Non-Competitive Market

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Questions:

Generic 6

4 x 6 = 24

Compare between monopoly and monopolistic competition.

Compare between perfect competition and monopolistic competition.

Compare between perfect competition and monopoly.

The market demand curve for a commodity and the total cost for a monopoly firm producing the commodity is given by the schedules below. Use information to calculate the following:

Quantity	0	1	2	3	4	5	6	7	8
Price	52	44	37	31	26	22	19	16	13

Quantity	0	1	2	3	4	5	6	7	8
Total cost	10	60	90	100	102	105	109	115	125

(i) The MR and MC schedules
(ii) The quantities for which the MR and MC are equal
(iii) The equilibrium quantity of output and the equilibrium price of the commodity.
(iv) The total revenue, total cost and total profit in equilibrium.

Generic 3

8 x 3 = 24

Explain any two sources of restricted entry under monopoly.

Explain the main features of barriers to the entry of firms.

Explain the feature of firms mutually interdependent in an oligopoly market.

Why AR curve (demand curve) under monopolistic competition is more elastic than AR curve under monopoly?

What is meant by prices being rigid? How can oligopoly behaviour lead to such an outcome?

10.

List the three different ways in which oligopoly firms may behave.

11.

What is the value of MR when the demand curve is elastic?

12.

Explain why the demand curve facing a firm under monopolistic competition is negatively sloped?

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Answers Key:

Generic 6

4 x 6 = 24

Monopoly	Basis	Monopolistic Competition
Monopoly refers to a market situation where there is a single seller selling a product which has no close substitutes.	Meaning	Monopolistic Competition refers to a market situation in which there are large number of firms selling closely related but differentiated products.
There is a single seller and the monopolist has full control over the supply.	Number of sellers	There are large number of sellers. So, a firm does not have much impact on activities of other firms.
There are no close substitutes of the product. So, there is no competition from new and existing products.	Nature of product	Products are differentiated on the basis of brand, size, colour, shape etc. So, a firm is in a position to influence the price
There is restriction on entry and exit. So, a firm can earn abnormal profits in the long run.	Entry or Exit	Although there is freedom of entry and exit but it is possible only for a competitive firm to enter or leave the industry.
Monopolist is a price-maker as firm and industry are one and the same thing.	Price	Firm is neither a price-taker nor a price maker but has partial control over price due to product differentiation
Downward sloping demand curve is less elastic due to absence of close substitutes.	A demand Curve	Downward sloping demand curve is more elastic due to presence of close substitutes.
Low selling costs are incurred.	Selling cost	Heavy selling costs are incurred on sales promotion.

Perfect Competition	Basis	Monopolistic Competition
It refers to a market situation where there are very large number of buyers and sellers dealing in a homogeneous product at a price fixed by the market.	Meaning	It refers to a market situation in which there are large number of firms selling closely related but differentiated products.
The products sold are homogeneous. So, buyers are willing to pay same price for all products, which leads to uniform price in the market.	Nature of Product	Products are differentiated on the basis of brand, size, colour, shape etc. So, a firm is in a position to influence the price.
Demand curve is perfectly elastic as price remains the same at all levels of output.	Demand Curve	Demand curve slopes downwards as more output can be sold only at less price.
Firm is a price-taker as price is determined by the industry.	Price	Firm is neither a price-taker nor a price-maker but has partial control over price due to product differentiation.
Buyers and sellers have perfect knowledge about market conditions.	Level of Knowledge	Sellers and buyers do not have perfect knowledge due to product differentiation and selling costs incurred by the sellers.
No selling costs are incurred as buyers and sellers have perfect knowledge about market conditions.	Selling Cost	Heavy selling costs are incurred on sales promotion due to lack of perfect knowledge among buyers and sellers.

Perfect Competition	Basis	Monopoly
It refers to a market situation where there are very large number of buyers and sellers dealing in a homogeneous product at a price fixed by the market.	Meaning	Monopoly refers to a market situation where there is a single seller selling a product which has no close substitutes.
There are very large number of sellers and no individual seller has control over activities of other firms	Number of Sellers	There is a single seller and the monopolist has full control over the supply.
The products sold are homogeneous. So, buyers are willing to pay the same price for all products, which leads to uniform price in the market.	Nature of Product	There are no close substitutes of the product. So, there is no competition from new and existing products
Any firm can freely enter or exit from this kind of market. It leads to absence of abnormal profits and abnormal losses in the long run.	Entry and Exit	There is restriction on entry and exit. So, a firm can earn abnormal profits in the long run.
In perfect competition, industry is price maker, firm is price taker because of homogeneous goods.	Price Maker/Taker	Monopolist is a price-maker as firm and industry are one and the same thing.
Buyers .and sellers have perfect knowledge about market conditions.	Level of Knowledge	Sellers and buyers do not have perfect knowledge
Demand curve is perfectly elastic as price remains the same at all levels of output.	Demand curve	Demand curve slopes downwards as more output can be sold only at less price.
Nosellingcosts are incurred as buyers and sellers have perfect knowledge about market conditions.	Selling cost	Selling costs are incurred for informative purposes due to lack of perfect knowledge

(i) Revenue Schedules

Q	P	TR=PxQ	MR=\(\frac{\Delta{TR}}{\Delta{Q}}\)
0	52	0	-
1	44	44	44
2	37	74	30
3	31	93	19
4	26	104	11
5	22	110	6
6	19	114	4
7	16	112	-2
8	13	104	-8

Cost Schedules

Q	TC	MC
0	10	-
1	60	50
2	90	40
3	100	10
4	102	2
5	105	3
6	109	4
7	115	6
8	125	10

(ii) For quantity of 6 units MRis equal to MC.
(iii) Equilibrium quantity of output occurs where MR = MC.
Equilibrium quantity = 6 units
Equilibrium price = Rs.19
(iv) TR = 114
TC = 109
Total profit = TR- TC = 114 - 109 = 5

Generic 3

8 x 3 = 24

(a) Grant of patent rights
(i) When a company introduces a new product or new technology it applies to the government to grant it patent certificate by which it gets exclusive rights to produce new product or use new technology.
(ii) Patent rights prevent others to produce the same product or use the same technology without obtaining license from the concerned company. Patent rights are granted by the government for a certain number of years.
(b) Licensing by Government : A monopoly market emerges when the government gives a firm license, i.e. exclusive legal rights to produce a given product or service in a particular area or region.

(i) The main reason why the number of firms is small is that there are barriers which prevent entry of firms into industry.
(ii) Patents, large capital, control over the crucial raw material etc, prevent new firms from entering into industry.
(iii) Only those who are able to cross these barriers are able to enter.

(i) Interdependence means that actions of one firm affects the actions of other firms.
(ii) Since the number of sellers is small, each firm has to take into consideration the possible reaction of its competitors, when making decisions.
(iii) The business decision of a single seller will have a substantial impact on the product price, output and profits of the rival firms.
(iv) For example the "Na tiona1 Newspapers" market, when the "Economic Times" introduced invitation pricing policy-they offered the newspaper at a price of Rs. 1.50 on weekdays. The Hindustan Times was forced to reduce its prices from Rs.2.50 per copy to Rs.1.50 per copy on weekdays. When Hindustan Times was celebrating its 75 years of service, they offered the newspaper at Rs.1/-weekdays.
The Times of India responded by matching the price cut.

(i) AR curve under both the markets slope downwards.
(ii) However, AR curve under monopolistic competition is more elastic as compared to AR curve under monopoly because of presence of close substitutes.
(iii) AR curve is less elastic in monopoly because of no close substitutes.

(i) Price rigidity refers to a situation in which whether there is change in demand and supply, the price tends to stay fixed.
(ii) In an oligopolistic market firms are in a position to influence the prices.
(iii) However, they stick to their prices in order to avoid a price war. If a firm tries to reduce the price the rivals will also react by reducing their prices. So, it will be of no benefit.
(iv) Likewise, if a firm tries to raise the price other firms will not do so. As a result, the firm which intended to raise the price will lose its customers. So, oligopoly behaviour leads to price rigidity in an oligopolistic market.

10.

Oligopoly firm may-
(i) cooperate with each other and formally have a contract or written document of their policies.
(ii) cooperate with each other but have tacit (informal) understanding.
(iii) not cooperate with each other.

11.

When demand curve is elastic (e > 1), MR is positive.
The relationship is given by,
MR=P\(\left( 1-\frac { 1 }{ e } \right) \)
Graphically, it is shown as is given here.

12.

(i) The demand curve of a firm under monopolistic competition is negatively sloped because of product differentiation.
(ii) The product of the sellers are differentiated but close substitutes of one another.
(iii) Each seller has some degree of monopoly power of 'Making' the price. But since there are many close substitutes available, the result is downward sloping and elastic demand curve.