![]() ![]() ![]() The demand is highly elastic in the case of monopolistic competition. However, product differentiation is necessary if a company wants to increase the price of its products. Price settingĪs mentioned above, the players in monopolistic competition are price setters and not price takers. This is in contrast to oligopoly where a price change by one player may start a price war. For example, a price change in McDonald’s burgers won't necessarily affect Burger King’s burger price. The action of one company in the case of monopolistic competition does not lead to a change in the strategy of other players. There may be varieties of many qualities in the products but as general consumers are not aware of them, the player may set the strategy to sell items in a way that suits them. Product differentiation is a key concept in monopolistic competition because the players all have similar products which they need to differentiate in order to attract consumer attention. In the case of monopolistic competition, there are usually a few companies that vie for market share.Įxamples include restaurants, such as McDonald’s and Burger King that offer similar products and compete for a similar market share Product Differentiation Competing Companies in Monopolistic Competition The monopolistic competition players rely heavily on advertising to promote their products and grab market share. The profits of players in monopolistic competition are positive in the short term but they approach zero in long run. This means that the competition is price sensitive. ![]() The demand in the case of monopolistic competition is highly elastic in the long run. The players in the case of monopolistic competition all have some market power to be the price setters. However, it has elements of both monopolies and perfect competition in general. The idea of monopolistic competition falls in between pure monopoly and perfect competition. Monopolistic competition is heavily reliant on business strategy and brand differentiation Moreover, the action of one player in monopolistic competition does not affect the business of other players. The barriers to entry and exit are usually low in the case of monopolistic competition. In a market with monopolistic competition, many companies provide services or sell goods of similar nature but these are not perfect substitutes for one another. Energy companies and water supply companies are good examples of public monopolies. Public monopolies provide essential services to the public and are controlled by the government. Companies that have unique research and development facilities, such as pharma companies fall under this category. Natural MonopolyĪ natural monopoly is derived from the unique abilities or attributes of the company. An example of a pure monopoly would be Microsoft Corporation whose software Windows held a 73% market share as of 2021. In a pure monopoly, the products of the company have no substitute. In a pure monopoly, there is only one player in the market and it maintains a high barrier to entry. Monopolies are divided into the following types − Pure Monopoly Therefore, in a monopoly, the company in the dominant position tries to maintain the monopoly as long as possible. It can become a price maker and ignore the conditions of the market while determining the prices.Īnother feature that is seen in monopolies is that the market leader creates a high barrier to entry to stop other businesses enter the industry or sector. In a monopoly, the organization in the dominant position can go against the market forces to control the market. The company that is a sole player in a monopoly, therefore, has a free hand to determine the prices, and demand and supply do not determine the prices. Moreover, there is no availability of substitute products in the market. In a monopoly, competition among firms is absent as only one player is dominant. Many governments enact laws to counter monopoly so that no single organization can control the market and exploit the customers using its dominant position in the market. Monopolies are devoid of competition and hence they are not encouraged in a free market economy. What is a Monopoly?Ī monopoly is a type of market structure where one company has dominance in a sector or an industry. Let us see in detail about monopoly and monopolistic competition. In another way, a monopoly business can buy companies to become the only significant player in the market. Companies usually become monopolies by having access to the entire supply chain, from production to sales which is known as vertical integration. ![]()
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