Question

Task 3
Describe market forms monopoly and monopolistic competition in pricing,
profit and socio-economic profitability. Feel free to compare with the free competition model.

Answer 1

Monopoly Market

Moopoly arises when in a market there is one dominant firm that controls the entire market and earns profit. Other firms are forced to exit the market, Monopoly power can arise due to various sources like faster mover advantage, increasing returns, natural monopoly and so on. Monopoly firm controls the whole market output. It produces that amount of output that maximises its profit. SInce consumers have no power and other firms face great barriers to enter the market, monopolists produce lower output and charge higher price for their products compared to perfect competition. Consumer surplus is extracted by the producers. SUch markets are generally illegal and prevented by government ru;es.

Monopolistic competition

monopolistic competition is a mixture of perfect competition and monopoly market. Here, there are a large number of small buyers and sellers, but as opposed to perfect competition, here each firm produces a differentiated product. The product differentiation can arise out of brand name, smell, taste or any other attribute. Die to this, each firm has certain degree of monopoly power. In compettive equilibrium of this market, there is presence of excess capacity as the firms producers at a level that is lower than potential. Here consumer pays higher price than perfect competition but enjoys higher variety of goods.