Question

5D1. Now that you have learned about various industry structures, think about a pure monopoly, monopolistic competition, and oligopoly from the economic and then from a consumer perspective. Then, post a response to the following:

As a consumer, what are the advantages and disadvantages of each of these industry structures?

To an economy, what are the advantages and disadvantages of each of these industry structures? Do private and social interests coincide under these industry structures? Give examples to support your reasoning.

Answer 1

Advantage of monopoly for consumer is that he has not to compare many commodities and their prices. He has a simple choice to either buy or not buy. Its disadvantages are that here price is greater than marginal cost. Further due to discrimination consumers are often exploited. Often firms make economic profits even in long run at the cost of consumers. Advantages of monopolistic competition is there is variety of goods which consumer can purchase as per his tastes. Even he can purchase a product at lower price which is almost similar to high cost product. The disadvantages are often prices are not proportional to costs of differentiated goods. E. G suzuki sells swift top end model in many countries with minor changes like touch screen, reverse camera at lakes of rupees more than lower end models which just lack these features. There is also problem of comparing thousands of goods, features and prices. In oligopoly then benefit is that one has to compare only few products and prices. The latter leds to competitive prices. Each company struggles to bring new goods of better quality. The problems are there are lesser choices, the prices remain often fixed.

To economy besides these advantages, the monopolist is able to withstand foriegn competition better. Furthermore it leds to production in market conditions where perfect competition firm can't operate through the mechanism of price discrimination. The problems are loss in consumer and producer surplus, Greater barriers to entry for competition etc. In case of monopolistic competition the gains are differentiation, less barriers to entry than monopoly and duopoly, economies of scale due to focusing on only few varieties etc. The problems are firms do not operate at full capacity. There is excess capacity. The advantages of duopoly are greater profits for firms. The disadvantages are small firms can't enter industry. E. G soft drink market in India is controlled by Pepsi and coca cola. Other firms can't make entry due to brand loyalty, lesser costs due to economies of scale for these firms and higher costs for entrants etc.

No private and social interests do not coincide in monopoly and duopoly. E. G consumer surplus is less in monopoly but firms enjoy profits. In monopolistic competition interests coincide to substantial extent but not as much as in perfect competition