the higher the proportion of advertising expenditures relative to an industry's sales, the higher the industry's profit margin. Higher profit margins indicate monopoly power, which implies that advertising leads to greater price control. It is unclear, however, whether higher advertising costs lead to higher profits or whether higher profits lead to higher advertising costs.

Other models of oligopoly

To try to explain certain types of business behavior, other models of oligopoly have been developed. The first tries to explain price constancy, the second explains why firms often follow the pricing policy of the firm that acts as the leader in announcing price changes, and the third shows how firms can set prices so so as not to maximize current profits, but to maximize profits in the long term by preventing new sellers from entering the market.

Price rigidity and a kinked demand curve.

Price constancy can be explained if individual firms believe that their rivals will not follow any increase in price. At the same time, they expect that their rivals will follow any decrease in their price. Under these circumstances, the demand curve, as perceived by each individual firm, has strange shape.

An already established price is taken. Let us assume that firms in the industry think that the demand for their product will be very elastic if they raise prices, since their competitors will not raise prices in response. However, they also proceed from the assumption that, if they lower prices, then demand will become inelastic, because... other firms will also lower the price. A sharp change in the elasticity of demand of a firm at a set price gives a broken curve.

Rice. 8 depicts a broken curve of demand and marginal income. Note the sharp drop in marginal income when the price falls below P, i.e. set price. This occurs due to a sharp drop in revenue when a firm reduces its price in response to competitors' price reductions. A firm that lowers its price will lose in gross income because marginal income becomes negative because demand is inelastic at prices below the set price.

In Fig. 8, maximum profits correspond to the size of output at which MR = MC Marginal cost curve - MC1. Therefore, the profit-maximizing output will be Q` units, and the price will be P`. Now suppose that the price of one of the resources necessary for the production of a good increases. This shifts the marginal cost curve upward from MC1 to MC2. If, after increasing marginal costs, the MC2 curve still intersects MR below t.A, then the firm will not change either price or output. Likewise, reducing marginal costs will not lead to any changes.

Price stability will be maintained only with increases in costs that do not shift the marginal cost curves upward enough to cross the marginal revenue curve above t.A., because a larger increase in marginal cost will lead to a new price. There will then be a new demand curve with a new kink. The kink persists only if firms maintain their beliefs about the reaction of their competitors to prices after the new price is established.

Leadership in prices

Price leadership is a common practice in oligopolistic markets. One of the firms (not necessarily the largest) acts as the price leader, which sets a price to maximize its own profits, while other firms follow the leader. Rival firms charge the same the same price as the leader, and operate at the level of output that maximizes their profits at that price.

The leading firm assumes that other firms in the market will not react in such a way as to change the price it has set. They will decide to maximize their profits at the price set by the leader as given. The model of price leadership is called a partial monopoly, because The leader sets a monopoly price based on his marginal revenue and marginal cost. Other firms accept this price as given.

Rice. Figure 9 shows how the price is determined under a partial monopoly. The leading firm determines its demand by subtracting the quantity of goods that other firms sell at all possible prices from market demand. The market demand curve D is shown in Fig. 9 per gr. A. The supply curve of all other firms - Sf is shown on gr. B (Fig. 9). The quantity of goods offered by competitors of the leading company will increase at higher prices. The leading company sells a less significant share of market demand at higher prices.

In Fig. Figure 9 shows that at price Pl, output is qd units. At the same time, the demand curve for gr. B shows that the quantity of goods offered by other firms will be equal to qf = qd-ql. The quantity of goods for which there is demand in the market remaining for the dominant firm (“net demand”) is ql units. This point is on the demand curve Dn. The demand curve then shows how much sales the leading firm can hope to make at any price after subtracting the sales made by other firms.

The leader firm maximizes profits by choosing a price that makes the marginal revenue from satisfying net demand, MRn, equal to its marginal cost. Therefore, the leader's price is P1, and the leader firm will sell ql units. products at this price. Other firms take the price P1 as given and produce qf units.

Price leadership can also be explained by fears on the part of smaller firms about retaliation from the leading firm. This is true when the leading firm can produce at a lower cost than its smaller competitors. When this occurs, smaller firms may hesitate to cut price below the leader. They understand that although they temporarily gain in sales from a price reduction, they will lose the price war that a larger company will unleash, because they have higher costs and therefore their minimum price higher than that of a larger company.

Smaller firms in oligopolistic markets passively follow the leader, sometimes because they believe that larger firms have more information about market demand. They are uncertain about future demand for their products and view the leader's price changes as a sign of changes in future demand.

Pricing that limits entry into the industry.

Firms in oligopolistic markets may set prices in such a way that it is unprofitable for potential new producers in the market to enter the market. To achieve this goal, firms in the market may set prices that do not maximize their current profits. Instead, they set prices so that to deter new producers from entering the market and having a downward impact on future profits.

Firms either collude or follow the example of other firms in setting prices that would prevent outsiders from entering the market. To achieve this goal, they estimate the minimum possible average cost of any new potential producer and assume that any new producer will accept the price set existing firms, and will adhere to it.

Graph A in Fig. Figure 10 shows the LRAC curve of a potential new manufacturer in an oligopolistic market. If the firm cannot rely on a price for its product equal to at least P`=LRACmin, then it will be able to make an economic profit by entering the market. Graph B, Fig. 10 shows the market demand for a product. Suppose that the existing firms in the industry organize a cartel in order to maximize current profits. Then they will set a price Pm corresponding to the output at which MR = MC. At this price, Qm units of the product would be sold, and the existing firms would share the total output among themselves. However, since Pm > LRACmin of potential new producers, the cartel is doomed to failure unless there is a barrier to entry. Consequently, firms know that setting a monopoly price is futile. At a monopoly price, more firms will enter to the market and the quantity of goods offered for sale will increase. Consequently, the price and profits will fall.

An entry price is a price that is low enough to prevent new potential producers from entering the market as sellers. Assume that the firms' average cost curves look the same as those of new producers. In this case, any price above P` will provoke the entry of “outsiders”. Consequently, firms in the industry will have to keep the price at the level P` = LRACmin. At this price they will sell Ql of the product, which is more than they would sell if the price were high enough to encourage new firms to enter the market , but then they receive zero economic profit.

If, however, firms have the advantage of low costs that new potential producers do not have, then they will be able to make long-run economic profits at price P` and at the same time deter potential producers from entering the market.

Entry-restrictive pricing illustrates how fears of new competitors entering a market can encourage profit-maximizing firms to temporarily refrain from exercising their monopoly power in the market.

Cournot duopoly model

A duopoly is a market structure in which two sellers, protected from the entry of additional sellers, are the sole producers of a standardized product with no close substitutes. Economic models of duopoly are useful to illustrate how an individual seller's assumptions about a rival's response affect equilibrium output. The classical model Duopoly is a model formulated in 1838 by the French economist Augustin Cournot. This model assumes that each of two sellers assumes that its competitor will always keep its output unchanged, at the current level. It also assumes that sellers do not learn about their mistakes. In reality, sellers' assumptions about a competitor's reaction are likely to change when they learn about their previous mistakes.

Let us assume that there are only two producers of product X in the region. Anyone wishing to purchase product X must purchase it from one of these two producers. Product X of each company is standardized and has no qualitative differences. No other manufacturer can enter the market. Let us assume that both producers can produce product X at the same costs and that average costs are constant and equal, therefore, to marginal costs. Graph A of Fig. 11 shows the market demand for good X, labeled Dm, along with the average and marginal costs of production. If good X were produced in a competitive market, the output would be Qc units and the price would be Pc=AC=MC.

The two firms producing good X are firm A and firm B. Firm A began producing good X first. Before firm B begins production, firm A has the entire market and assumes that the output of rival firms will always be zero. Because it believes , which has a monopoly, produces the monopoly output corresponding to the point at which MRm = MC. The resulting price is Pm. Assume a linear demand curve. This implies that marginal revenue will fall with output at twice the rate of price. Since the demand curve divides segment Pce in half, then the monopoly output is half of the competitive output. Consequently, the initial output of firm A, maximizing its profit, is Qm units.

Immediately after firm A begins production, firm B enters the market. The emergence of new firms is impossible. Firm B assumes that firm A will not respond by changing output. It therefore begins production, assuming that firm A will continue to produce Qm units of product X. The demand curve that firm B sees for its product is shown in gr. In Fig. 11. It can serve all those buyers who would buy product X if the price fell below the current price of firm A, Pm. Consequently, the demand curve for its output begins at price Pm, when market demand is Qm units. goods. This demand curve is Db1, and sales along this curve represent the increase provided to firm B to the current market output Qm units, which firm A had produced up to this point.

The marginal revenue curve corresponding to the demand curve Db1 - MRb1. Firm B produces a volume of output corresponding to the equality MRb1 = MC. Judging by the counting on the output axis from the point at which the output of product X is equal to Qm units. ,we see that this volume is 0.5.X units. goods. An increase in the market supply of good X from X to 1.5 X units, however, reduces the unit price of good X from Pm to P1. Table 2 presents the output data of each firm for the first month of activity. Each firm's profit-maximizing output is always half the difference between Qc and the volume of production that it assumes another firm will have. Competitive output is the output corresponding to the price P = MC - in this case 2X units. goods. As the table shows, firm A starts with the production of 0.5 Qc, provided that the output of its rival is zero. Then firm B produces 0.5 X of product X this month, which is 0.5(0.5Qc) = 0.25 Qc. This is half the difference between competitive output and monopoly output, which was originally provided by firm A.

A fall in the price of good X, caused by additional production by firm B, leads to a change in the demand curve of firm A. Firm A now expects that firm B will continue to produce 0.5.X units. commodity. She sees demand for her commodity X as beginning at the point on the market demand curve corresponding to monthly output 0.5. X units. Its demand is now equal to Da1, as shown in graph. C, Figure 11. Its profit-maximizing output is now equal to half the difference between competitive output and the volume currently produced by firm B. This occurs when MRa1 = MC. Firm A assumes that firm B will continue to produce 0.5.X units of a commodity after it adjusts its output, therefore firm A's profit-maximizing output is equal to

1/2(2X - 1/2X)=3/4 X .

This can be written as:

1/2(Qc - 1/4Qc)=3/8 Qc,

as shown in Table 2.

Cournot duopoly model (Fig. 11)

First month.

1/2Qc 3/4 Qc Qc Q

Second month.

Duopole Cournot equilibrium table. 2

Month Issue company A Issue. company B

1 1/2Qc 1/2(1/2Qc)=1/4Qc

2 1/2(Qc-1/4Qc)=3/8Qc 1/2(Qc-3/8Qc)=5/16Qc

3 1/2(Qc-5/10Qc)=11/32Qc 1/2(Qc-11/32Qc)=21/64Qc

4 1/2(Qc-21/64Qc)=43/128Qc 1/2(Qc-43/128Qc)=85/256Qc

Final equilibrium

Qa=(1-(1/2Qc+1/8Qc+1/32Qc+...))Qc=(1-1/2(1-1/4))Qc=1/3Qc

Qb=(1/4+1/16+1/64+...)Qc=(1/4(1-1/4))Qc=1/3Qc

Total output =2/3Qc

Now it is firm B's turn to respond again. Firm A will reduce its production from 1/2 Qc to 3/8 Qc, this leads to a decrease in the total supply of good X from 3/4 Qc to 5/8 Qc. As a result, the price of the good rises to P2. Firm B assumes , that firm A will continue to produce this quantity. It views its demand curve as a line starting at the point where market output is 3/8Qc. This demand curve is Db2, indicated on gr. D,Fig. 11. Maximum profit exists at the point where MRb2=MC. This equals half the difference between competitive output and the 3/8 of competitive output that firm A is currently supplying. As shown in Table 2, firm B is now producing 5/ 16 competitive output. The total market output is now 11/16Qc, and the price is reduced to P3. For each month, each duopolist produces half the difference between the competitive output and the output carried out by competitive firm.

As shown in gr. E, Fig. 11, each firm produces 1/3 Qc, and the price is equal to Pe. This is the Cournot equilibrium for a duopoly. It would exist if only each firm stubbornly believed that the other would not regulate its output, which implies that the management of the firm does not take into account its errors, which, of course, is a great simplification. But with more complex assumptions, it becomes difficult to determine the equilibrium conditions.

Response curves.

The same equilibrium can be depicted in another way. The response curves show the profit-maximizing amounts of output that will be carried out by one firm, given the amounts of another rival firm.

Response curve 1 represents the output of firm B as a function of the output of firm A, and response curve 2 does the opposite.

Response Line 1

1/3Qc Response Line 2

1/4Qc1/3Qc 1/2Qc Qc

Any issue above Qc is unprofitable, because the price falls below the level of average costs. Consequently, if the output of one of the firms is equal to Qc units, then the second responds with zero output. Equilibrium is achieved when the two response curves intersect and each firm produces 1/3 Qc. For any other output, firms mutually react to the choice each other's output values.

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