Question

Write about the theory of monopoly. and rivalry, oligopoly, and monopolostic competion. At least 250 words.

Answer 1

Answer :-

Theory of monopoly :-

Monopoly is a market structure in which there is only one supplier of a product.

Characteristics of a monopoly:

May be small or large, only one supplier of the product, and sells a product where there are no close substitutes.

Natural monopoly is monopoly that arises from economies of scale.

Rivalry :-

Rivalry is the threat that firms will compete away profit margins. Rivalry occurs through:

1. Price competition

2. Frequent intro of new products

3. Intense advertising

4. Fast competitive response

5. Exit barriers

Sources of increasing rivalry;

1. Large number of competing firms of similar size

2. Lack of product differences

3. Slow industry growth

4. Fixed costs are a significant fraction of total costs

5. Production capacity added in large increments.

Greatest threat to performance is for rivals to dissipate economic profits through price competition.

Oligopoly :-

Oligopoly is a market structure in which a small number of interdependent firms compete.

It is a market structure in which a few large firms dominate a market; barriers to entry, cooperation, collusion and cartels.

Characteristics/ Key Features:

1) Few Sellers in the Industry

2) Interdependence Between Firms

3) Product Differentiation Occurs

4) Barriers to Entry Exist

5) Collusion May Occur

6) Non-price Competition is More Common than Price Competition.

Barriers to entry exist these are common in oligopolistic markets as existing firms wish to maintain their market share. E.g. High start-up costs or Brand proliferation.

Monopolistic competition :-

Monopolistic Competition is a market structure in which a large number of firms compete.Each firm produces a differentiated product.Firms compete on price, product quality, and marketing.Firms are free to enter and exit.

Characteristics of monopolistic competition:

1)Many small buyers and sellers

2)Freedom of entry and ext

3)Perfect information

4)Slightly different (heterogenous products)

It is to be noted that 1-3 match up with perfect competition but in perfect competition products are perfect substitutes.

Efficiency of monopolistic competition:

Not very efficient because they usually do not produce at the minimum average cost.