Types of market structures: perfect competition, monopolistic competition, oligopoly and monopoly. Pros and Cons of Monopoly Advantages and Disadvantages of Monopolistic Competition

The concept of product differentiation

Since monopolistic competition is characterized by product differentiation, I will consider this concept in more depth.

Product differentiation arises from the existence of the following differences between market segments:

1) Quality. It is not a one-dimensional characteristic, that is, it does not come down only to whether the product is bad or good. Even simple consumer properties of the simplest products are surprisingly diverse. For example, toothpaste should:

Clean your teeth (this is definitely - it's toothpaste);

Disinfect the oral cavity;

Strengthen tooth enamel;

Strengthen gums;

To taste good, etc.

And all these properties, only as an exception, can be combined in one product. In many cases, a gain in one feature of a product leads to a loss in another. Therefore, the selection of priorities in the main consumer qualities of the product opens up opportunities for a wide variety of products. And all of them become unique in their own way and find their consumer - they occupy their niche in the market.

2) Imaginary quality. Moreover, imaginary qualitative differences between them can serve as the basis for product differentiation. It has long been known, in particular, the fact that a significant percentage of smokers on test trials are unable to distinguish "their" brand from others, although in ordinary life they faithfully buy only it. Let us pay special attention to this circumstance: from the point of view of the market behavior of the consumer, it does not matter whether the goods are really different. The main thing is that he thinks so.

3) Terms and services. Differences in service unite the second (after quality) group of product differentiation factors. The fact is that for a wide group of products, especially for technically complex consumer goods for industrial purposes, the long-term nature of the interaction between the seller and the buyer is characteristic. An expensive car should work properly not only at the time of purchase, but throughout its entire service life. The full service cycle includes service at the time of purchase and pre-sales service. Each of these operations can be performed in a different volume (or not performed at all). As a result, one and the same product, as it were, decomposes into a whole range of varieties that differ sharply in their service characteristics and therefore turn into completely different goods.

Thirdly, it contributes to the formation of new needs.

Fourth, advertising creates product differentiation where there is no real difference between them. As already noted, in the cigarette market, many qualitative differences are imaginary. So, real differences in the advertising presentation of goods are very often hidden behind imaginary differences in quality, although the consumer may not be aware of this.

Summing up, I can say that product differentiation provides firms with certain monopolistic advantages. But this situation has another interesting side. Entry into a monopolistically competitive market is not blocked by any barriers, with the exception of barriers related to product differentiation. In other words, product differentiation not only creates advantages for the company, but also helps not to offend them from competitors: it is not so easy to repeat the delicate taste of fine liquor or even an equivalent response to a successful advertising campaign.

Advantages and disadvantages of monopolistic competition

Monopolistic competition has its advantages and disadvantages.

The benefits of monopolistic competition include:

Product differentiation expands consumer choice;

Strong competition keeps prices to the level marginal cost, which are at the minimum possible level for differentiable products (although somewhat higher than in the market of perfect competition);

The bargaining power of an individual firm is comparatively small, so that firms, for the most part, receive rather than set prices;

This market is the most favorable for buyers.

As a rule, firms operating under monopolistic competition are both relatively and absolutely small. The size of firms is severely limited by the rapid emergence of losses from scale of production (negative economies of scale). And if existing firms make full use of economies of scale, then the industry supply will increase due to the entry of new firms into the industry, and not due to the expansion of the activities of old ones.

Small size predetermines the main disadvantages of this market model:

instability market conditions and the uncertainty of small business. If the market demand is weak, then this can lead to financial losses, bankruptcy, exit from the industry. If the market demand is strong, then it increases the new influx of firms into the industry and limits above-normal profits for incumbents;

Small size and strong market forces limit financial opportunities for risk and R&D (research and development work) and innovation activities(because R&D requires a sufficiently high minimum enterprise size). And although there are exceptions Personal Computer Apple was first developed in a garage), most small firms are not technically advanced or innovative.

Practical tasks and situations

1. What is the basis of market power in firms of monopolistic competitors: after all, the volume of their production and sales can be very small?

2. Why, under conditions of monopolistic competition, firms knock out predominantly non-price competition?

3. Monopolistically competitive firms do not forget to wish their customers a Happy New Year. Why?

6. The demand function of a firm that is an imperfect competitor has the form:

Р= 50 – 2∙Q, the function of its total costs is ТС= 80 + 2∙Q + 5∙Q 2 .

Determine the price and quantity of output in equilibrium. How will these values ​​change if the market becomes perfectly competitive?

Questions for self-control

1. What is the advantage of monopolistic competition over perfect competition?

2. What is the relationship between price and volume of output in conditions of monopolistic competition?

3. Name the equilibrium condition of the firm under monopolistic competition in the long run.

4. What are the conditions for entering the market under monopolistic competition?

5. Under conditions of perfect or monopolistic competition, does the firm have a greater potential for survival?

6. Is there a relationship between the number of sellers of a differentiated product and the degree of market power each of them has? If so, what is the nature of this dependence?

7. If firms expand product differentiation, how will this affect economic efficiency market functioning?

8. Whether firms operating under monopolistic competition ignore the reaction of competitors to their actions.

9. Will a monopolistically competitive firm increase output if marginal revenue exceeds marginal cost?

Tests

1. Under conditions of monopolistic competition, an enterprise produces:

a) a unique product;

b) a differentiated product;

c) a standardized product;

d) a unified product;

e) homogeneous product.

2. Markets of perfect and monopolistic competition have in common:

a) differentiated goods are produced;

b ) there are many buyers and sellers in the market;

c) each firm faces a horizontal demand curve for its product;

d) homogeneous goods are produced;

e) the market behavior of each firm depends on the reaction of its competitors.

3. Supporters of the point of view that monopolistic competition is quite effective and beneficial to consumers argue that:

a) product differentiation favors a better realization of the diverse tastes of consumers;

b) under conditions of monopolistic competition, firms produce an efficient, from the point of view of the market, volume of output;

c) perfect competition leads to a fierce price war between firms;

d) under conditions of monopolistic competition, an efficient, from the point of view of society, use of resources is achieved;

e) all the previous statements are true.

4. Product differentiation does not follow from:

a) features of the design of the goods;

b) its shape, color and packaging;

c) the price of the goods;

d) special trademark and trademark;

e) a special set of services accompanying the sale of this product.

5. In conditions of monopolistic competition:

a) the needs of buyers are satisfied at a lower level than in conditions of perfect competition;

b) the needs of buyers are satisfied more fully than in conditions of perfect competition;

c) production costs and price are reduced due to economies of scale;

d) the demand curve is a horizontal line;

e) producers agree on a joint pricing policy.

6. In conditions of monopolistic competition, in order to maximize profits, a firm must:

a) observe the equality of average costs and prices;

b) to ensure the correspondence of marginal costs and demand;

c) ensure the equality of marginal cost and marginal revenue;

d) keep the excess of total income of total costs.

7. The main difference between monopoly and monopoly
competition is as follows:

a) a monopoly is able to appropriate net profit in the long run, and a monopolistically competitive firm is not capable of;

b) a monopoly has monopolistic power, but a monopolistically competitive firm does not;

c) the condition P > MR is true for a monopoly, and the condition P = MR - for a monopolistically competitive firm.

8. What formula is correct in conditions of monopolistic competition for a firm that achieves equilibrium in the long run.

a) MR = MC and P = LRAC;

b) P = MS and P = LRAC;

c) P = MC and P = MR;

1. Course of economic theory: general foundations of economic theory. Microeconomics. Macroeconomics. Fundamentals of the national economy: tutorial/ ed. prof. A.V. Sidorovich. - M ..: "Business and Service", 2001, Ch. eighteen.

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4. Mikhailushkin, A.I. Economics: a textbook for technical universities / A.I. Mikhailushkin, P.D. Shimko. - M .: "Higher School", 2001. Ch. 2, § 2.8.

5. Nosova S.S. Economic theory: textbook for universities / S.S. Nosov. - M .: VLADOS, 2003, Ch. fourteen.

6. Nureev, R.M. Course of economic theory: a textbook for universities / R.M. Nureyev. - M.: NORMA, 2001, Ch. 7, § 7.3.

7. Economics: textbook / ed. A.S. Bulatov. - M .: YURIST, 2001, Ch. 12, § 3.

8. Economic theory: a textbook for universities / ed. A.I. Dobrynina, L.S. Tarasevich. - St. Petersburg: PETER, 2002, Ch. 7.

9. Economic theory: textbook / ed. ed. IN AND. Vidyapina, A.I. Dobrynina, G.P. Zhuravleva, L. S. Tarasevich. - M .: INFRA-M, 2002, Ch. 15, § 1.

- This is one type of market structure in which a large number of enterprises produce differentiated goods. The main feature of this structure is in the products of existing enterprises. It is very similar, but not completely interchangeable. This market structure gets its name from the fact that everyone becomes a small monopolist that produces their own special version of the product, and also because of the many competing firms that produce similar products.

The main features of monopolistic competition

• Differentiated products and a large number of competitors;
• A high degree of rivalry ensures price as well as fierce non-price competition (advertising of goods, favorable terms of sale);
• The absence of dependence between companies almost completely eliminates the possibility of secret agreements;
• Free opportunity to enter and exit the market for any enterprise;
• Decreasing, forcing to constantly revise the pricing policy.

In the short term

Under the conditions of this structure, up to a certain point, demand is quite elastic with respect to price, however, the calculation of the optimal level of production that allows maximizing income is similar to a monopolistic one.

Demand line for a product DSR, has a steeper slope. Optimal production volume QSR, allowing you to get the maximum income, be at the point of intersection of marginal income and costs. Optimal price level P SR, corresponds to a given volume of production, reflects the demand DSR, since this price covers the averages and also provides a certain .

If the cost is below the average cost, the company needs to minimize its losses. In order to understand whether it is worth releasing products, it is necessary to determine whether the price of products exceeds . If higher than variable costs, then the entrepreneur should produce the optimal volume of production, since it will cover not only variable, but also part of the fixed costs. If the market value is lower than variable costs, then the release of products should be delayed.

In the long run

In the long term, other companies that have entered into begin to influence the size of profits. This leads to the fact that the total purchasing demand is distributed among all companies, the number of substitute goods increases and the demand for the products of a particular firm decreases. In an attempt to increase the level of sales, existing companies spend money on advertising, promotion, product improvement, etc., and, consequently, costs increase.

This market situation will continue until the potential profit that attracts new companies disappears. As a result, the firm remains both without losses and without income.

Economic efficiency and disadvantages

The market of monopolistic competition is the most favorable option for buyers. Product differentiation provides a huge choice of goods and services for the population, and the price level is determined by consumer demand, not by the enterprise. The equilibrium price in monopolistic competition is higher than the marginal cost, in contrast to the price level for products that are set in a competitive market. That is the price that consumers will pay additional goods exceed on their manufacture.

The main disadvantage of monopolistic competition is the size of existing enterprises. The rapid incurrence of losses from scaling up greatly limits the size of firms. This provides stability and uncertainty market conditions and small business development. In the case of insignificant demand, firms can suffer significant financial losses and go bankrupt. And limited financial resources do not allow enterprises to use innovative technologies.

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product differentiation expands consumer choice;

strong competition keeps prices close to the level of marginal costs, which are at the lowest possible level for differentiated products (although somewhat higher than in a perfectly competitive market);

the bargaining power of an individual firm is comparatively small, so that firms, for the most part, receive rather than set prices;

This is the most favorable market for buyers.

Disadvantages of a monopolistic competition market:

As a rule, firms operating under monopolistic competition are both relatively and absolutely small. The size of firms is severely limited by the rapid emergence of losses from production (negative economies of scale). And if existing firms take full advantage of economies of scale, then the industry supply will increase due to the entry of new firms into the industry, and not due to the expansion of old ones.

Small size predetermines the main disadvantages of this market structure.

Volatility in Market Conditions and Small Business Uncertainty. If the market demand is weak, then this can lead to financial losses, bankruptcy, exit from the industry. If market demand is strong, it increases the influx of new firms into the industry and limits above-normal profits for incumbents.

Small Firm Sizes and Rigid Market Forces limit financial opportunities for risk and R&D and innovation (because R&D requires a fairly high minimum enterprise size). While there are exceptions (the Apple personal computer was first developed in a garage), most small firms are not technically advanced or innovative.

Question. 4. The behavior of the firm in an oligopoly

In an oligopoly, large firms can behave differently: do not take into account the behavior of other producers, as in perfect competition; try to anticipate the behavior of other manufacturers; collude with other manufacturers (it is illegal in many countries). Large enterprises in an oligopoly can use four options for the formation of market prices.

First, different competitive prices. Each of the dominant firms can raise or lower the price, regardless of the others.

Secondly, rigid monopoly prices based on overt or covert cartel agreements.

Thirdly, leading monopoly price when firms wait for one of the operating firms to establish a price and follow it.

Fourth, a systematically formed price, which is based on the average production costs of large producers.

For the first time, an attempt to create a theory of oligopoly was made by the French mathematician, philosopher and economist Antoine Augustin Cournot (1801-1877) back in 1838. However, his book, which outlined this theory, went unnoticed by his contemporaries. In 1863 he released new job"Principles of the Theory of Wealth", where he outlined the old provisions of his theory, but without mathematical proofs. Only in the 70s. 19th century followers began to develop his ideas.

The Cournot model assumes that there are only two firms in the market, and each firm assumes that the competitor's price and output remain unchanged, and then makes its own decision. Each of the two sellers assumes that its competitor will always keep its output stable. The model assumes that sellers do not find out about their mistakes. In fact, these sellers' assumptions about the competitor's reaction will obviously change when they learn about their previous mistakes.

The Cournot model is shown in fig. 10.10.

Rice. 10.10. Cournot duopoly model

Let us assume that duopolist 1 starts production first, which at first turns out to be a monopolist. Its output (Fig. 10.10) is q1, which at the price P allows it to extract the maximum profit, because in this case MR = = MC = 0. For a given output, the elasticity market demand is equal to one, and the total revenue reaches a maximum. Then duopolist 2 starts production. In his view, the output will shift to the right by Oq1 and will be aligned with the line Aq1. He perceives segment AD" of the market demand curve DD as a curve of residual demand, to which his marginal revenue curve MR2 corresponds. opportunity to maximize profits. This issue will be a quarter of the total market demand at zero price, OD "(1/2 x 1/2 = 1/4).

In the second step, duopolist 1, assuming duopolist 2's output remains stable, decides to cover half of the still unsatisfied demand. Assuming that duopolist 2 covers a quarter of the market demand, the output of duopolist 1 at the second step will be (1/2)x(1- 1/4), i.e. 3/8 of the total market demand, etc. With each successive step, the output of duopolist 1 will decrease, while the output of duopolist 2 will increase. Such a process will end in balancing their output, and then the duopoly will reach the state of Cournot equilibrium.

Many economists considered the Cournot model to be naive for the following reasons. The model assumes that duopolists do not draw any conclusions from the fallacy of their assumptions about the reaction of competitors. The model is closed, i.e. the number of firms is limited and does not change in the process of moving towards equilibrium. The model says nothing about the possible duration of this movement. Finally, the assumption of zero transaction costs seems unrealistic. Equilibrium in the Cournot model can be represented by response curves showing the profit-maximizing outputs that one firm will produce given the competitor's outputs.

On fig. 10.11. the response curve I represents the profit-maximizing output of the first firm as a function of the output of the second. Response curve II represents the profit-maximizing output of the second firm as a function of the output of the first.

Rice. 10.11. response curves

Response curves can be used to show how equilibrium is established. If we follow the arrows drawn from one curve to the other, starting with output q1 = 12,000, then this will lead to the realization of the Cournot equilibrium at point E, at which each firm produces 8000 products. At point E, two response curves intersect. This is the Cournot equilibrium.

Unlike the Cournot model, in which both firms are equal players in the market, in the Stackelberg model one of them (leader I) is active, and the other (follower II) is passive. The follower gives the leader the opportunity to be the first to offer the desired quantity of goods on the market and considers the unsatisfied industry demand remaining after that as his market share.

Such a relationship between competitors may arise due to the asymmetric distribution of information: the leader knows the follower's cost function, while the follower is not aware of the leader's production capabilities.

In such a situation, firms do not need to make strategic decisions. The leader's profit depends only on his output, since the follower's output is given by his reaction equation: q II = q II ( q I).

For a visual comparison of the Cournot equilibrium with the Stackelberg equilibrium, the reaction lines of duopolists must be supplemented with lines of equal profit (isoprofits). The isoprofit equation is obtained by solving the duopoly profit equation with respect to the volume of output that provides a given amount of profit.

On fig. 10.12 shows how the isoprofits of firm II are located. Given the output of firm I, the corresponding point on the response line of firm II indicates the volume of its production that maximizes profit. Firm II can get the same profit with a larger or smaller output only if firm I reduces the supply on the market, so the tops of the isoprofit are located on the reaction line. The lower the isoprofit is located, the greater the profit it represents, since it corresponds to a smaller competitor's output.

Combining the isoprofit cards of duopolists, you can see combinations q I , q II , corresponding to sectoral equilibrium in the Cournot and Stackelberg models (Fig. 10.13). The point of intersection of reaction lines ( With) represents the equilibrium in the Cournot model, and the point of contact of the reaction line of the follower with the lowest isoprofit of the leader represents the equilibrium in the Stackelberg model ( S I or S II).

From fig. 10.13 it follows that the firm that becomes the leader has an increase in profit compared to that which it received when competing according to the Cournot model: the leader switches to a lower isoprofit.

It can be proved that with linear functions of industry demand and total costs of duopolists in the Stackelberg model, the market price will be lower than in the Cournot model.

Cartel. Since the monopoly price provides the maximum profit in the market of a homogeneous good, duopolists (oligopolists) will receive the greatest profit if they organize a cartel - an explicit or secret conspiracy to limit market supply in order to maintain a monopoly price.

However, the cartel agreement is not a Nash equilibrium, since each member of the cartel can increase profits by increasing their output as long as the others stick to the agreement. The likelihood of violating a cartel agreement increases as the number of its members increases.

The Prisoner's Dilemma clearly shows the features of oligopolistic pricing.

Two thieves were caught red-handed and charged with a number of thefts. Each of them faces a dilemma - whether to confess to old (unproven) thefts or not.

Rice. 10.14. "Prisoner's Dilemma"

If only one of the thieves confesses, then the one who confesses receives the minimum term of imprisonment (1 year), and his unrepentant comrade receives the maximum (10 years). If both thieves confess at the same time, then both will receive a small leniency (6 years each); if both persist, then both will be punished only for the last theft (3 years each). The prisoners sit in different cells and cannot agree with each other. Before us is a non-cooperative (inconsistent) game with a non-zero (in this case, negative) sum. A characteristic feature of this game is the disadvantage for both participants to be guided by their own private (mercenary) interests.

In this section, we will look at the market structure in which numerous firms selling close but not perfect substitute products. This is commonly called monopolistic competition — monopoly in the sense that each manufacturer is above its version of the product and - because there is a significant number of competitors selling similar products.

The basis of the model of monopolistic competition and the name itself were developed in 1933 by Edward H. Chamberlain in his work "The Theory of Monopolistic Competition".

The main features of monopolistic competition:

• Product differentiation
• A large number of sellers
• Relatively low barriers to entry and exit from the industry
• Tough non-price competition

Product differentiation

Product differentiation is a key characteristic of this market structure. It assumes the presence in the industry of a group of sellers (manufacturers) who produce goods that are close, but not homogeneous in their characteristics, i.e. goods that are not perfect substitutes.

Product differentiation can be based on:

• the physical characteristics of the goods;
• location;
• "imaginary" differences related to packaging, trademark, company image, advertising.
• In addition, differentiation is sometimes divided into horizontal and vertical:
• vertical is based on the division of goods by quality or some other similar criterion, conditionally into "bad" and "good" (the choice of TV is "Temp" or "Panasonic");
• horizontal assumes that at approximately equal prices, the buyer divides goods not into good or bad, but into those that correspond to and do not correspond to his taste (the choice of a car is Volvo or Alfa-Romeo).

By creating its own version of the product, each firm acquires, as it were, a limited monopoly. There is only one manufacturer of Big Mac sandwiches, only one manufacturer of Aquafresh toothpaste, only one publisher of the School of Economics magazine, and so on. However, they all face competition from companies offering substitute products, i.e. operate under monopolistic competition.

Product differentiation creates an opportunity limited influence on market prices, since many consumers remain committed to a particular brand and firm even with some price increase. However, this impact will be relatively small due to the similarity of products of competing firms. The cross elasticity of demand between the products of monopolistic competitors is quite high. The demand curve has a slight negative slope (in contrast to the horizontal demand curve under perfect competition) and is also characterized by high price elasticity of demand.

A large number of manufacturers

Similar to perfect competition, monopolistic competition is characterized by a large number of sellers, so that the individual firm occupies a small share of the industry market. As a consequence, a monopolistic competitor is usually characterized by both absolute and relatively small size.

A large number of sellers:

• one side, excludes the possibility of collusion and concerted action between firms to limit output and raise prices;
• with another - does not allow firm in a significant way influence market prices.

Barriers to entry into the industry

Entry into the industry usually not difficult due to:

• small ;
• small initial investment;
• small size of existing enterprises.

However, due to product differentiation and brand loyalty, market entry is more difficult than under perfect competition. The new firm must not only produce competitive products, but also be able to attract buyers of existing firms. This may require additional costs for:

• strengthening the differentiation of its products, i.e. providing it with such qualities that would distinguish it from those already available on the market;
• advertising and sales promotion.

Non-price competition

Rigid non-price competition is also a characteristic feature of monopolistic competition. A firm operating under monopolistic competition may apply three main strategies impact on sales volume:

• change prices (i.e. implement price competition);
• produce a product with certain qualities (i.e. strengthen differentiation of your product technical specifications , quality, services and other similar indicators);
• revise advertising and marketing strategy (i.e. strengthen the differentiation of your product in the field of sales promotion).

The last two strategies are related to non-price forms of competition and are more actively used by companies. On the one hand, price competition is difficult due to product differentiation and consumer commitment to a particular trademark(price reduction may cause a less significant churn of buyers from competitors to compensate for loss in profits), with another- a large number of firms in the industry leads to the fact that the effect of the market strategy of an individual company is distributed among so many competitors that it will be practically insensitive and will not cause an immediate and targeted response from other firms.

It is usually assumed that the model of monopolistic competition is most realistic in relation to the service market ( retail, services of private practitioners of doctors or lawyers, hairdressing and beauty services, etc.). With regard to material goods such as various brands of soap, toothpaste or soft drinks, then their production, as a rule, is not characterized by small size, large number or freedom of entry into the market of manufacturing firms. Therefore, it is more correct to assume that wholesale market of these goods belongs to the oligopolistic structure, and retail market to monopolistic competition.