Monopolistic competition, oligopoly, and duopoly are the three market structures
ID: 1247334 • Letter: M
Question
Monopolistic competition, oligopoly, and duopoly are the three market structures and all three possess similarities and differences explain them . Address the differences between monopolies competitions and oligolopolies.Explanation / Answer
Similarities The two market situations have the following similarities. The number of firms is huge under perfect competition and monopolistic competition. The freedom of entry and exit of firms is there in both the firms. Firms compete with each other. The break even point is established where marginal cost and marginal revenue are equated. In both the market conditions, firms can earn super normal or abnormal profits and can also incur short run loses. Whereas in the long run, firms earn only normal profits. Dissimilarities There are nevertheless certain points of dissimilarities in both the market situations. In the market situation of perfect competition, each firm produces and sells a standardised product so that no buyer has any likings for the commodity of any individual seller over others. Alternatively, there is product disparity under monopolistic competition. The commodities may be similar or more likely to each other however they are not identical. They are close substitutes. They are diverse in the form, in the design, in the colour, in the flavour, packing etc. We can give best examples of Cold Beverages like Pepsi and Coke for monopolistic competition. Under Perfect Competition, price is determined by the influences of demand and supply for the entire industry. Every firm has to sell its product at that price. It cannot influence price by its solitary performance. It has to fiddle with its output to that price. Thus every firm is a price taker and quantity adjuster. Conversely, every firm has its own price policy under monopolistic competition. It cannot control more than a diminutive segment of the total productivity of a product in a gathering. Graphically, the demand curve AR of a firm is perfectly elastic under perfect competition and the marginal revenue MR curve coincides with it. As against this, the demand curve of a firm is elastic and downward inclining under monopolistic competition and its corresponding MR curve lies below it. It entails that a firm will have to reduce the price of its product to increase its sales by attracting some customers of its competitors, provided latter do not reduce their prices. Though the equilibrium stipulations of the two market conditions are the same yet there are disparities in the price marginal cost relationship between the two. When under perfect competition MC = MR, price also equals them since price AR = MR. This is for the reason that, the AR curve is horizontal to the X axis. Since the AR curve inclines downward to the left, the MR curve is below it under monopolistic competition. So price, AR > MR = MC. Another disparity amid the two market situations corresponds to their dimensions. In the long run competitive firms are of the optimum sized and produce to their full capacity for the reason that prior AR = LMC = LAC at its minimum. But under monopolistic competition the firms are of less than the optimum size and possess surplus capacity since the AR curve is downward inclining and cannot be tangent to LAC curve at its minimum point. The firm