Free Case Study On Competition And Market Power
A perfectly competitive firm is a price taker in the market. Since there are a large number of firms producing homogeneous products each firm cannot influence the market price by his/her activity since each firm produces only a small part of the whole industry output . So, the demand curve facing a firm in a perfect competition is infinitely elastic.
A monopolist is a price maker. Since the monopolist is the only seller in a market with a large number of buyers, the monopolist can influence the price by his output decisions. The monopolist faces a downward sloping demand curve . This implies that the demand is inelastic in nature.
Oil, diamonds and electricity transmission are the sectors characterized by monopoly concentration. The production of oil is subject to the ownership of oil wells which is a natural resource. Oil is of strategic importance for an economy as it is an important and indispensable source of energy for transport and industries. The demand for oil is thus inelastic. For these reasons the export and import of oil is often kept under control through government regulations. It has also been observed that the oil producing entities form cartels and control the price of oil in the world market. The cartel acts like a monopolist. The monopolization of the market for oil points to three factors, the ownership of a strategic resource, the inelasticity of demand and government regulations. The formation of cartels is also another factor that has lead to monopolization of this market.
Diamond is also a precious stone that gets its value because of its quality as a precious stone used in jewelry and also because of its scarcity. The ownership of diamond mines is the factor that leads to the monopoly power. There are only a few diamond mines all over the world. The firms owning these mines enjoy monopoly power in the world market.
Electricity Transmission gets its monopoly power from the technology involved in transmission. This is an ideal example of natural monopoly. In a particular region it is not possible for the market to support more than one transmission entity. The initial cost of setting up a transmission network is quite high. But once a large network is set up the average costs tends to fall with the increase in the number of connections. It also not possible for another utility to enter the service area of an existing transmission utility as the serving utility is already covering the whole market with its transmission lines. The area cannot support another utility. It should also be added that the setting up of transmission lines is a sunk cost as these lines cannot be used for some other purpose if the firm decides to quit the industry. So a firm will not be interested in entering a sector where there is already a serving transmission utility.
In case of eggs the market will essentially be a competitive one. First of all this is a homogeneous product because it is hardly possible for the buyers to distinguish from the eggs being sold by one seller form the eggs sold by some other seller. There is free entry into the market and free exit. The egg production does not involve high fixed cost. Anybody can start production at any point of time and also leave the industry once losses start creeping in.
The automobiles sector is usually characterized by monopolistic competition. There is high degree of product differentiation. Each firm produces cars with unique characteristics. The differentiation also exists in the types of services offered by the firms.
The firm I’m associated with is also an electricity utility. It is a vertically integrated private company dealing with power supply in a big city. Since it is vertically integrated it deals with all the three elements of power supply. It has its generation plants as well as transmission and distribution lines. In the generation sector there are other firms in the industry. That implies that the generation sector is competitive. The transmission in this area is a licensed activity. This company holds the transmission license for its service area. The other independent generators have to use its transmission and distribution lines. Thus, in the transmission and the distribution sector it is a monopolist. The company charges transmission tariff per unit of power transmitted through its network and wheeling charges for the use of its distribution network. Being a private company, the primary aim is profit maximization. The transmission and distribution sector fetches a considerable amount of surplus profit due to the monopolistic nature of this activity. So, in this case, the monopolistic activity of transmission and distribution promise higher profit compared to the competitive activity of generation. In the case of transmission and distribution the source of the monopoly power is of course government regulation which allows transmission lines to be set up only by a transmission and distribution licensee. Moreover, electricity transmission by the virtue of its technical attributes possesses some natural monopoly characteristics, so that another firm won’t find it profitable to obtain a license to transmit electricity in the same area. In this case both government regulation and technical characteristics are responsible for the existence of monopoly.
In both perfect competition and monopolistic competition the firms earn zero economic profit or normal profit in the long-run .The perfectly competitive firms produce homogeneous goods. There is free entry and exit into and from the market as the production does not involve any huge initial cost. Monopolistic competition is also characterized by free entry and exit of firms to and from the industry. In the short run if any firm is earning super-normal profit other firms will tend to enter the industry attracted by this high profit possibility. As more and more firms enter the industry the industry supply curve shifts to the right as the supply keeps on increasing. The price keeps on falling. At a time the price reaches such a level that it lies below the average cost of production. The firms incur losses. This results in an exodus of the loss making firms from the industry. The industry supply curve shifts to the left indicating fall in supply. The price rises until all the existing firms earn normal profit. The firms in a monopolistic competition produces differentiated product which enjoys super-normal profit in the long-run as the product differentiation gives some market power to the firms. But in the long-run the super-normal profit fades away as the market is characterized by free entry and exit of firms. The firms in monopoly or oligopoly market continue to earn super-normal profit even in the long-run as there are barriers to entry in these forms of market.
Koutsoyiannis, A. (2003). Microeconomics. Pulgrave Macmillan.
Pindyck, R., & Rubinfield, D. (2009). Microeconomics (7th ed.). Prentice Hall.
Varian, H. R. (2010). Intermediate Microeconomics A Modern Approach (8th ed.). New York: W. W. Norton & Company.
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