COMPETITIVE EQUILIBRIUM

Competitive Equilibrium: Monopolistic Competition and Monopoly

[Name and Number of the Course]

[Date of Submission]

Abstract

This paper discusses the market structures monopolistic competition and monopoly. The two are quite similar; however, there are a number of differences between the two. A firm needs to consider the effects that each market structure will have in the short-run and in the long-run. The Wonks Company under discussion has transitioned from monopolistic competition to monopoly. A suggestion for Wonks Company has been given in the paper according to the features of each market structure.

Table of Contents

Thesis Statement …4

Introduction4

Discussion4

Monopoly5

Monopolistic Competition5

Price Discrimination6

Benefits to Stakeholders6

Changes in Prices and Output7

Monopolistic Competition vs. Monopoly7

Conclusion8

References9

Competitive Equilibrium: Monopolistic Competition and Monopoly

Thesis Statement: The market structure of monopolistic competition is better for the firm and consumers, rather than a complete monopoly.

Introduction

Monopolistic competition is the phenomenon where the price of a product or service is determined from the prices charged by rival firms. A firm does not account for the impact its own prices would have on the prices of other firms. This allows firms to act like monopolies in the short run, and earn profits on a greater scale. However, in the long run, this turns into perfect competition and no one firm can solely gain economic profit. There are instances where monopolistic competition results in a natural monopoly. This only happens when the consumer's rationality is low or innovativeness is low. Even the government cannot intervene in such a naturally occurring monopoly, in the market. A monopoly is proven to be inefficient for the market, but can be beneficial in terms of lowering of the cost of production and provision of incentive to innovate (Basak and Pavlova, 2004) (Case, Fair, and Oster, 2009).

Discussion

Investors have shown considerable concern over the effects of a firm's monopoly power on the choice of its production and the firm's shareholder value. There is concern on the overall economy, as well. There is a trade-off between the valuation of future profits and current profits. This trade-off causes the firm to increase their production beyond the competitive benchmark, and lower prices of their products and services. The stakeholders benefit here as they get to make purchases of reasonably priced offerings (Sattinger, 2004).

Monopoly

Monopoly is the phenomenon of having a single supplier or a product or service. The cases in which monopoly arises are quite a few. Firstly, monopoly arises in a market where there are no substitutes for the particular product or service. Most governments purposely ensure monopoly of basic utilities like water and electricity. There is no substitute for using water for showering or washing clothes. Secondly, monopoly is possible in a market that has strict barriers to entry. A barrier to entry is like protection for a firm that another firm will not be able to enter the market and compete with it. There are three major categories of barriers to entry; namely, ownership barrier, legal barrier and natural barrier.

Monopolistic Competition

Monopolistic competition gives little power to firms over setting the prices of their products and ...