Monopolistic Competition (Non-Price Competition)

Business Assignment
Name
Institution
Introduction
Questions
Q.1
Monopolistic Competition (Non-Price Competition)
Definition of Non-Price Competition
In a competitive market, there are different ways by which different firms may competewith one another in the market and one of those ways is non-price competition. According to Baye & Beil (2006), Non-price competition is defined as a marketing strategy whereby which one given firm tries to distinguish services or products from other competing products on other attributes such as design and workmanship. In a monopolistic market, a firm may increase its sales and profits through a non-price means like product variation like a design without necessarily cutting prices. A monopolistic competitor may decide to change its products by either altering or changing the physical attributes or better still can be competitive by changing its promotional programs. In addition to that it is important to note that variation of product and variation of selling expenses would make the monopolistic firm’s demand curve to least elastic and at the same time increasing the cost of production. As a result, the total amount of profits or revenue that the monopolistic firm will be able to earn by producing the total quantity of goods or products that are equal to its Marginal Revenue with Marginal Cost will be changed greatly. In other words, for a monopolistic firm to remain as profitable as it used to be before the cost of production has been changed by varying the physical attributes of its products, the quantity of products being produced that will be equating its marginal revenue and marginal cost will also have to be changed.
Graph Showing Profit Maximization under Monopolistic Market
Q.1
lefttop
In a monopolistic market, profit is maximized at the point where the marginal revenue is equal to marginal cost (MR=MC). Marginal cost is the change in the total cost that is brought by a change in the total quantity produced. On the other hand marginal revenue is defined as the change in the total revenue that is brought by a change in the total products produced.
For example if a monopolist Total Cost (T.C) is represented by P= 10Q+Q^2. Its demand function is P=25-Q. Total Revenue (TR)= 25Q-Q^2
Q= quantity demanded.
MC=10+2Q
MR=25-2Q
10+2Q=25-2Q
Q=3.75
Profit is maximized at the point where MC=MR
Total Profit= TR-TC
How a Monopolistic Competitive Firm may Increase its Prices without losing its Customers
Customers are the most important stakeholders in any business and any would strive to keep all of its current customers as well as attracting new ones. Any firm that would want to remain competitive in the market must have proper pricing strategies. To add on that, it is important to note that pricing decisions can be categorized as one of the important decisions that any firm would make. There are strategies by which a monopolistic firm can use to increase its prices and at the same time afford to retain all of its customers. It is first important to understand the meaning of a monopolistic market; Baye & Beil (2006) defines a monopolistic competition as an industry where there are many sellers, selling products that is close substitutes to one another but have been differentiated either in terms of design and packaging for example, the case of Cinthol and Liril and both soaps are used for personal care. However, it is important to note that in a monopolistic market, firms are free to fix its prices as they deem fit. Another thing that can be said about monopolistic market is said to be combination of both monopoly and perfect competition because it has a mixture of features for all of these markets. Therefore a firm under a monopolistic industry can use some strategies to increase prices of its products without losing its customers. For example, a firm may differentiate its products in relation to the customers’ preferences and tastes and be able to retain all of its customers. For example, a firm may differentiate its products from other products that substitutes to theirs through packaging, branding and design. Therefore, a monopolistic competitive firm may actually increase the prices of its products without necessarily losing its customers through the strategy of product differentiation.
Business Strategy (Oligopoly or Cartel)
Question Two
Graph Showing Profit Maximization under Oligopoly or Cartel Market
Q.2
From the graph below, it is important to note that in oligopoly or cartel market, the profit
Is maximized at the point where Marginal Revenue is equal to Marginal Cost (MR=MC).
How Kinked Demand Curve that Represents Price Rigidity under the Oligopoly or Cartel Market Work
According to Bisping & Eells (2006), under oligopolistic market, prices and output cannot be determined by each other or indeterminate. Furthermore, different firms are mutually depending on one another in setting pricing policy. Oligopolistic market is mostly identified with the kinked demand curve. The kinked demand curve in an oligopolistic market is an idea that was invented in 1939 by one Paul M. Sweezy. Mr. Sweezy came up with the kinked demand curve model to explain oligopolistic organizations rather than emphasizing on price and output determination. The model is based on the idea that oligopolistic organizations would remain stable with the determination of price and output. This shows that oligopolistic form of market is characterized by price rigidity or stability to a larger extent. Prices are said to be rigid in oligopolistic market especially in those instances where the prices may be decreased downwards. This is because, if one firm reduces the prices of its products, there are high chances that other competitors may actually do the same to neutralize the impact of the price reduction. And at the same time, if one firm increases its products in an oligopolistic market, the competitor firm may respond by cutting down the prices of its products, and if this happens, the firm that had increased its products will lose some of its customers. In addition to that it is important to note that the model of kinked demand curve has got its weaknesses or short comings. For instance, it mostly emphasizes on the price rigidity, but it has not explained the price itself. It assumes that competing firms only follow the decrease of prices, which may not necessarily be true. Finally, it ignores the idea of non-price completion like product differentiation. It ignores the price leadership or existence of cartels in the market.
Reasons for Existence of Price Rigidity only in Oligopolistic Competition
Q.2 (b).
More often than not, prices are generally rigid or stable in oligopolistic markets. There have been different models that have been used to explain seasons of price stability. The most common one is the kinked demand curve model although it has some of its short comings. Price rigidity mainly exists in the oligopolistic because oligopoly is a form of market with limited competition and this market is made up of very few producers or sellers. Due to the smaller number of sellers or producers in an oligopolistic market, if one firm reduces the price of its products, there are high chances that another competing firm will respond by reducing its products just to neutralize the effects of that particular production. On the other hand, if a firm attempts to increase its prices, it will be rendered uncompetitive.
Business Strategy (Monopoly)
Graph Showing Profit Maximization in a Monopoly Market
From the graph above, it is important to note the profit is maximized at the point where the Marginal Revenue is Equal to the Marginal Cost (MR=MC).
Question Three
Q.3(a)
To begin with it is first prudent to first understand the meaning of the term monopoly market. According to Bisping & Eells (2006), monopoly market is described as a market structure that is made up of only one seller or producer, selling an outstanding or a unique product in the market. In monopoly form of market the seller or the producer has got no direct competitor. It is important to note that in monopolist market, factors like license, patent, resource ownership and government protection makes a monopoly firm to remain a single seller in the market. In addition to that it is important to note that the output of a monopoly firm increases if the government forces a monopolist to reduce its prices.
Reasons why if a Government forces a Monopoly firm to reduce its Prices, the Output of the Monopolist Firm will Increase
Most of the experts have pointed out that if a monopolist firm is left to set prices in the market on its own, will most likely produce a low level of output and in turn will hike the prices of its products. In other words a monopolist will maximize the profit by producing lower level of output. A monopoly firm will be happy producing at a point where its prices are greater than its costs. Therefore if the government intervenes and forces that particular monopoly firm to reduce its prices, then there is a high chance of that particular firm responding by producing a high level of output just to keep the level of profit that they were making before the government intervened. If a government sets the price ceiling in a monopolist market, the firm will be forced to trade just a little bit below the Average Total Cost (ATC) leaving the monopolist firm to make a just enough profit. Therefore if the government set the price ceiling for a monopolist firm, then the monopolist firm will be left with no option but to increase its production level.
Monopoly Demand Curve
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