compare and contrast Monopoly and Monopolistic Competition market structures. Analyse the implications for the businesses and their customers of operating in each market structure.

Monopoly and Monopolistic Competition Market Structures

Different types of markets have distinctive defining characteristics. These characteristics are about the structure of supply, demands, and the corresponding prices change within the market. A market can be of perfect competition structure. Monopolistic competition. Oligopoly or even monopoly structures (Helpman& Krugman, 1985). These structures are all different but comparable depending on the firm and the industry. This paper is an exploration of monopoly and monopolistic competition market structures. Using the examples of Circuit Managed Laundry Systems as an example of a monopoly structure and Giffgaff as an example of a monopolistic competition structure, the paper will compare and contrast the two types of market structures.

Monopoly Market Structure

In a monopoly, there is one provider, seller or service provider who dominates the market. This means that the provider has the product that almost all the people in the market requires and is by and large the only provider. Any new entry into this market is often barred by misconceptions and even the realities of the economy. The provider can set prices and benefits at their most profitable level possible since there is no significant competition.

The equilibrium in a monopoly market is dependent on the equality of the supply and demand. The point of equilibrium is where MC = MR. Also, the MC curve cuts MR curve from below as shown in the diagram below. The price determination in a monopoly market is determined by the relationship between MR and MC. If MR exceeds MC, increasing production will lead to increased profits. Similarly, when MC exceeds the MR reducing production can decrease the losses.

 

 

 

 

 

From the diagram above, the business will be in equilibrium at output Om. During this equilibrium, the price will be at Pm with the Price AC being the average total cost. The area between AC and Pm is the monopoly profit area. All the prices must, therefore, lie within this area if the business is to be profitable.

Circuit Managed Laundry Systems in Nottingham is a perfect example of a monopoly market. The company has been in existence for a very long time and has even built a strong reputation in the business (Circuit.co.uk). Through its popularity, the company has been able to get into the minds of many consumers and established itself in areas where its services are needed most. Having a station at all students apartments in Nottingham, the business has ensured that all the laundry services needed by the students are available within reach. The student, therefore, have no reason to seek the services elsewhere. With extensive advertisements and partnering with the local universities, the company has created a barrier to the entry of new businesses (Smiritin.d). If a different business with similar services sought to enter the market, they would be frustrated by the monopoly that Circuit enjoys.

 

Monopolistic Competition Structure

In a monopolistic competition market structure, there are some businesses selling a similar but not identical product or service. This means that the market has more than one businesses with products or services that are direct substitutes of one another. Each, however, have specific specifications and characteristics that make it slightly different from the rest. The products are therefore differentiated by the businesses through location, pricing strategies, packaging, tariffing and advertisements. In this kind of market, entry or exit of a business is relatively easy.

The monopolistic competition market seems to be a combination of both the perfect competition and the monopoly structure. In this structures, commodities are similar but not homogenous; the producers are many and all are substitutes of each other. Like the monopoly structure, the point of equilibrium is where MC = MR. Also, the MC curve in monopolistic competition cuts MR curve from below (see the diagram below).

In the short run, first entrants into the market may enjoy massive profits since they seem to be having a monopoly. However, due to the free entry of products and businesses in the market, no business has abnormal profits in the long run since new substitutes become available and the demand for the original business reduces (Sutton 2001). Firms and businesses existing in a monopolistic competition will seek to create demands for their products or service through the reduction of prices and further product differentiation. However, all the prices must be within the profitable margins for the business to survive.

Giffgaff is a telecommunication service provider. In Nottingham, the company is not the only one providing telecommunication services. However, people will choose to either stay with Giffgaff or use a different provider due to the services specifications of the company and its pricing strategies and tariffs (giffgaff.com). Also, Giffgaff cannot boast of having any considerable market share or a stable market base. The entry of business with better rates and pricings will lead to people choosing the better option based on the differentiations existing. This kind of market, therefore, remains competitive as long as there is ease of doing business and the services are monopolistic ally differentiated.

Comparing Monopoly and Monopolistic Competition

There is one major similarity between monopoly market structures, and the monopolistic competition structure is the nature of the relationship between demands and supplies. From the diagrams above, the point of equilibrium for both structures is where MC = MR. In addition, the MC curve cuts MR curve from below. In addition, the price determination for both is by the relationship between MR and MC. The second similarity between the two types of market structure is that in both structures the demand curve (AR) slopes downwards to the right with the revenue curve (MR) below it (Ergas1984). This means that as the output increases the demand reduces as the business keeps supplying the products or the services. Thirdly, the producer in both market structures is the determiner of the prices. This means that the producer is the ultimate price-maker and can raise or lower the price at will and depend on the market.

There are however differences between the two market structures. First, in the monopoly market structure, there is a single producer in the business(Helpman& Krugman 1985). The market shares that the single producer enjoys results to a monopoly structure. On the other hand, the monopolistic competition structure has two or more producer or provider of the service. The producers compete for the market share depending on the product or service differentiation (whatiseconomics.org). Changes in the price, although controlled by the producer are set a standard that will lead to profitability.

A second difference between the two market structures is that in a monopoly, the prices charged may be different for different customers. This implies that price discrimination is acceptable as part of increasing profits by the firm(whatiseconomics.org). However, a monopolistic competition structure cannot exercise price discrimination due to the nature of the market. There are different providers of the same product, and hence, price discrimination will affect the firms place in the market. Further in a monopoly environment, the businesses are likely to make supernormal profits due to lack of competition and the existing barriers to entry(Ergas 1984). This, however, does not happen with the monopolistic competitive environment since there are no barriers to entry and competition is the order of business.

Conclusion

The market structure adopted by a business or a firm depends on the nature of the market and the products. For most businesses, the competitive environment is the most normal form of structure. This implies that businesses are in an environment of continuous competition for customers and to make profits. However, there are businesses that enjoy a monopoly in an environment where they are the only providers of a service. Circuit Laundries is one of such businesses. The profits in such cases are dependent on the way the business chooses to price its products and service (prezi.com). The monopoly, in addition, bars the entry of competitors. In other businesses, there is a monopolistic competitive structure of the market. In this, there is a single product which is being provided by various businesses but all having it in a different form. As happens in the telecommunication industry, the differentiations and pricing strategies determine the market shares of business.

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