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3. Advantages and disadvantages of monopolistic competition

There are dynamic and static theories of monopolistic competition and monopoly. The following disadvantages of monopolistic competition are investigated from the standpoint of the static theory:

The average costs of a monopolist will be able to exceed the possible minimum level, since they are shifted to buyers;

Perhaps the formation and development of a closed cycle of stagnation in production (reduction in output to increase prices - reduction in employment - reduction in consumption, income, demand; a new cycle of decline in output, etc.)

In the dynamic approach of monopoly competition, which was followed by economists of the Austrian school (founder - J. Schumpeter), attention is focused on the superiority of monopoly. Based on the dynamic theory, it is recognized that it is inappropriate for the proponents of the static approach to focus on price competition, since it is not considered to be characteristic in the industry. Companies are destroying the very structure of economic sectors (hypercompetition and Schumpeterian competition) with their own innovations. These conditions reveal the following advantages of monopolistic competition:

Stability of output growth at “ creative destruction», Since a monopoly company is protected from competition in the long term and can improve development and research;

The innovations introduced by the monopolist, in the long term, lead to a reduction in costs to a level that is unattainable in conditions of perfect competition;

Advertising data is good faith, at least in the long run, as buyers think intelligently and manufacturers are not considered "fly-by-night" companies. The static theory of monopoly is generally applicable to mature industries, while the dynamic theory is applicable to growing ones.

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Competition is essential in the life of society. It stimulates the activities of business units. Through competition, commodity producers seem to control each other. Their struggle for the consumer leads to lower prices, lower production costs, and improved product quality.

Also, it should be noted that market competition contributes to a more efficient use of resources in the production of goods necessary for society. Those. the industry draws resources into production exactly to the extent that is necessary to cover effective demand.

In addition, the advantage of competition is that it creates conditions for the optimal use of scientific and technological achievements in the field of creating new types of goods, introducing new technology and technology, the development of better methods of organizing and managing production.

Competition aims manufacturers to meet a variety of needs, to improve the quality of goods and services.

The undoubted advantage of competition is that it requires a flexible response and quick adaptation producers to changing production conditions, and also provides freedom of choice and action for consumers and producers.

The combination of the listed advantages makes perfect competition one of the most efficient types of the market. It is precisely the completely competitive market that is the regulator of social production.

Perfect competition, like the market economy in general, has several disadvantages. Speaking about the fact that perfect competition ensures efficient allocation of resources and maximum satisfaction of the needs of buyers, one should not forget that it proceeds from solvent needs, from the distribution of cash incomes that have developed earlier. This creates equality of opportunity, but does not guarantee equality of results. Perfect competition takes into account only those costs that pay off. However, in the conditions of insufficient specification of property rights, there are benefits (costs) that are not taken into account by firms: they are carried out by society.

In this case, one speaks of collateral external benefits or costs (positive or negative externalities). Therefore, under conditions of insufficient specification of property rights, underproduction of positive and overproduction of negative externalities is possible.

Perfect competition does not provide for the production of public goods, which, although they bring satisfaction to consumers, cannot be clearly divided, evaluated and sold to each consumer separately (piece by piece).

Perfect competition, involving a huge number of firms, is not always able to provide the concentration of resources necessary to accelerate scientific and technological progress.

Thus, for all its advantages, the market for perfect competition cannot be idealized. Small enterprises operating in the market cannot compete with large-scale enterprises saturated with modern technology.

Now about the advantages and disadvantages of monopoly. The study of the laws of the market behavior of monopolies gives grounds to assert that monopolies as business organizations play a significant role in the socio-economic development of any country.

It must be recognized that a monopolist can have a cost advantage through gains from scale and innovation. Indeed, the expansionary behavior of monopoly companies carries with it the potential for economic growth. In addition, monopoly can reduce costs in cases where a significant level of concentration contributes to the full achievement of economies of scale, or is necessary to do so.

Typically, a monopoly company (especially if it is a vertically integrated structure) can also achieve significant advantages in transaction costs... A huge monopoly is able to reduce administrative costs, the costs of various kinds of agreements and the conclusion of contracts between individual production units, combining in its structure the adjacent stages of product manufacturing, R&D, sales, customer service, etc. Obviously, as a result of such a trend towards joining efforts achieves a significant economic effect.

Huge monopoly associations make a significant contribution to the country's GDP and ensure the competitiveness of the national economy. And this is also an indisputable fact.

Flexibility is the basis for maintaining a monopoly. The presence of a set of factors of potential competition determines the unstable nature of modern monopolies. The dynamism of the market development, changes in its structure caused by scientific and technical progress, the intensification of diversification processes, the intensification of the inter-industry and interstate expansion of capital, and the globalization of the economy limit the monopoly power of companies. Therefore, the monopolist is forced to show high mobility, timely adapt to spontaneous market processes, obey their dictates, rebuild depending on changes in market demand, and act in accordance with the requirements of a changing competitive environment. Of course, in this sense, small monopolies have an advantage over giant companies: it is easier for the former to achieve flexibility by being as close as possible to consumers of their own products.

Today, there is no longer any doubt or objection to the fact that a monopoly firm can be more innovatively active than a firm operating in a competitive industry. The high innovative activity of the monopolist is due to the wide opportunities for large-scale financing, significant scientific and technical potential, a combination of economic, technological, organizational factors necessary for the implementation of discoveries and innovations. Opportunities are not the only incentives for a monopolist to innovate, however. Today, innovation for a monopoly is at the same time the basis, condition and guarantee of maintaining a monopoly position. The point is that: 1) innovations ensure the preservation and growth of superprofits of monopolies; 2) technological innovations are necessary condition maintaining sustainable competitive advantages and maintaining leadership, as well as serving as a means of global competition for the largest TNCs; 3) innovation is one of the means of creating strategic barriers to entry into the industry for potential competitors.

Monopoly firms have significant investment potential. The investment opportunities of monopoly firms and their propensity to invest are much higher than those of other market participants. One of the sources of investment is the monopoly profits that such firms tend to invest in research, so they always have the opportunity to stay ahead of their rivals, or at least stay at their level.

It should be noted that the products of the monopolies are of high quality, which allowed them to gain a dominant position in the market.

On the downside, the main one is that monopolies have market power to generate monopoly profits. This leads to the disappearance of the desire of monopolist producers to reduce production costs. This means that there will be no reason to reduce prices for consumers.

To maintain their monopoly position, monopolies establish barriers to entry into the market, which reduces the level of competition in the country's economy.

The activity of monopolies increases the differentiation of income (the incomes of the bulk of consumers fall, which negatively affects and leads to a decrease in the profits of monopolists, i.e. the market power of monopolists is weakening), which is fraught with socio-political conflicts and instability. In addition, the possibility arises of merging the power of monopolies with the power of the state and contributes to the emergence of oligarchic structures (their power will correspond to their personal interests, and not to the common good).

Product differentiation concept

Since product differentiation is characteristic of monopolistic competition, I will take a deeper look at this concept.

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 is not limited only to whether it is a good product or a good one. Even the simple consumer properties of the simplest products are surprisingly diverse. For example, a toothpaste should:

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

Disinfect the oral cavity;

Strengthen the enamel of the teeth;

Strengthen the gums;

Taste good, etc.

And all these properties can be combined in one product only as an exception. In many cases, winning in one product property leads to losing in another. Therefore, the selection of priorities in the main consumer qualities of a product opens up opportunities for a wide variety of products. And they all become unique in their own way and find their consumer - they occupy their own 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, 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 actually differ. The main thing is for him to think so.

3) Conditions 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, a long-term nature of interaction between the seller and the buyer is inherent. An expensive car should work properly not only at the time of purchase, but also throughout its entire service life. The full service cycle includes service at the time of purchase and pre-sale service. Each of these operations can be performed to a different extent (or not performed at all). As a result, one and the same product, as it were, decomposes into a whole range of varieties, sharply differing in their service characteristics and therefore turning 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, behind the imaginary differences in quality, real differences in the advertising presentation of the goods are often hidden, although the consumer may not even be aware of this.

To summarize, 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 obstacles associated with product differentiation. In other words, product differentiation not only creates advantages for the company, but also helps prevent them from being offended by competitors: it is not so easy to repeat the subtle taste of an exquisite liqueur or even an equivalent response to a successful advertising campaign.

Advantages and Disadvantages of Monopolistic Competition

Monopoly competition has advantages and disadvantages.

The advantages of monopolistic competition include:

Product differentiation expands consumer choice;

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

The market 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.

Typically, firms operating in a monopolistic competitive environment are both relatively and absolutely small. Firm size is tightly limited by the rapid onset of scale losses (negative economies of scale). And if existing firms make full use of the possibilities of economies of scale of production, then the sectoral supply will grow due to the entry of new firms into the industry, and not due to the expansion of the activities of old ones.

Small size and predetermines the main disadvantages of this market model:

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

Small size and tough market forces limit the financial scope for risk and R&D (research and development) and innovation activities(since 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 businesses are not technically advanced or innovative.

In this section, we will consider the structure of the market in which numerous firms selling close but imperfect substitute products. This is usually called monopolistic competition — monopolistic in the sense that each manufacturer is above his own version of the product and - since there are a significant number of competitors selling similar products.

The foundations 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- a key characteristic of this market structure. It assumes the presence in the industry of a group of sellers (producers) 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:

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

By creating its own version of the product, each firm acquires a kind of 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, etc. However, they all face competition from companies offering substitute products, i.e. operate in conditions of monopolistic competition.

Product differentiation creates an opportunity limited influence on market prices, since many consumers remain loyal to a particular brand and firm, even with a slight increase in prices. However, this impact will be relatively small due to the similarity of competing firms' products. The cross-elasticity of demand between the goods of monopolistic competitors is quite high. The demand curve has a slight negative slope (as opposed to a horizontal demand curve in perfect competition) and is also characterized by a 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 has a small share of the industry market. As a consequence, a monopolistically competing one is usually characterized by both absolutely and relatively small size.

A large number of sellers:

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

Barriers to entry into the industry

Entering the industry usually not difficult, which is associated with:

• small;
• small initial investment;
• the small size of already operating enterprises.

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

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

Non-price competition

Hard non-price competition Is also a characteristic feature of monopolistic competition. A firm operating in a monopolistic competitive environment may apply three main strategies influence on sales volume:

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

The last two strategies refer 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 loyalty to a particular brand (a price reduction may cause less significant customer outflow from competitors to compensate for the 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 will be 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 the most realistic in relation to the service market ( retail, services of private practitioners or lawyers, hairdressing and beauty services, etc.). As for tangible goods, such as various types of soap, toothpaste or soft drinks, their production, as a rule, is not characterized by small size, large numbers 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 oligopoly structure, and retail market- to monopolistic competition.

The market economy is a complex and dynamic system, with many connections between sellers, buyers and other participants business relationship... Therefore, markets, by definition, cannot be homogeneous. They differ in a number of parameters: the number and size of firms operating in the market, the degree of their influence on the price, the type of goods offered, and much more. These characteristics determine types of market structures or otherwise market patterns. Today it is customary to distinguish four main types of market structures: pure or perfect competition, monopolistic competition, oligopoly and pure (absolute) monopoly. Let's consider them in more detail.

Concept and types of market structures

Market structure- a combination of characteristic industry characteristics of market organization. Each type of market structure has a number of characteristic features that affect how the price level is formed, how sellers interact in the market, etc. In addition, the types of market structures have varying degrees of competition.

Key characteristics of types of market structures:

• the number of selling firms in the industry;
• size of firms;
• number of buyers in the industry;
• type of goods;
• barriers to entry into the industry;
• availability of market information (price level, demand);
• the ability of an individual firm to influence the market price.

The most important characteristic of the type of market structure is level of competition, that is, the ability of a single selling company to influence the general market conditions. The more competitive the market, the lower the opportunity. Competition itself can be both price (change in price) and non-price (change in the quality of goods, design, service, advertising).

Can be distinguished 4 main types of market structures or market models, which are presented below in descending order of the level of competition:

• perfect (pure) competition;
• monopolistic competition;
• oligopoly;
• pure (absolute) monopoly.

Table with benchmarking main types market structure shown below.

Table of the main types of market structures

Perfect (pure, free) competition

The market for perfect competition (English "Perfect competition") - characterized by the presence of many sellers offering a homogeneous product, with free pricing.

That is, there are many companies on the market offering homogeneous products, and each selling firm, by itself, cannot influence the market price of this product.

In practice, and even on the scale of the entire national economy, perfect competition is extremely rare. In the XIX century. it was typical for developed countries, but in our time, only (and then with a reservation) agricultural markets, stock exchanges or the international currency market (Forex) can be attributed to the markets of perfect competition. In such markets, a fairly homogeneous product (currency, stocks, bonds, grain) is sold and bought, and there are a lot of sellers.

Features or conditions of perfect competition:

• number of sales firms in the industry: large;
• the size of the selling firms: small;
• product: uniform, standard;
• price control: none;
• barriers to entry into the industry: practically nonexistent;
• methods of competition: only non-price competition.

Monopolistic competition

Market of monopolistic competition (English "Monopolistic competition") - characterized by a large number of sellers offering a varied (differentiated) product.

In conditions of monopolistic competition, entry to the market is fairly free, there are barriers, but they are relatively easy to overcome. For example, to enter the market, a firm may need to obtain a special license, patent, etc. The control of the selling firms over the firms is limited. The demand for goods is highly elastic.

An example of monopolistic competition is the cosmetics market. For example, if consumers prefer Avon cosmetic products, they are willing to pay more for it than for similar cosmetics from other companies. But if the difference in price is too large, consumers will still switch to cheaper counterparts, such as Oriflame.

Monopolistic competition includes food and beverage markets. light industry, market medicines, clothes, shoes, perfumery. Products in such markets are differentiated - the same product (for example, a multicooker) has different sellers(manufacturers) can have many differences. Differences can manifest themselves not only in quality (reliability, design, number of functions, etc.), but also in service: availability of warranty repairs, free shipping, technical support, payment by installments.

Features or features of monopolistic competition:

• number of sellers in the industry: large;
• firm size: small or medium;
• number of buyers: large;
• product: differentiated;
• price control: limited;
• access to market information: free;
• barriers to entry into the industry: low;
• methods of competition: mainly non-price competition, and limited price competition.

Oligopoly

Oligopoly market (English "Oligopoly") - characterized by the presence on the market of a small number of large sellers, whose goods can be either homogeneous or differentiated.

Login to oligopolistic market difficult, entry barriers are very high. The control of individual companies over prices is limited. Examples of oligopoly are car market, markets cellular, household appliances, metals.

The peculiarity of the oligopoly is that the decisions of companies on the prices of goods and the volumes of their supply are interdependent. The market situation strongly depends on how companies react when the price of products changes by one of the market participants. Possible two kinds of reaction: 1) follow-up reaction- other oligopolists agree with the new price and set prices for their goods at the same level (follow the initiator of the price change); 2) reaction of ignoring- other oligopolists ignore the price change by the initiating firm and maintain the same price level for their products. Thus, the oligopoly market is characterized by a broken demand curve.

Features or oligopoly terms:

• number of sellers in the industry: small;
• firm size: large;
• number of buyers: large;
• product: homogeneous or differentiated;
• price control: significant;
• access to market information: difficult;
• barriers to entry into the industry: high;
• competitive methods: non-price competition, very limited price.

Pure (absolute) monopoly

Pure monopoly market (English "Monopoly") - is characterized by the presence on the market of a single seller of a unique (having no close substitutes) product.

Absolute or pure monopoly is the exact opposite of perfect competition. Monopoly is the market for one seller. There is no competition. The monopolist has full market power: it sets and controls prices, decides how much of a product to offer to the market. Under a monopoly, the industry is essentially represented by just one firm. Market entry barriers (both artificial and natural) are almost insurmountable.

The legislation of many countries (including Russia) fights against monopolistic activities and unfair competition (collusion between firms in setting prices).

Pure monopoly, especially on a national scale, is a very, very rare phenomenon. Examples include small settlements(villages, townships, small towns), where there is only one store, one owner public transport, one Railway, one airport. Or natural monopoly.

Special varieties or types of monopoly:

• natural monopoly- a product in the industry can be produced by one firm at a lower cost than if many firms were engaged in its production (example: utilities);
• monopsony- there is only one buyer in the market (monopoly on the demand side);
• bilateral monopoly- one seller, one buyer;
• duopoly- there are two independent sellers in the industry (such a market model was first proposed by A.O. Cournot).

Features or monopoly terms:

• number of sellers in the industry: one (or two if it comes about duopoly);
• firm size: various (usually large);
• number of buyers: different (there can be many or a single buyer in the case of a bilateral monopoly);
• product: unique (has no substitutes);
• price control: complete;
• access to market information: blocked;
• barriers to entry into the industry: almost insurmountable;
• methods of competition: absent as unnecessary (the only thing is that a company can work on quality to maintain its image).

Galyautdinov R.R.

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