Monopolistic competition is a market structure in which there are several or many sellers; each produce similar, but slightly different products. Differentiation of the products can be due to color, design, taste, size,fragrances etc. every producer has the right to set its price and quantity without affecting the market place as a whole(Samuelson & Marks, 2003). Monopolistic Competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, the firms are left with excess production capacity.
Characteristics of Monopolies
A Monopoly is a single seller of a good or service. The three basic characteristics of Monopolies include Ownership or Control over a major resource, exclusive right given by the government, falling average total cost and public utilities. Monopolies are uncommon and usually have sole ownership of a resource such as Apple Computers.
There is no other computer company that owns an operating system as Mac; therefore, they have sole ownership of their systems. Government Action would create another factor, which are patents, copyrights or special licenses. Biotech companies have patents for their drugs. They are the only company that developed and produced the drug patent grants a monopoly to a company to have a sole right to sell the product. Sole licenses are another government action that can grant companies monopolies(Krugman &Obstfeld, 2008). Natural Monopoly is an industry where the fixed cost of the capital good is so high that it is not profitable. Some examples of Natural Monopolies would be water, electricity or natural gas.
The government regulates these services therefore; they can exploit their monopolies with high prices. However, they are allowed a fixed percentage of profit above cost. To determine price, a monopoly is large enough to influence its own price instead of taking that is given by a price trendsetter. A monopoly does face a downward slope demand curve if the market demand is the company’s demand. To maximize profits, a monopoly may raise its price but it can possibly lose their sales. Thus, in order to sell more, it must lower their price. In other words, this would be called Output effect, which gains more revenue because it sells more, and Price effect that gains less revenue because it gets less from each unit sold because of the lower price
Characteristics of a Perfect Competition
Perfect competition refers to a market situation where there are a large number of buyers and sellers. They sell the product at a uniform price and enjoy the freedom of the enterprise. The price is determined not by the company but by the industry itself.
There are two different meanings to the word competition, when it is used in everyday term, competition means competitive behavior of the firms which it rivals among themselves, nevertheless, in economics it refers to the competitive market structure(Pindyck&Rubinfeld, 2001). The less power that the firm has to influence the market, the more competitive the market structure is. A perfect competition is a market in which there are several firms selling identical products with no firm large enough, relative to the entire market, to be able to influence market price.
There are four key characteristics of a perfect competition, which are a large number of small firms, identical products sold by all firms, freedom of entry into and exit out of the industry and knowledge of prices and technology. This combination of these four characteristics will make it difficult for any firm to exert any control over the market. Firms that are producing identical products means that a large number of perfect substitutes exist for the
Output produced by any given firm. The demand curve for a perfectly competitive firm’s output is perfectly elastic. Competition amongst buyers forces the market price up to the maximum demand price of the demand curve. Competition amongst sellers forces the market price down to the minimum supply price of the supply curve. When the market price is higher or lower which creates surplus, competitive forces gets rid of the imbalance and restores the equilibrium. Some of the barriers that can affect the completive market are externalities, public goods and imperfect information.
Pricing strategy of movies and theaters
Entertainment providers like movies and theaters often charge diverse prices to students, the general public, seniors, etc., even though the cost of supplying that entertainment to each consumer is identical. According to an article “Cinema Statistics for 2013”, Profit maximizing movie theatres, carnivals, often realize that some customers are willing to pay more, or are capable to pay more, for entertainment than other customers. The tricky part of it is that demand-related customer information is not readily available to suppliers. Ticket booth operators at the movies could try to inquire customers about their willingness to pay for tickets, but they aren’t likely to get much information because customers have no inducement to tell the truth about their favorites(Darren et al., 2005). As a result, movie theaters need to consider other variables that are easily observed such as age, income or time of purchase, which are likely to be connected with willingness to pay.
Assume that there is only one form of entertainment in town, and that the movie theatre is a monopoly supplier of this entertainment. Once the movie theatre manager regulates what variables are linked to the willingness to pay, the manager will charge different prices to each of the different recognizable groups.
Rather than charge just P1 which matches with P* in the one price for all units sold method, the theatre proprietor can charge prices P2 and P3 to seniors and children respectively. Both of these prices will attract additional sales, which would certainly not have occurred when the theatre charged P*. This because these groups can buy tickets at a price which is above AC, the theatre can strict additional profits
When applying for insurance policy such as life insurance, medical examinations are mandatory. All medical test are conducted by the paramedics at the expense of the insurer. The requirements for this process vary from one insurance company to another typically based on the applicant’s age and the amount of insurance they are applying for. In most cases, the insured will be needed to have a medical examination that will include full blood chemistry and urinalysis. Various medical questions about the life of the insured are completed by the insurance agent (Bakos, 2008). This is to protect the insurance company from adverse selection as well as those people who may have fraudulent motives towards the company. Adverse selection may occur when a risk is insured and is likely to happen. The insurance company will take responsibility of preventing loss of money through such dubious means by the person seeking insurance cover.
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