Monopolistic competition combines features of both monopoly and perfect competition. An enterprise is a monopolist when it produces a particular kind of product that is different from other products on the market. However, the competition of monopolistic activity is created by many other firms that produce a similar, not completely. This type of market is closest to the real conditions for the existence of firms that produce consumer goods or provide services.

Definition

Monopolistic competition is a situation in the market when many manufacturing firms produce a product similar in purpose and characteristics, while being monopolists of a particular type of product.

The term was introduced by the American economist Edward Chamberlin in the 1930s.

An example of monopolistic competition is the shoe market. A shopper may prefer a particular shoe brand for a variety of reasons: material, design, or hype. However, if the price of such shoes is excessively high, he can easily find an analogue. Such a restriction regulates the price of the product, which is a feature of perfect competition. The monopoly is provided by a recognizable design, patented production technologies, unique materials.

Services can also act as goods of monopolistic competition. Restaurants are a prime example. For example, fast food restaurants. They all offer roughly the same dishes, but the ingredients often differ. Often, such establishments strive to stand out with a branded sauce or drink, that is, to differentiate their product.

Market Properties

The market of monopolistic competition is characterized by the following features:

• It interacts with a large number of independent buyers and sellers.
• Almost anyone can start working in the industry, that is, the barriers to entry into the market are quite low and are more related to the legislative registration of production activities, obtaining licenses and patents.
• To successfully compete in the market, the company needs to produce products that differ from the products of other firms in terms of properties and characteristics. This division can be either vertical or horizontal.
• When setting the price of a product, firms are not guided either by production costs or by the reaction of competitors.
• Both producers and buyers have information about the mechanisms of the market of monopolistic competition.
• Competition for the most part is non-price, that is, the competition of product characteristics. The company's marketing policy, in particular advertising and promotion, has a significant impact on the development in the industry.

A large number of manufacturers

Perfect and monopolistic competition is characterized by a sufficiently large number of producers in the market. If hundreds and thousands of independent sellers operate simultaneously in the market of perfect competition, then in a monopolistic market I offer several dozen firms. However, this number of manufacturers of the same type of goods is enough to create a healthy competitive environment. Such a market is protected from the possibility of collusion between sellers and artificial price increases with a decrease in production volumes. The competitive environment does not allow individual firms to influence the overall level of the market price.

Barriers to enter the industry

It is relatively easy to get started in the industry, but to successfully compete with existing firms, you will have to make efforts to differentiate your product more, as well as to attract customers. Significant investments will require advertising and "promotion" of the new brand. Many buyers are conservative and trust a time-tested manufacturer more than a newcomer. This can hinder the process of going to market.

Product differentiation

The main feature of a monopolistic competitive market is the differentiation of products according to certain criteria. These can be real differences in the field of quality, composition, materials used, technology, design. Or imaginary, such as packaging, company image, trademark, advertising. Differentiation can be vertical or horizontal. The buyer divides the proposed similar products according to the quality criterion into conditionally “bad” and “good”, in this case we are talking about vertical differentiation. Horizontal differentiation occurs when the buyer focuses on their individual taste preferences, with other objectively equal characteristics of the product.

Differentiation is the main way a firm stands out and takes a place in the market. The main task: to determine your competitive advantage, target audience and set an acceptable price for it. Marketing tools help to promote products in the market and contribute to the growth of brand value.

With such a market structure, both large manufacturers and small enterprises focused on working with a specific target audience can survive.

Non-price competition

One of the main features of monopolistic competition is non-price competition. Due to the fact that there are a large number of sellers on the market, price changes have little effect on the volume of sales. In such conditions, firms are forced to resort to non-price methods of competition:

• make more efforts to differentiate the physical properties of their products;
• provide additional services (for example, after-sales service for equipment);
• attract customers through marketing tools (original packaging, promotions).

Profit maximization in the short run

In the short run model, one factor of production is fixed in terms of cost, while other elements are variable. The most common example of this is the production of a good requiring manufacturing capacity. If the demand is strong, in the short term, only the amount of goods that the factory capacity allows can be obtained. This is due to the fact that it takes a significant amount of time to create or acquire a new production. With good demand and an increase in price, it is possible to reduce production at the plant, but still have to pay for the cost of maintaining the production and the associated rent or debt associated with the acquisition of the enterprise.

Suppliers in monopolistic competitive markets are price leaders and will behave similarly in the short term. Just as in a monopoly, a firm will maximize its profit by producing goods as long as its marginal revenue equals its marginal cost. The profit maximization price will be determined based on where the maximum profit falls on the average revenue curve. Profit is the sum of the product multiplied by the difference between the price minus the average cost of producing the good.

As can be seen from the graph, the firm will produce the quantity (Q1) where the marginal cost (MC) curve intersects with the marginal revenue (MR) curve. The price is set based on where Q1 falls on the average revenue (AR) curve. The firm's profit in the short run is represented by the gray box, or the quantity times the difference between the price and the average cost of producing the good.

Because monopolistically competitive firms have market power, they will produce less and charge more than a perfectly competitive firm. This results in a loss of efficiency for society, but from a producer's point of view, desirable because it allows them to make a profit and increase the producer's surplus.

Profit maximization in the long run

In the long run model, all aspects of production are variable and therefore can be adjusted to reflect changes in demand.

While a monopolistic competitive firm may make a profit in the short run, the effect of its monopoly price will reduce demand in the long run. This increases the need for firms to differentiate their products, leading to an increase in the average total cost. A decrease in demand and an increase in cost causes the long-run average cost curve to become tangent to the demand curve at the profit-maximizing price. This means two things. First, that firms in a monopolistic competitive market will eventually incur losses. Secondly, the firm, even in the long run, will not be able to make a profit.

In the long run, a firm in a monopolistic competitive market will produce the quantity of goods where the long run cost (MC) curve intersects marginal revenue (MR). The price will be set where the quantity produced falls on the average income (AR) curve. As a result, the firm will suffer losses in the long run.

Efficiency

Due to product diversification, the firm is a kind of monopolist of a particular version of the product. This is where monopoly and monopolistic competition are similar. The manufacturer can reduce the volume of output, while artificially inflating the price. Thus, an excess of production capacity is created. From the point of view of society, this is inefficient, but it creates conditions for greater diversification of the product. In most cases, monopolistic competition is favored by society because, thanks to the variety of similar, but not exactly identical, products, everyone can choose a product according to their individual preferences.

Advantages

1. There are no serious barriers to entry into the market. The opportunity to make a profit in the short term attracts new manufacturers, which forces old firms to work on the product and apply additional demand stimulation measures.
2. Variety of similar but not exactly identical products. Each consumer can choose a product according to personal preferences.
3. The market of monopolistic competition is more efficient than monopoly, but less efficient than perfect competition. However, in a dynamic perspective, it encourages manufacturers and retailers to use innovative technologies to maintain market share. From the point of view of society, progress is good.

Flaws

1. Significant advertising costs that are included in the cost of production.
2. Underutilization of production capacities.
3. Inefficient use of resources.
4. Fraudulent manoeuvres, which create false product differentiation, which misleads consumers and creates unreasonable demand.

Monopolistic competition is a market structure in which several dozen manufacturers of a similar, but not absolutely identical product operate on the market. This combines the features of both monopoly and perfect competition. The main condition for monopolistic competition is product diversification. The firm has a monopoly on a particular version of the product and may overprice, creating an artificial scarcity of the product. This approach encourages firms to use new technologies in production in order to remain competitive in the market. However, this market model contributes to overcapacity, inefficient use of resources and rising advertising costs.

Monopolistic competition. The behavior of the firm in conditions of monopolistic competition

Monopolistic competition is a type of market imperfect competition , in which sellers of differentiated products compete with each other for sales volumes. The products of firms in a monopolistic competition market are close but not completely interchangeable, that is, each of the many small firms produces a product that is slightly different from the products of its competitors.

The number of firms on the market can reach 25, 40, 60, etc. These include restaurants, bakeries, service stations, the production of toothpaste, soap, deodorants, washing powder, the drug market, etc.

The market of monopolistic competition is characterized by the following main features :

• The presence of many sellers and buyers (the market consists of a large number of independent firms and buyers), but less than under perfect competition.
• The production of differentiated products that have many close but imperfect substitutes. Product differentiation can be based not only on differences in the quality of the product itself, but also on those services that are associated with its maintenance. Attractive packaging, more convenient location and opening hours of the store, better customer service, availability of a discount - all this can attract a buyer.
• Low barriers to entry into the industry. This does not mean that starting a monopoly competitive firm is easy. Difficulties such as problems with registrations, patents and licenses take place in the market of monopolistic competition.
• Awareness of sellers and buyers about market conditions.
• Presence of both price and non-price competition. Non-price competition uses such non-price product parameters as novelty, quality, reliability, prospects, compliance with international standards, design, ease of use, after-sales service conditions, etc.

In the short run, the firm's behavior under monopolistic competition much the same behavior monopolies . Since the product of this firm differs from the products of competing firms in special qualitative characteristics that appeal to a certain category of buyers and a sufficient number of consumers are willing to pay a higher price, the firm can raise the price of its product without dropping sales.

Like a monopoly, a firm underproduces a little and overprices it. Thus, monopolistic competition is similar to a monopoly situation in that firms have the ability to control the price of their goods.

In the long run, monopolistic competition similar perfect competition . With free market access, the potential for profit attracts new firms with competing brands, driving profits to zero. The same process works in reverse as well. If demand in a monopolistic competition market declined after equilibrium was reached, firms would leave the market.

This is because a reduction in demand would make it impossible for firms to cover their economic costs. They will exit the industry and move their resources to more profitable ventures. As a result, the demand and marginal revenue curves of the remaining sellers in the market will shift upwards. The exit of firms from the industry will continue until a new equilibrium is reached.

7.4. PRICING IN CONDITIONS
MONOPOLISTIC COMPETITION

Perfect competition and monopoly are opposite extreme models of market structures. However, there may be intermediate models that are not fully competitive, are not controlled by a single vendor, and are much more common. Monopolies, owning even 99% of the market, cannot maintain their power for a long time. Over time, there are multiple divisions or mergers, which ultimately leads to the competition of strong rivals.

A. Marshall, because of his unwillingness to draw a distinction between perfect and less perfect competition, practically delayed the development of both the theory of competition and the theory of monopoly. However, the discrepancies between theory and reality were so obvious that the monopolistic competition model was an instant success in the 1930s. and extremely quickly entered the mainstream of microeconomic theory.

Under monopolistic competition, firms have some control over price. In contrast to the conditions of perfect competition, each individual producer, by changing the volume of output, can affect the price of his product.

This is possible if competing firms sell a non-standardized product. Opportunities differentiation goods in terms of quality, appearance, reputation (trademark) and other characteristics give each seller a measure of monopoly power over the price.

The market for detergents, for example, offers many varieties. Monopolistic competition is the market for confectionery, household appliances, etc. At the same time, firms face competition from existing firms or new firms entering the industry; The market is open for entry and exit.

Monopolistic competition A market structure in which many sellers compete to sell a differentiated product in a market where new sellers can enter.

The main features of a market with monopolistic competition:

• The product of each firm trading in the market (differentiated product) is an imperfect substitute for the product sold by other firms, but its cross elasticity must be positive and relatively large. Product differentiation arises from differences in consumer properties, quality, service, and advertising. Often the consumer pays not only for quality, but also for the brand.
• There are a relatively large number of sellers in the market, each satisfying a small but not too small share of the market demand for a common type of product sold by the firm and its rivals. The share of the company must be more than 1%. In a typical case - from 1 to 10% of sales in the market during the year. None of the firms has a decisive advantage over the others.
• Sellers in the market place no regard for the reactions of their rivals when choosing how much to charge or how much to produce. This is a consequence of the fact that the number of sellers is large and the decision of one of them has little effect on the position of others.
• The market has conditions for free entry and exit. New firms are free to enter, but established firms have an advantage and newcomers will experience difficulty, as it is not easy for a new brand or new service to establish a reputation.

Thus, monopolistic competition is similar to monopoly, since individual firms can control the price, but it is also similar to perfect competition, since each product is sold by many firms and there is free entry and exit in the market.

7.4.1. DEMAND CURVE FOR PRODUCTS OF A MONOPOLISTICALLY COMPETITIVE ENTERPRISE

Since each competitor sells a variety of a particular good that is different from all others, he acts as a monopolist in relation to his group of regular buyers. Therefore, the demand curve for his products has a negative slope and he himself determines the volume of his supply and price. But since the products produced by monopolistic competitors are easily interchangeable, the demand for the products of an individual competitor depends not only on the price of its products, but also on the prices of other competitors' products.

Schedule on rice. 7.28 demonstrates the differences in the behavior of enterprises in a monopoly and monopolistic competition. On rice. 7.28 line AB is the demand curve under complete monopoly, while the broken line CDEK is the demand curve under monopolistic competition.

The producer feels like a monopolist only in the interval Q 2 Q 3 . If he decides to reduce the volume to Q 1 so that the price is P 1 ", some buyers will go to

Rice. 7.28. Broken demand curve for products under monopolistic competition

competitors and the price will be set at the level P 1 Accordingly, when setting a low price P 4, the manufacturer expects to produce Q 4 ", however, his competitors have also reduced prices and he has to increase the volume to Q 4.

7.4.2. SHORT-TERM FIRM EQUILIBRIUM UNDER MONOPOLY COMPETITION

On which part of its demand curve a monopolistic competitor chooses a combination of P, Q, is determined by the Cournot point, while, most likely, the firm will receive a monopoly profit if P>AC.

Thus, a firm under monopolistic competition in the short run behaves like a monopolist, which is shown in Fig. rice. 7.29. The firm will produce Q MK units of production, focusing on the profit maximization condition for the monopoly MC=MR, at the demand price for a given output P MK. The shaded area above firm AC's average cost is the profit the firm will earn in the short run.

7.4.3. LONG-TERM EQUILIBRIUM UNDER MONOPOLY COMPETITION

However, in a market of monopolistic competition, this cannot last long. Economic profit will attract other firms to the industry, which will start producing a similar product, or the firm itself in the long run, trying to increase profits, can expand by building new facilities. This will lead to supply increase this type of product and price reduction.

For example, if one firm offers a whitening toothpaste, after determining the profitability, other firms will offer similar toothpastes to the market. In the long run, the D and MR curves will shift down for a given firm.

The long-run equilibrium in a monopolistically competitive market is similar to the perfectly competitive equilibrium in that neither firm earns more than normal profit ( rice. 7.30).

Thus, under conditions of monopolistic competition, as well as under perfect competition, the equilibrium price in the long run is equal to the average

costs and firms do not earn economic profits. However, in conditions of monopolistic competition, products will not be produced at the minimum average cost, as in perfect competition. Due to the negative slope of the D line, it touches the LAG curve to the left of the LAG low.

Consequently, in a state of long-run equilibrium, monopolistic competitors have excess production capacity, and because of this, differentiated goods are more expensive than standard goods. The shaded area rice. 7.30- Paying for diversity. If the product would be standardized and produced under perfect competition, then the condition P = MC = LAC min would be satisfied.

From the discrepancy between the estrus of long-term equilibrium and the point of minimum average costs, the following follows:

• the market structure of monopolistic competition forces the buyer to overpay for the goods. The payment for product differentiation is equal to the difference between the equilibrium price established under monopolistic competition and the price under perfect competition;
• under monopolistic competition, the volume is less than the volume of production under perfect competition;
• since at the point of long-run equilibrium the demand price is higher than the firm's marginal cost, there will be buyers who would be willing to pay more for an additional unit of goods than the firm's cost would be. From the point of view of buyers, the industry underutilizes resources to produce the volume of goods they need. However, increasing output will cut firms' profits, so they won't.

Thus, the higher the degree of product differentiation, the more imperfect competition in the market and the greater the deviation of the capacities used, production volumes and prices from the most efficient ones.

Free entry to the market prevents firms from extracting economic profits in the long run. If, after achieving equilibrium in the market with

Rice. 7.29. Equilibrium of a firm under monopolistic competition in the short run

Rice. 7.30. Equilibrium of a firm under monopolistic competition in the long run

monopolistic competition will reduce demand, then firms will leave the market, as P

Advertising and other promotional activities are firms' attempts to increase demand for their product. If advertising is not important for a company in conditions of perfect competition due to the impossibility of influencing the price, for a monopolist - due to the absence of competitors, then for a company in conditions of monopolistic competition it is the main tool in the struggle for existence.

For example, according to Financial Newspaper, more than 10 domestic firms spend more than 1 million rubles on advertising in the press alone. These are such firms as Party, Vist, Samos, etc. Among the product groups, the most frequently advertised are: computers, electrical household goods, office equipment, audio and video equipment, cars, furniture, building materials, communications.

Schedule on rice. 7.31 shows how a monopolistic competitor can increase its market share by spending on advertising. Advertising costs increased the cost per unit of output (AC 1, AC 2), but at the same time demand for the firm's products (D 1 , D 2) increased, and as a result, its revenue increased.

TR 2 = P 2 Q 2 > TR 1 = P 1 Q 1 .

Schedule on rice. 7.32 shows the profit of the firm after advertising in the short period. As already noted, significant costs are associated with advertising and other promotional activities, therefore, the average costs for any release after the advertising campaign will be AC ​​2, respectively

The profit-maximizing output is now the one for which MR 2 = MC 2 . On the graph, this is the point K 2, the output is equal to Q 2, the price is P 2, which corresponds to the demand curve D 2. In the absence of any advertising, this firm would earn zero economic profit, as shown in the graph (point E, where P 1 = AC 1). Advertising allows the firm to generate positive economic profits (shaded area). However, this is only possible in the short term.

But since entry into the market of monopolistic competition is free, the positive profit the firm earns as a result of additional advertising spending will attract new manufacturers to the market who will produce a similar product and imitate the marketing program of the successful firm. As a result, the demand and marginal revenue curves will shift down. The combination of increased costs and reduced demand in the long run will reduce the resulting economic profit to zero ( rice. 7.33).

However, since advertising has served to increase demand for all sellers in a monopolistic market and has contributed to the entry of new producers into the market, the total consumption of the product increases and excess capacity is lower than it would be in the absence of advertising.

Monopolistic competition is a type of imperfect competition in the market in which many producers sell products that are different from each other. The firm monitors the prices set for other products, but at the same time tries to ignore the impact of the cost of other goods. Models of monopolistic competition can often be seen in light industry. Typically, such a system is valid for firms in various industries in a market structure: restaurants, clothing, footwear, as well as the service sector (usually in large cities), etc. Edward Hastings Chamberlin is considered the "founding father" of the concept, who wrote groundbreaking book The Theory of Monopolistic Competition (1933). Joan Robinson published The Economics of Imperfect Competition in which she compared two types of competition in the market.

Specifications

Monopolistically competitive markets have the following characteristics:

1. There are many producers and many consumers in the market, and no single business has complete control over the market price.
2. Consumers believe that there are non-price differences between competitors' products.
3. There are several barriers to entry and exit.
4. All manufacturers collectively have some degree of price control.

In the long run, the characteristics of monopolistic competition are in fact the same as those of perfect rivalry between producers. The difference between them is that in the first type, the market produces heterogeneous products. The firm makes a profit in the short run, but may lose it in the long run as demand decreases and the average total cost increases.

Features of the market of monopolistic competition

So, the market of monopolistic competition has 6 distinctive features, these are:

1. Product differentiation.
2. Lots of firms.
3. There are no major barriers to entry and exit to the market in the long term.
4. Independent decision making.
5. Some degree of market power.
6. Buyers and sellers do not have complete information (imperfect information.

Let us consider the features of monopolistic competition in more detail, talking about each separately.

Product differentiation

Firms in monopolistic competition sell products that have real or perceived non-price differences. However, they are not large enough to exclude other goods as substitutes. Technically, the cross elasticity of demand between products in such a market is positive. They perform the same basic functions, but have differences in qualities such as type, style, quality, reputation, appearance, which are usually needed to distinguish them from each other. For example, the main task of vehicles for moving people and objects from point to point is the rationality of the design, comfort and safety. However, there are many different types of vehicles, such as scooters, motorcycles, trucks and cars.

Many firms

Monopolistic competition exists when there are a large number of firms in each product group, as well as a number of companies on the so-called sideline that are ready to enter the market. The fact that there are a large number of participants gives each of them the freedom to set prices without participating in the strategic decisions regarding the prices of other firms, and the actions of each of the companies do not actually matter.

How many firms must be in a market structure of monopolistic competition to maintain equilibrium? The answer to this question depends on factors such as fixed costs, economies of scale, and the degree of product differentiation. In addition, the higher the degree of product differentiation, the more a company can separate itself from other competitors, and the fewer participants will be in market equilibrium.

No major barriers to market entry in the long term

It doesn't cost much to enter and exit the market. There are numerous firms that are willing to become new entrants, each with their own unique product. Any company that is unable to meet its costs can exit the game without the financial cost of liquidation. Another thing is that it is necessary to create such a company and a product that will be able to withstand the conditions and stay afloat.

Independent decision making

Each firm of monopolistic competition sets its own terms of exchange for its product. The company does not look at what impact the decision may have on competitors. The point of this approach is that any action will have such a small impact on the market as a whole that the firm can act without fear of serious competition. In other words, each business entity feels free to set prices.

market power

Firms in monopolistic competition have some degree of market power. This means that participants have control over the terms and conditions of the exchange, namely, they can raise prices without losing all their customers. And the source of such power is not a barrier to entry into the market. Firms of monopolistic competition can also lower the cost of a product without triggering a potentially disastrous price war with competitors. In such a situation, the demand curve is very elastic, although not flat.

Inefficiency

There are two sources under which the market of monopolistic competition is considered inefficient. First, at optimal entry, the firm sets a price that exceeds marginal cost, with the result that the company maximizes profit at which marginal revenue equals marginal cost. Since the demand curve is sloping downward, this means that the participant will absolutely set a price that exceeds marginal cost. The second source of inefficiency is the fact that firms operate with excess capacity. That is, the company will first maximize profit when entering the market. But under both pure and monopolistic competition, players will operate at the point where demand or price equals average cost. For a firm in a purely competitive market, this equilibrium is where the demand curve is perfectly elastic. Thus, in the long run, it will be tangent to the average cost curve at the point to the left of the low. The result is an excess of production capacity and monopolistic competition, the balance of which will be disturbed.

Perfect competition and pure monopoly are two extreme cases of market structure. Both are extremely rare. An intermediate and much more realistic stage is monopolistic competition. In this case, firms, though, face competition from other firms in the industry or already beings. sellers, but have some power over the prices of their goods. This market structure is also characterized by differentiation of goods, i.e. Many firms offer similar but not identical products.

Difference between pure monopoly and perfect competition.

Imperfect Competition exists when two or more sellers, each with some control over the price, compete for sales. This happens in two cases:

Firms sell non-standardized products

When price control is determined by the market share of individual firms (in such markets, each seller produces a sufficiently large part of the product to significantly affect supply, and therefore prices.

Also, in many cases, price control in the market can be explained by a combination of these two factors.

Monopolistic competition occurs when many sellers compete to sell a differentiated product in a market where new sellers can enter.

A market with monopolistic competition is characterized by the following:

1. The product of each firm trading on the market is an imperfect substitute for the product

sold by other companies.

Each seller's product has exceptional qualities and characteristics that cause some buyers to prefer its product to that of a competing firm. Product differentiation means that an item sold on the market is not standardized. This may be due to actual quality differences between products or to perceived differences that result from differences in advertising, brand prestige, or “image” associated with owning the item. .

2. There are a relatively large number of sellers on the market, each of which

satisfies a small but not microscopic share of the market demand for a generic type

goods sold by the firm and its rivals.

Under monopolistic competition, the size of the market shares of firms in general exceeds 1%, i.e. the percentage that would exist under perfect competition. Typically, a firm accounts for between 1% and 10% of sales in the market during the year.

3. Sellers in the market do not consider the reaction of their rivals when choosing which

set the price of their goods or when they choose annual volume targets

sales.

This feature is still a consequence of the relatively large number of sellers in the market with monopolistic competition. if an individual seller cuts the price, it is likely that the increase in sales will occur not at the expense of one firm, but at the expense of many. As a result, it is unlikely that any individual competitor will suffer a significant loss in market share due to a decrease in the selling price any particular firm. Therefore, there is no reason for competitors to react by changing their policy, since the decision of one of the firms does not significantly affect their ability to make profits. The firm knows this and, therefore, does not take into account any possible competitors' reactions when choosing their price or sales target.

4. There are conditions on the market for free entry and exit

With monopolistic competition, it is easy to start a firm or leave the market. Profitable market conditions with monopolistic competition will attract new sellers. However, entry into the market is not as easy as it was under perfect competition, because new sellers often experience difficulties with their new brands and services to buyers. Therefore, existing firms with an established reputation can maintain their advantage over new producers. Monopolistic competition is similar to a monopoly situation, since individual firms have the ability to control the price of their goods. It is also similar to perfect competition, because. each commodity is sold by many firms, and there is free entry and exit in the market.

The existence of an industry under monopolistic competition .

Although each seller's product is unique in a market with monopolistic competition, enough similarities can be found between different kinds of products to group sellers into broad categories similar to an industry.

Product group represents several closely related but not identical products that satisfy the same customer need. In each product group, sellers can be considered as competing firms within an industry. when defining an industry, a number of assumptions must be made, and a number of appropriate decisions must be made. in an industry with monopolistic competition, the cross elasticity of demand for the goods of rival firms must be positive and relatively large, which means that the goods of competing firms are very good substitutes for each other, which means that if the firm raises the price above the competitive one, then it can expect to lose a significant amount of sales in favor of competitors.

Typically, in markets with the most monopolistic competition, the top four firms account for 25% of total domestic supply, while the top eight firms account for less than 50%.

Short-run equilibrium of the firm under monopolistic competition.

The demand curve, as it is seen by a monopoly-competitive firm, is sloping down. there will be buyers willing to pay a higher price for this product. (The rest depends on the elasticity of demand for this product, i.e. whether the profit from the increase in price will cover the loss from the reduction in sales or not). Demand and marginal income also depend on the prices set by competing firms, because if they lowered their prices, then the seller would make less profit from lowering / raising the price. But, as mentioned earlier, a monopoly-competitive firm does not take into account the reaction of competitors to its actions.

The short-term equilibrium of the firm is shown in Figure 1.

Price and cost.

Profit-maximizing quantity = Q. This output corresponds to the point at which MR = MC. To sell this quantity, the firm will set a price equal to P1, at this price, the quantity of goods for which there is a demand corresponds to t. A on the supply curve and constitutes a profit-maximizing output. When setting a price equal to P1, the firm receives a profit per unit of goods equal to segment AB, and from the entire output equal to the area of ​​​​the shaded rectangle.

Firm equilibrium in the long run

But making a profit is possible only in the short term, because. in the long term, new firms will come into the industry that will copy the achievements of the seller, or the seller himself will begin to expand and profits will fall to normal, because. as the quantity supplied increases, the unit price that each individual seller can charge will decrease. move down. This means that the price and marginal revenue that the firm can expect to fall in the long run due to the increased supply of the product. Plus, the demand for each individual firm's product will also tend to become more elastic at a given price, i.e. To. an increase in the number of competing firms increases the number of substitutes. New firms enter the market until it is no longer possible to make a profit. Therefore, long-run equilibrium in a market with monopolistic competition is similar to a competitive equilibrium in that no firm earns more than normal profit.

Figure 2 shows the long-run equilibrium of an industry under monopolistic competition.

Price and cost.

Q1 Q2 Qty

An industry cannot be in equilibrium as long as firms can charge more for a product than the average cost of a profit-maximizing output, i.e. the price should be equal to the average cost of this output. In long-term equilibrium, the demand curve is tangent to the long-term average cost curve. The price that must be set in order to sell Q1 of the product is P, corresponds to t. are equal to P per piece, and therefore profit is zero both on one piece and as a whole. Free entry to the market prevents firms from extracting economic profits in the long run. The same process works in the opposite direction. If demand in the market were to decrease, after equilibrium is reached, then the firms would leave the market, because the reduction in demand would make it impossible to cover the economic costs. which he must establish. to sell this quantity of goods, less than the average cost of AC1 for its production. under these circumstances, firms cannot cover their economic costs, they will exit the industry and move their resources to more profitable enterprises. When this happens, the demand curve and the marginal revenue curves of the remaining firms will shift upward. maximum prices and marginal revenue for any output. and which could be received by the remaining sellers. The exit of firms from the industry will continue until a new equilibrium is reached, in which the demand curve is again tangent to the LRAC curve, and firms receive zero economic profits. The exit process of firms from the market could also occur as a result of firms overestimating the marginal revenue possible from sales in the market. An excess number of firms could make the commodity so abundant that firms in the market could not cover their average cost at a price at which marginal revenue equals marginal cost .

Rice. 3. (Monopolistically competitive firm suffering losses)

Price and cost

The shaded rectangle is the loss of the firm.

Comparison with the original competitive equilibrium .

Consumers pay higher prices when products are differentiated from what they would pay if the product were standardized and produced by competitive firms. This is true even if the LRMC of a monopolistically competitive firm is identical to the curve of a perfectly competitive firm. the place where the additional costs of product differentiation arise. Therefore, under monopolistic competition, economic profit falls to zero before prices reach a level that allows them to cover only their marginal costs. At the level of output for which price equals average cost, the price exceeds marginal cost. marginal revenue does not reach the value of the price at any volume of output). In equilibrium, the firm always adjusts the price until it establishes the equality MR = MC. Since the price always exceeds MR, it will exceed MC in equilibrium. As long as the product is differentiated among firms, it is impossible that in the long run, the average cost of production has reached its maximum possible level. The disappearance of economic profit requires that the demand curve be tangent to the cost curve. This can only happen with output corresponding to LRAC min if the demand curve is a horizontal line, as in perfect competition. Monopolistically competitive firms do not achieve everything in possible long-term cost savings. As shown in Figure 2, in equilibrium, a typical monopoly competitive firm produces Q1 products, but LRACmin is reached at Q2 output, hence Q1-Q2 = excess capacity. Therefore, the same output could be offered to the consumer at lower average cost. The same quantity of goods could be produced by a smaller number of firms that would produce a larger quantity of goods at the lowest possible cost. But equilibrium under these conditions can only be achieved if the product is standardized. Therefore, product differentiation is incompatible with saving unused resources .ceteris paribus, the higher the equilibrium price, the greater the excess capacity.

Conclusion .:

A monopoly competitive equilibrium is similar to a purely monopoly equilibrium in that prices exceed the marginal cost of production. However, in a pure monopoly, the price may also exceed average cost in the long run due to barriers to entry for new sellers. In monopolistic competition, free entry to the market prevents the continued existence of economic profit. Profit is a lure that attracts new firms and keeps prices below the level that would exist under a pure monopoly, but prices exceed those that would exist for standardized goods under pure competition.

The costs of non-price competition.

In addition to the costs of overcapacity, there are also costs incurred by firms in monopoly competitive markets when the firm seeks to convince the consumer that its products are different from those of competitors. Monopolistically competitive markets are characterized by trademarks and continuous development. new products and improvements to old ones. Many consumers have been led to believe that the quality of brand name products is superior to those of competitors. It is likely that firms in monopoly competitive markets will compete by improving or developing new products rather than by lowering prices to increase sales. Improvements in a product by an individual firm will allow it to make profits until other firms copy those improvements. Often these improvements are superficial and insignificant. But once a product is improved, the firm usually starts advertising to inform consumers of these changes.

implementation costs

Advertising and sale of goods are costly processes. Implementation costs - these are all the costs that a company incurs in order to influence the sale of its product. By making advertising and other sales-related expenses, the company hopes to increase revenues, revenue. Advertising can affect the level of demand for the company's product and the price elasticity of this demand. It can also affect the cross elasticity of demand for a product with respect to the prices of competing firms' goods. Advertising can also increase the demand for goods. all sellers in a product group. goods are perfect substitutes, and buyers are fully informed. therefore, under these circumstances, advertising is useless. Firms engage in advertising and other promotional activities when they can point out the unique aspects of their products and when the information is not freely available to buyers.

Sales cost curves and profit-maximizing advertising.

There are significant costs associated with advertising and other promotional activities. In order to coordinate all these efforts, staff is needed, which must be paid. Implementation costs are discrete, which means that they are not necessary all the time for the production of goods. When a company advertises its product, it misses the opportunity sell more of the product, keeping costs and therefore price higher. Advertising is an attempt to get more sales at any price. The same increase in sales could possibly be achieved by reducing the price.

It is likely that the average cost of sales (per unit of output) first decreases and then increases. They increase as actual sales increase. the costs advanced for the implementation are distributed over a larger number of units of the product. Sales costs per unit. products are also reduced when a large advertisement is given, if the price per advertisement falls as the number of advertisements increases. It is also possible that higher overall advertising costs, meaning more advertisements, lead to proportionately larger increases in sales. Repeated advertisements in different media can have an impact on increasing sales.

You can imagine the curve of average selling costs (ACs), which shows how the selling costs of a unit change. product at different levels of expected demand. The greater the demand for a product, the lower the average selling costs associated with selling a given quantity of goods on the market. Therefore, a change in demand for a product can shift the sales cost curve. A change in any factor affecting the demand for the firm's product will shift the curve of average selling costs either up or down. The U-shaped curve of average selling costs is shown in fig. 4. This curve shows the cost of selling a unit of the product sold, given the demand for the company's product and the amount of advertising costs of competing firms. A decrease in demand shifts the curve of average selling costs upwards, as well as an increase in advertising costs for competing firms. Thus, the average selling costs associated with a given output, the lower the stronger the demand for the product and the lower the selling costs incurred by competitors.

Selling price per unit

P`,Q`,MR1,D1 - price, quantity, marginal revenue and demand before advertising

Pa, Qa, MR2, D2 - price, quantity, marginal revenue and demand after advertising.

MC + MCs - marginal cost of production +prev. implementation costs

AC+ACs - medium ed. production + medium ed. implementation.

Zashtrikhov. rectangle-profit in the short term after advertising.

The firm, thanks to advertising costs, shifts its demand curve from D1 to D2 and the prev curve. revenue from MR1 to MR2. A profit-maximizing output is one for which MR2 equals marginal cost of production plus marginal cost of distribution. In the absence of advertising, the firm would earn zero economic profit. Advertising allows the firm to make positive economic profits in the short run. Advertising implies that the firm can increase demand and marginal revenue at a high cost. An increase in demand, if constant, reduces the cost of sales required to sell a given quantity of a product and therefore induces the firm to reduce advertising spending again. The interdependence between MR and MC in If advertising is successful, it makes it impossible to predict the equilibrium level of advertising spending.

P and cost.

Equilibrium in the long run with the implementation of promotional activities under

monopolistic competition.

Advertising that generates profits in a monopolistically competitive industry sets in motion a process that will destroy these profits. Since there is free entry into the industry under monopolistic competition, advertising that causes economic profits can be expected to attract new sellers to the market. Therefore, the ACs curve move up due to increased advertising costs of competitors, and curves D and MR will shift down. The combination of these factors will negate economic profit. advertising served to increase demand for all sellers in the market and contributed to the emergence of new manufacturers, then the total amount of goods consumed increases.

The demand curve of each firm must be tangent to the AC + ACs curve with a profit-maximizing output Ql. At the price of P1, the firm receives zero economic profit. The equilibrium quantity Ql is greater than Q`, which would exist in the absence of advertising. .(segment Q`Ql). This helps to reduce average production costs, which, however, does not bring benefits to the consumer, because. the price does not decrease, but rather increases, because it reflects the average selling costs required to sell Ql of a product. Advertising also diverts resources from the production of other goods. In the long run, the company does not benefit from advertising, because that with it, that without it, the company receives zero profit. Advertising, however, can perform an important social task, supplying consumers with information and reducing transaction costs when buying. If advertising ensures recognition of the product and leads to consumer addiction, then it allows sellers to raise prices no loss in sales to competitors. A positive relationship is also found between profits and advertising. This is interpreted as an indication that advertising increases monopoly power. However, other studies show that the information provided by advertising contributes to a decrease in consumers' commitment to a particular type of product. This implies that advertising increases the price elasticity of demand for the profits of each individual firm.

Rice. 6 depicts the balance in the long run with imp. advertising activities.

Oligopoly

Oligopoly- this is a market structure in which very few sellers dominate in the sale of any product, and the emergence of new sellers is difficult or impossible. The product sold by oligopolistic firms can be both differentiated and standardized.

Typically, oligopolistic markets are dominated by two to ten firms, which account for half or more of the total sales of a product.

In oligopolistic markets, at least some firms can influence the price due to their large shares in the total output. Sellers in an oligopolistic market know that when they or their rivals change prices or sales volume, the consequences will affect profits of all firms in the market. Sellers are aware of their interdependence. Each firm in an industry is expected to recognize that a change in its price or output will elicit a response from other firms. The response any seller expects from rival firms in response to changes in its price , the volume of output or changes in marketing activities, is the main factor determining his decisions. The reaction that individual sellers expect from their rivals affects the equilibrium in oligopolistic markets.

In many cases, oligopolies are protected by entry barriers similar to those for monopoly firms. Natural An oligopoly exists when a few firms can supply an entire market at a lower long-run cost than many firms would.

The following features of oligopolistic markets can be distinguished:

1. Only a few firms supply the entire market .The product can be either differentiated or standardized.

2. At least some firms in an oligopolistic industry have large market shares .Consequently, some firms in the market are able to influence the price of a product by varying its availability on the market.

3. Firms in the industry are aware of their interdependence .

There is no single oligopoly model, although a number of models have been developed.

Conscious rivalry: oligopolistic price wars.

If we assume that there are only a handful of sellers in the local market selling a standardized product, then we can consider a model of “conscious rivalry”. Each firm in the market seeks to maximize profits, and suppose each assumes that its competitors will stick firmly to the original price.

price war- a cycle of successive price cuts by firms competing in an oligopolistic market. This is one of the many possible consequences of oligopolistic rivalry. Price wars are good for consumers, but bad for sellers' profits.

It is easy to understand how firms are drawn into this war. Since each seller thinks that the other will not respond to his price cut, each of them is tempted to increase sales by cutting prices. the market - or so it thinks - and can thus increase profits. But the competitor responds by lowering the price. The price war continues until the price falls to the average cost level. In equilibrium, both sellers charge the same price P=AC=MC . The total market output is the same as it would be under perfect competition. Assuming that each firm always maintains its current price, the other firm can always increase profits by demanding 1 ruble less than its rival. Of course, the other firm will not maintain the same price , because she realizes that she can make a big profit by demanding 1 kopeck less than a competitor.

Equilibrium exists when no firm can any longer benefit from a price decrease. This occurs when P = AC and economic profits are zero. A price decrease below this level will result in a loss. Since each firm assumes that other firms will not to change the price, then it has no incentive to increase prices. To do so would be to lose all sales to competitors, who are supposed to keep their price unchanged at P = AC. This is the so-called Bertrand equilibrium. In general, in an oligopolistic market, the equilibrium depends on the assumptions firms make about the reactions of their rivals.

Unfortunately for consumers, price wars are usually short-lived. Oligopolistic firms are tempted to cooperate with each other to set prices and carve up markets in a way that avoids the prospect of price wars and their negative impact on profits.

Oligopoly Behavior Strategy and Game Theory

Game theory analyzes the behavior of individuals and organizations with opposing interests. The results of management decisions of firms depend not only on these decisions themselves, but also on the decisions of competitors. Game theory can be applied to the pricing strategy of oligopolistic firms. The following example illustrates the possibilities of game theory.

In the previous price war model, it is assumed that the competitor will keep the price the same. will keep its price unchanged, and realize that the enemy will either respond by lowering the price, or keep it at the same level. the profit that the firm can make depends on the reaction of the rival. In this case, managers calculate their profits both for the case in which the competitor keeps the price unchanged, and for the case of a change in price. The result of this is a matrix of results. strategies for each possible response of the opponent in the game. How much the player can win or lose depends on the opponent's strategy.

Table 1 shows the decision outcome matrix of the managers of companies A and B.

The matrix of results of managerial decisions in the price war

S t r a t e g e B

Reduce price Maintain price Maximum

for 1 r / pc losses

Maximum loss - X - Z

Therefore, if both firms maintain prices, then there will be no change in their profits. If the comp. And reduced the price, and the computer. B would maintain it at the same level, then A's profits would increase by Y units, but if B also reduced the price in response, then A would lose X units. , but if A had left the price the same, and B would have lowered it, then A would have lost Z units, which is more than in the previous case. Therefore, the maximin (best) strategy of company A is to reduce the price. firm B makes the same calculations, then for it the maximin strategy is also to reduce the price. Both companies receive less profit than they can get by agreeing to maintain the price. However, if one maintains the price, then it is always more profitable for the opponent to reduce it.

Collusion and cartels .

A cartel is a group of firms that work together and agree on decisions about output volumes and prices as if they were a single monopoly. over the volume of products produced are subject to sanctions.

But a cartel is a group of firms, therefore it faces difficulties in setting monopoly prices, which a pure monopoly does not have. The main problem of cartel is the problem of coordinating decisions between member firms and establishing a system of restrictions (quotas) for these firms.

Cartel formation.

Assume that in a certain area several producers of a standardized product want to form a cartel. Suppose that there are 15 regional suppliers of a given product. Firms charge a price equal to average cost. Each firm is afraid to raise the price for fear that others will not follow it and its profits will become negative. Let us assume that output is at a competitive level Qc (see Fig. 7, column A), corresponding to the size of output at which the demand curve intersects the MC curve, which is the horizontal sum of the marginal cost curves of each seller. The MC curve would be a demand curve if the market was fully competitive. Each firm produces 1/15 of the total output Qc

The initial equilibrium exists at t. Competitive price = Pc. At this price, each producer earns a normal profit. At a cartel price Pm, each firm could maximize profits by setting Pm = MC / If all firms do this, then there will be an excess cement, equal to QmQ units. per month. The price would drop to Rs. To maintain the cartel price, each firm must produce no more than the value of the quota qm.

To establish a cartel, the following steps must be taken.

1. Make sure there is a barrier to entry in the industry to prevent other firms from selling the product after a price increase. If free entry into the industry were possible, the increase in price would attract new producers. Consequently, supply would increase and the price would fall below the monopoly level that the cartel seeks to maintain.

2. Organize a meeting of all manufacturers of this type of product to establish joint benchmarks for the overall level of output .This can be done by estimating the market demand and calculating the marginal revenue for all output levels. Choose an output for which MC = MR (it is assumed that all firms have the same production costs). Monopoly output will maximize profits for all sellers. This is shown in gr .A fig. 7. The demand curve for a product in the region is D. The marginal income corresponding to this curve is MR. The monopoly output is Qm, which corresponds to the intersection of MR and MC. The monopoly price is Pm. The current price is Rc, and the current output is Qc. the current equilibrium is the same as the competitive one.

3. Set quotas for each cartel member Divide the total monopoly output, Qm, among all members of the cartel. For example, one could instruct each firm to supply 1/15 Qm every month. balance production until their marginal cost equals the market marginal revenue (MR`). As long as the sum of the monthly outputs of all sellers is Qm, a monopoly price can be maintained.

4. Establish a procedure for implementing approved quotas . This step is crucial to making the cartel workable. each firm has incentives to expand its production at the cartel price, but if everyone increases output, then the cartel is doomed, because. the price will return to its competitive level. This is easy to show. Chart B (Figure 7) shows the marginal and average costs of a typical producer. Prior to the implementation of the cartel agreement, the firm behaves as if the demand for its output at a price of Pc is infinitely elastic. It is afraid raise its price for fear of losing all of its sales to a competitor. It produces qc. output qm units product, resp. the point at which MR` equals the marginal cost MC of each individual firm. Assume that the owners of any of the firms believe that the market price will not fall if they sell more than this quantity. If they perceive Pm as the price lying beyond their influence, then their profit-maximizing output will be q`, where Pm=MC. Provided that the market price does not decrease, the firm can, by exceeding its quota, increase profits from PmABC to PmFGH.

An individual firm may be able to exceed its quota without appreciably reducing the market price. Suppose, however, that all producers exceed their quotas in order to maximize their profits at the cartel price Pm. Industry output would increase to Q`, where Pm = MC. B as a result, there would be an excess of product, because. demand is less than supply at this price. Consequently, the price will fall until the surplus disappears. up to Rs. and manufacturers would go back to where they started.

Cartels usually try to impose penalties on those who bypass quotas. But the main problem is that once a cartel price is set, individual firms seeking to maximize profits can earn more by cheating. If everyone cheats, then the cartel breaks up, i.e. To. economic profits fall to zero.

Cartels also face a problem in making monopoly price and output decisions. This problem is especially acute if firms cannot agree on an estimate of market demand, its price elasticity, or if they have different production costs. firms with higher average costs achieve higher cartel prices.

In oligopolistic markets, individual firms take into account the possible reaction of their competitors before they start advertising and undertake other promotional expenses. An oligopolistic firm can significantly increase its market share through advertising only if rival firms do not strike back, starting their own advertising campaigns.

In order to better understand the problems that an oligopolistic firm faces when choosing a marketing strategy, it is useful to approach it from the position of game theory. firms must develop a maximin strategy for themselves and decide whether it is profitable for them to start advertising campaigns or not. If firms do not start advertising campaigns, then their profits do not change. However, if both firms seek to avoid the worst outcome by pursuing a maximin strategy, then they both prefer advertise their product. Both are chasing profits and both end up with losses. This is because each chooses a strategy with the least loss. If they agreed not to advertise, they would receive large profits.

There is also evidence that advertising in oligopolistic markets is carried out on a larger scale than is necessary for profit maximization. rival firms cancel each other's advertising campaigns.

Other studies have shown that advertising improves profits. They indicate that the higher the proportion of advertising spend relative to industry sales, the higher the industry's rate of return. higher profit margins indicate monopoly power, which implies that advertising leads to greater price control. It is not clear, however, whether higher advertising costs lead to higher profits, or whether higher profits cause higher advertising spending.

Other oligopoly models

Other models of oligopoly have been developed to try to explain certain types of business behavior. The first attempts to explain price invariance, the second why firms often follow the pricing policy of a firm that acts as a leader in announcing price changes, and the third shows how firms can set prices in such a way that not to maximize current profits, but to maximize profits in the long run by preventing new sellers from entering the market.

Price rigidity and broken demand curve.

Price stability can be explained if individual firms believe that their rivals will not follow any increase in price. At the same time, they assume that they will follow any decrease in their price. Under these circumstances, the demand curve, as perceived by each individual firm, has strange shape.

An already established price is taken. Assume that firms in the industry think that the demand for their product will be very elastic if they raise prices, because their competitors will not raise prices in response. However, they also proceed from the assumption that, if they lower prices, then demand will become inelastic, because other firms will also lower the price. A sharp change in the firm's elasticity of demand at a fixed price produces a broken curve.

Rice. 8 depicts a broken curve of demand and marginal revenue. Note the sharp drop in marginal revenue when the price falls below P, i.e. a set price. This is due to a sharp drop in revenue when a firm lowers its price in response to a competitor's price cut. A firm that lowers its price will lose gross revenue because marginal revenue becomes negative because demand is inelastic at prices below the set price.

On fig. 8, the maximum profits correspond to the size of the output, at which MR = MC The marginal cost curve is MC1. Therefore, the profit-maximizing output will be Q` units, and the price will be P`. Now suppose that the price of one of the resources needed to produce the good increases. This shifts the marginal cost curve upward from MC1 to MC2. If, after increasing marginal cost, curve MC2 still intersects MR below mA, then the firm will not change either price or output. Similarly, reducing marginal cost will not lead to any changes.

Price stability will be maintained only with cost increases that do not shift the marginal cost curves upward enough to cross the marginal revenue curve above T.A., because. a larger increase in marginal cost will lead to a new price. Then there will be a new demand curve with a new kink. The kink persists only if firms hold their beliefs about their competitors' price response after the new price is established.

Price Leadership

Price leadership is a common practice in oligopolistic markets. One of the firms (not necessarily the largest) acts as a price leader that sets a price to maximize its own profits, while other firms follow the leader. price as the leader and operate at the output level that maximizes their profits at that price.

The leading firm assumes that other firms in the market will not react in such a way that they change the price it has set. They will decide to maximize their profits at the price set by the leader as given. the leader sets a monopoly price based on his marginal revenue and marginal cost. Other firms accept this price as given.

Rice. Figure 9 shows how the price is determined under partial monopoly. The leading firm determines its demand by subtracting the quantity of goods that other firms sell at all possible prices from the market demand. The market demand curve D is shown in fig. 9 on gr. A. The supply curve of all other firms - Sf is shown in gr. B (Fig. 9). The quantity of goods offered by the competitors of the leading firm will increase at higher prices. The leading firm sells a smaller share of market demand at higher prices.

On fig. 9 it can be seen that at the price Pl, the output is qd units. At the same time, the demand curve for gr. B shows that the quantity of goods offered by other firms will be equal to qf=qd-ql. is on the demand curve Dn. The demand curve then shows how much sales the leading firm can hope to generate at any price after deducting the sales generated by other firms.

The leading firm maximizes profits by choosing a price that makes the marginal revenue from satisfying net demand, MRn, equal to its marginal cost. Therefore, the leader's price is P1, and the leading firm will sell ql units. products at this price. Other firms take the price P1 as given and produce qf units.

Price leadership can also be explained by fears on the part of the smaller firms about the reaction of the leading firm. This is true when the leading firm can produce at a lower cost than its smaller competitors. When this state of affairs occurs, smaller firms may hesitate price below the leader. They understand that although they gain temporarily in sales from the price reduction, they will lose the price war that the larger firm will unleash, because. they have higher costs and hence their floor price is higher than that of the larger firm.

Smaller firms in oligopolistic markets passively follow the leader sometimes because they believe that larger firms have more information about market demand. They are unsure about the future demand for their products and view the leader's price change as a sign of a change in demand in the future.

Pricing that limits entry into the industry.

Firms in oligopolistic markets may set prices in such a way that it is not profitable for potential new producers in the market to enter the market. To achieve this, firms in the market may set prices that do not maximize their current profits. Instead, they set prices in such a way that to keep new manufacturers from entering the market and having a downward impact on future profits.

Firms either collude or follow the example of other firms in setting prices that would prevent entry into the market of “foreigners”. To achieve this, they estimate the lowest possible average cost of any new potential producer and assume that any new producer will accept the price set by existing firms, and will adhere to it.

Graph A in Fig. 10 shows the LRAC curve of a potential new producer in an oligopolistic market. If a firm cannot rely on a price for its product equal to at least P`=LRACmin, then it will be able to make economic profit by entering the market. Graph B, fig. 10 shows the market demand for a product. Suppose existing firms in the industry organize a cartel to maximize current profit. Then they will set a price Pm corresponding to the output at which MR = MC. At this price, Qm units of the product would be sold, and existing firms would divide the total output among themselves. However, since Pm > LRACmin of potential new producers, the cartel is doomed to failure unless there is a barrier to entry. Therefore, firms know that it is futile to set a monopoly price. At a monopoly price, more firms will enter into the market and the quantity offered for sale will increase. Consequently, the price and profits will fall.

The price that limits entry to the market is a price that is low enough to prevent new potential producers from entering the market as sellers. Assume that the average cost curves of firms look the same as those of new producers. In this case, any price above P` will provoke the entry of “outsiders”. Therefore, firms in the industry will have to keep the price at P`=LRACmin. At this price, they will sell Ql of the product, which is more than they would sell if the price were high enough to encourage new firms to enter the market , but then they earn zero economic profit.

If, however, firms have a low cost advantage that new potential producers do not have, then they will be able to extract long-term economic profits at the price P` and at the same time keep potential producers from entering the market.

Entry-restricting pricing illustrates how fear of new competitors entering the market can push profit-maximizing firms to temporarily not exercise their monopoly power in the market.

Cournot duopoly model

A duopoly is a market structure in which two sellers, protected from additional sellers, are the only producers of a standardized product that has no close substitutes. Duopoly economic models are useful to illustrate how an individual seller's assumptions about a rival's response affect equilibrium output. The classical model duopoly is a model formulated in 1838 by French economist Augustin Cournot. This model assumes that each of two sellers assumes that its competitor will always keep its output unchanged, at the current level. It also assumes that sellers do not know about their mistakes. In fact, salespeople's assumptions about a competitor's reaction are likely to change when they become aware of their previous mistakes.

Suppose that there are only two producers of good X in a region. Anyone who wants to buy good X has to buy it from one of these two producers. The good X of each firm is standardized and has no qualitative differences. No other producer can enter the market. Suppose that both producers can produce good X at the same cost and that the average cost is constant and therefore equal to the marginal cost. Graph A fig. 11 shows the market demand for good X, labeled Dm, together with average and marginal production costs. If good X were produced in a competitive market, output would be Qc units and price would be Pc=AC=MC.

The two firms producing good X are firm A and firm B. Firm A started producing good X first. Before firm B starts production, firm A owns the entire market and assumes that the output of rival firms will always be zero. which has a monopoly produces monopoly output corresponding to the point at which MRm=MC. The resulting price is Pm. Assume a linear demand curve. This implies that marginal revenue will fall as output rises twice as fast as the price. Since the demand curve divides cut PcE in half, then the monopoly output is half the competitive output. Therefore, the initial output of firm A, maximizing its profit, is Qm units.

Immediately after firm A starts production, firm B enters the market. New firms cannot enter. Firm B assumes that firm A will not respond by changing output. It therefore starts production, assuming that firm A will continue to produce Qm units of product X. The demand curve that firm B sees for its product is shown in gr. In fig. 11. It can serve all those buyers who would buy product X if the price fell below the current price of firm A, Pm. Therefore, the demand curve for its output begins at the price Pm, when the market demand is Qm units. Goods. This demand curve Db1, sales along this curve represent the increase provided by firm B to the current market output Qm units that firm A has produced up to this point.

The marginal revenue curve corresponding to the demand curve Db1 - MRb1. Firm B produces a volume of output corresponding to the equality MRb1 = MC. , we see that this volume is 0.5.X units. goods. An increase in the market supply of product X from X to 1.5 X units, however, reduces the unit price of product X from Pm to P1. Table 2 presents the output data of each firm for the first month of activity. the volume of production that, as it assumes, will have another firm. Competitive output is the output corresponding to the price P \u003d MC - in this case 2X units. goods. As the table shows, firm A starts with the production of 0.5 Qc, provided that the output of its rival is zero. Then firm B produces 0.5 X of product X this month, which is 0.5(0.5Qc) = 0.25 Qc. This is half the difference between competitive output and monopoly output, which was originally provided by firm A.

The fall in the price of good X, caused by the additional production of firm B, leads to a change in the demand curve of firm A. Firm A now assumes that firm B will continue to produce 0.5.X units. product. She sees the demand for her product X as starting at the point on the market demand curve corresponding to a monthly output of 0.5. X units. Its demand is now equal to Da1, as shown in gr. C, Figure 11. Its profit-maximizing output is now half the difference between competitive output and the volume currently produced by firm B. This happens when MRa1=MC. Firm A assumes that firm B will continue to produce 0.5.X units of a good after it adjusts its output, so firm A's profit-maximizing output is

1/2(2X - 1/2X)=3/4X .

This can be written as:

1/2(Qc - 1/4Qc)=3/8Qc,

which is shown in table 2.

Cournot duopoly model. (Fig. 11)

First month.

1/2Qc 3/4 Qc Qc Q

Second month.

Duopoly equilibrium Cournot tab. 2

Month Issue firm A Issue. firm B

1 1/2Qc 1/2(1/2Qc)=1/4Qc

2 1/2(Qc-1/4Qc)=3/8Qc 1/2(Qc-3/8Qc)=5/16Qc

3 1/2(Qc-5/10Qc)=11/32Qc 1/2(Qc-11/32Qc)=21/64Qc

4 1/2(Qc-21/64Qc)=43/128Qc 1/2(Qc-43/128Qc)=85/256Qc

Final equilibrium

Qa=(1-(1/2Qc+1/8Qc+1/32Qc+...))Qc=(1-1/2(1-1/4))Qc=1/3Qc

Qb=(1/4+1/16+1/64+...)Qc=(1/4(1-1/4))Qc=1/3Qc

Total output =2/3Qc

Now it is the turn of firm B to answer again. Firm A will reduce its production from 1/2 Qc to 3/8Qc, which leads to a decrease in the total supply of good X from 3/4Qc to 5/8Qc. As a result, the price of the good rises to P2. Firm B assumes that firm A will continue to produce this quantity. It considers its demand curve as a line starting at the point where the market output is 3/8Qc. This demand curve Db2, indicated in gr. D,fig. 11. The maximum profit exists at the point where MRb2=MC. This is equal to half the difference between competitive output and the 3/8 of competitive output currently supplied by Firm A. As shown in Table 2, Firm B is now producing 5/ 16 competitive output. The total market output is now 11/16Qc, and the price drops to P3. For each month, each duopolist produces half the difference between the competitive output and the output of the competitive firm.

As shown in gr. E, Fig. 11, each firm produces 1/3 Qc, and the price is Pe. This is the Cournot equilibrium for a duopoly. It would exist. does not take into account its errors, which, of course, is a great simplification. But with more complex assumptions, it becomes difficult to determine the equilibrium conditions.

response curves.

The same equilibrium can be represented in another way. Response curves show the profit-maximizing output that one firm will produce given the size of another rival firm.

Response curve 1 represents the output of firm B as a function of the output of firm A., and response curve 2 is vice versa.

Response Line 1

1/3Qc Response line 2

1/4Qc1/3Qc 1/2Qc Qc

Any release above Qc is unprofitable, because. the price falls below the level of average cost. Therefore, if the output of one of the firms is equal to Qc units, then the second responds with zero output. Equilibrium is reached when the two response curves intersect and each firm produces 1/3Qc. output values ​​to each other.

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