Competitive Industry, Monopoly, and Monopolistic Competition
Competitive industry comprises the companies which have no market power. Such companies are usually small and unable to diversify their proposals and substantiate superior prices. At the same time, they are not able to increase their prices without the risk of losing their customers (Giachetti 2013). The firms owning market power are called “price makers,” and the firms lacking market power are referred to as “price takers” (Giachetti 2013, p. 24).
Monopoly is an industry represented by only one company (Jamison 2010). Monopolistic organizations have great market power over the amounts of goods and prices for them. Monopolies can set whatever prices they want as the customers have no choice and will still buy from them. Additionally, monopolistic industries do not spend too much money on advertising. In their case, it is enough just to state that the product is available. As they have no competitors, they do not need to prove that their product is better or owns some special features.
Monopolistic competition is a structure of industry with a low level of rival concentration and a high degree of price competition among many companies (Giachetti 2013). This structure presupposes some level of product diversification.
Thus, all three structures (competitive industry, monopoly, and monopolistic competition) have some success in the market. However, the degree of market power is what differs the three structures. Monopoly bears a great market power, monopolistic competition has a smaller degree of it, and the firms belonging to competitive industry own no market power at all.
Role of Market Power in Shaping the Competitive and Monopoly Industry
Being an ability of a company to increase the products’ prices, market power has a great impact in shaping the industries (Kaczorowska 2011). However, this influence has double nature: market power has both benefits and limitations. The major advantage of competition created by market power is that it causes a better quality of goods and encourages innovative approaches. While this is good for the customers, the workers also benefit from market power competition. The companies are willing to pay more to the skilled employees (Benefits of competition and indicators of market power 2016).
The biggest disadvantage of market power is that the firms may abuse it. For instance, in the case of monopoly, huge market power allows the organizations to set extra high prices for their goods as the customers have no alternative (Benefits of competition and indicators of market power 2016). Another limitation is that monopolies created with the help of market power do not tend to work on innovations. Also, they frequently start neglecting the quality status of their products (Eight pros and cons of monopolies 2015).
Entry Effects in the Monopolistic Competition
Monopolistic competition is a type of market integrating the features of competitive markets and monopoly (Pettinger 2008). Entry, as well as exit, is free under the circumstances of a monopolistic competitive market. However, the companies have a possibility to diversify their goods. Thus, they have an inflexible curve of demand, and they are able to set the prices (Pettinger 2008). The freedom of entry has an adverse impact on such companies. Extra large profits stimulate more organizations to join the market. As a result, a bigger number of companies will lead to smaller profits in the course of time.
Monopolistic competitive market allows freedom of entry but then eliminates the possibilities. Thus, the companies may have extra big profits at the beginning and gradually lose profits due to the peculiarities of the market.
Benefits of competition and indicators of market power 2016, 2017, Web.
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Giachetti, C 2013, Competitive dynamics in the mobile phone industry, Palgrave Macmillan, New York.
Jamison, M 2010, Industry structure and pricing: the new rivalry in infrastructure, Springer-Verlag, New York.
Kaczorowska, A 2011, European Union Law, Routledge, New York.
Pettinger, T 2008, Monopolistic Competition, Web.