Characteristics of Monopoly and monopolistic

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					Monopoly characteristics regarding Microsoft Competition


Introduction
Monopoly is a term derived from the Greek words 'monos' or alone and 'polein' or sell.
The term is extensively used in economics. It refers to controlled power over the market,
by an individual or company.


Monopoly symbolizes control over a product to the extent that the enterprise or
individual dictates the terms of access and the markets for availability. The term is
specific to a seller's market. A similar situation in the buyer's market is referred to as
monophony. Monopoly first appeared as an economics-related term in 'politics' by
Aristotle. In his work, the thinker describes the rise and fall of monopolies of olive
presses.


In ancient times, common salt was responsible for natural monopolies, till the time
people learned about winning sea-salt. Regions that faced scarcity of transport facilities
and that of storage were most prone to notorious escalation of commodity prices and
uneven distribution of daily-use products and services. The characteristics of monopoly
are unique to the condition generated by intent.
A Firm is considered a monopoly if :
(1) A single firm selling all output in a market,
(2) A unique product,
(3) Restrictions on entry into and exit out of the industry, and more often than not
(4) Specialized information about production techniques unavailable to other potential
producers.
(Ref 3)




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Characteristics of monopoly
The characteristics of monopoly are in direct contrast to those of perfect competition. A
perfectly competitive industry has a large number of relatively small firms, each
producing identical products. Firms can freely move into and out of the industry and
share the same information about prices and production techniques. (Ref 13)


The fundamental cause of monopoly.
      Barriers to entry , Barriers to entry have three sources:
           a. An ownership of key resource
           b. A legal barrier by government
           c. A large economy of scale
      Exclusive ownership of an important resource that cannot be readily duplicated is
       a potential source of monopoly.
      Government-created monopolies
      Patent and copyright laws are a major source of government-created monopolies.
       Governments also restrict entry by giving a single firm the exclusive right to sell
       a particular good in certain markets.
Monopoly versus perfect competition (Ref 20)
   Competitive firm                            Monopoly
          A is one of many producers                    A is the sole producer
          A has a horizontal demand curve               A    has     a   downward-sloping
          A is a price taker                             demand curve
          A sells as much or as little at               A is a price maker
           same price                                    A        reduces price to increase
                                                          sales


Price control:
In a monopoly, on account of a single market entity controlling supply and demand,
degree of price and supply control exerted by the enterprise or the individual is greater.
The absence of competition spares the monopolizing company from price pressure.
Nevertheless, to evade the entry from new market participants, the company needs to
regulate the set product or service price within the paradigms of the monopoly theorem.
Monopoly has scope for entrepreneurship to make available limited goods and/or


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services at a higher price. The price and production decisions of such firms target profit
maximizing via predetermined quantity choice. This helps to cut even on the marginal
and revenue outcomes. (Ref 2)


Total Revenue        P x Q = TR
Average Revenue     TR/Q = AR = P
Marginal Revenue        TR/    Q = MR
- MR does not equal AR


Increased scope for mergers:
In a monopoly, due to the dictates of a single entity, scope for vertical and/or horizontal
mergers increase. The mergers take on coercive form to effectively blot out competitors
and carry on supply chain management. (Ref 2)


Monopoly’s Marginal Revenue
A monopolist’s marginal revenue is always
less than the price of its good. The demand
curve is downward sloping (Figure 1). When
a monopoly drops the price to sell one more
unit, the revenue received from previously
sold units also decreases
When a monopoly increases the amount it
sells, it has two effects on total revenue (P x
Q). The output effect—more output is sold,
                                                                      Figure 1
so Q is higher.
The price effect—price falls, so Q is higher.
(Ref 2)
Legal sanctions:
Competition laws restrict a monopoly with regards to the extent of dominant position
held and exhibit of illegal and abusive behavior. This is, however, milder in the case of a
government-granted monopoly. Such a legal monopoly is offered as an incentive to a
risky, domestic venture. (Ref 2)




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Predatory pricing:
This feature of monopoly benefits the
consumers. These are short term market gains
when prices drop to meet scarce demand for
the product (Figure2). The suppliers and
direct    consumers     benefit   from       the
monopolizing company's attempt to increase
sale for business marketing. This kind of
pricing also helps the government to step in
and address any unregulated monopoly. If the
predatory pricing is not managed efficiently,
                                                                   Figure 2
the monopoly environment could be split.
A monopoly maximizes profit by producing the
quantity at which marginal revenue equals
marginal cost (Figure3). It then uses the demand
curve to find the price that will induce
consumers to buy that quantity. (Ref 2)




Price elasticity:                                                    Figure 3
with regards to the demand of the product or service offered by the monopolizing
                                       company or individual, the price elasticity to
                                       absolute value ratio is dictated by price increase and
                                       market demand. It is not uncommon to see surplus
                                       and/or a loss categorized as 'dead-weight' within a
                                       monopoly (Figure4). The latter refers to gain that
                                       evades both, the consumer and the monopolist.
                                       (Ref 2)




Lack of innovation:
On account of absolute market control, monopolies display a tendency to lose efficiency
over a period of time. With a one-product-shelf-life, innovative designing and marketing
techniques take a back seat. (Ref 2)

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Lack of competition:
When the market is designed to serve a monopoly, the lack of business competition or
the   absence   of   viable   goods   and   products   shrinks   the   scope   for   'perf ect
competition'(Figure5). (Ref 2)




                                            Figure 5

Monopoly litigation:
Lack of competition does not eliminate consumer dissatisfaction. High market share
results in consumers defying increased prices and welcome new entrants to the seller's
market. Competition law dictates are designed to pronounce a monopoly illegal, if found
to be abusing market power via practices of exclusionary nature. The law addresses
abusive conduct in the form of product tying, supply cuts, price discrimination and
exploitative deals. (Ref 2)




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Monopoly in terms of Microsoft


Officials of the US department of justice and the
attorneys general of 17 states have requested that a
federal judge split the Microsoft Corporation into two companies. The argument is that
the split would provide greater competition in computer software.
If all other things are held equal, a monopoly can raise the price of its product above that
which would prevail in a competitive market, to the disadvantage of consumers. But in
the case of software, other things are not equal. Many computer programs complement
one another, working together in an integrated way to create a whole greater than the
single parts. This synergy would be lost if the windows operating system is split into one
company and applications into another.
Another aspect of the case is the global economy. The USA has a huge trade deficit with
the rest of the world, and one major exception has been computer software. The US has
been the leader in developing computer programs. Breaking up Microsoft will open the
door to more foreign as well as domestic competition, and exports of American software
will decline. Other countries encourage their leading industries, while us policy is to
punish any firm that gets too successful.
Microsoft is not an absolute monopoly, since it is not the only producer of operating
systems. Apple-Macintosh computers use different operating systems, and there are
competing systems available, though not yet widely used, for IBM-type computers. It is
possible to enter the field, either with a new operating system, or with software that
bypasses such systems via the internet. At most, Microsoft has monopoly power, the
power to raise prices and to stifle competition.
Microsoft is accused of exploiting such monopoly power. If the company has behaved
wrongly, then the appropriate remedy is a lawsuit or prosecution of the relevant
executive’s .Splitting the firm in two goes beyond any needed remedy for bad behavior.
Monopoly power in software is quite different from that of some natural resource such as
oil, as the technology is advancing rapidly, and even a dominant firm must innovate or
be left behind. Moreover, Microsoft’s biggest competitor is its own past products. The
biggest competition for windows 98 or 2000 is Windows 95, since the new version is not
just sold with new computers, but also to previous users who wish to upgrade. If the new
version is priced too high, then users will stick with their older versions.


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Many people envy the great wealth that has been obtained by the shareholders and
especially the top executives of Microsoft. They think it's not fair that so much wealth
should be concentrated in a few hands. But the moral criterion should be how this wealth
was obtained, not how much it is or who has it.




                                                                                 Figure 6




If the wealth came from land values not generated by the owners, then the appropriate
remedy is the community and public collection of the rent, not interference in the
enterprises using land. If excessive wealth came from protection granted by patents, then
the appropriate remedy is to reform the patent system. Effective remedies eliminate the
causes rather than just treat effects.
If splitting Microsoft really benefited the public and other software firms, then the
response would be an increase in the prices of the shares of stock of these companies
(Figure6). But instead, the share prices and market averages have tumbled down. This
indicates that the breakup is seen as damaging by shareholders in general. The investing
public does not think the breakup will help. (Ref 4)
The best evidence that Microsoft is a monopoly and insulated from price
competition is its huge profits. As Microsoft's installed base expands, its average
cost per unit of software is dropping dramatically, but it doesn't want to pass the
savings on to the customer, as they would have had to if they had true
competition, which they minimized primarily by OEM distribution of their
software, which continues to this day.
As a monopolist, Microsoft provides as little value as possible to each upgrade,
to extend the upgrade cycle as long as possible for greater profits. Maybe this
explains the lack of innovation in a company with so many advantages as a
monopoly and with so many billions of dollars to invest for research and
development! Thus, ironically, Microsoft's best strategy is NOT to innovate.
(Ref 12)

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Monopolistic characteristics regarding Wall Mart competition


Introduction
Market situation in which many independent buyers and sellers may exist but competition is
limited by specific market conditions. It assumes product differentiation, a situation in which
each seller's goods have some unique properties, thereby giving the seller some monopoly
power.
A type of competition within an industry where:


1. All firms produce similar yet not perfectly substitutable products.
2. All firms are able to enter the industry if the profits are attractive.
3. All firms are profit maximizers.
4. All firms have some market power, which means none are price takers. (Ref 11)


i. Monopolistic competition (Figure7)




                                         Figure 7


ii.         Economic              analysis          of            monopolistic         competition
      A.    P      is      high       compared        to      pure      competition (P>MR=MC)
      B. Quantity will be restricted causing ATC to be higher than that indicated by the
curve's lowest point. (Figure 7)
      C.   Tends    to    be      more    competitive      than      monopoly    and   oligopoly.
      D.   Some believe economic profit tends toward zero as the number of firms adjust
to varying profit levels.(Ref 6)


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iii. Attitudes differ toward monopolistically competitive companies using advertising to
emphasize product differentiation.

                            For                                            Against

               Informs potential customers                           Persuades potential

            Finances national communication                       Social costs (billboards)

               Rewards and thus stimulates
             technological advancement and                         Adds little to a product
                        innovation

       Increases output resulting in economies of          Ads cancel each other's effect, output
                   scale and lower ATC                         doesn't change, ATC increases

           Promotes spending and employment               Promotes of spending cannot be proven.


Characteristics of Monopolistic
Monopolistic competition refers to a market structure that is a cross between the two
extremes of perfect competition and monopoly. This allows for the presence of
increasing returns to scale in production and for differentiated (rather than homogeneous
or identical) products. However this retains many features of perfect competition, such
as the presence of many many firms in the industry and the likelihood that free entry and
exit of firms in response to profit would eliminate economic profit among t he firms. As a
result, this offers a more realistic depiction of many common economic markets. The
best describes markets in which numerous firms supply products which are each slightly
different from that supplied by its competitors. Examples include automobiles,
toothpaste, furnaces, restaurant meals, motion pictures, romance novels, wine, beer,
cheese, shaving cream and many more.
Monopolistic Competition
A firm engaged in monopolistic competition which is considering reducing prices in order to
increase total revenue has two conflicting factors to consider. Reducing prices will increase
the quantity of a good sold, but the reduction in price will also apply to quantities of the good
that would have been sold at a higher price.(Ref 11)




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Marginal revenue curve in monopolistic competition .
The phrase "contestable markets" describes markets where there are few sellers, but they
                                            behave in a competitive manner because of the
                                            threat of new entrants. For instance, an airline
                                            may serve a particular route exclusively, but does
                                            not charge excessive prices because those prices
                                            would entice additional airlines to offer that
                                            route.(Ref 15)


                                            Government regulation is often used to keep new
                Figure 8
                                            firms out of markets. Economists generally favor
deregulation as this helps to keep prices low. Prices over the long run in a competitive market
will move to the lowest point of the firm's average
total cost curve.(Figure 8)
Because price searchers face downward-sloping
demand curves, the price they charge will exceed
the firm's marginal cost. The price charged and
the quantity produced will not be where the firm
minimizes average total costs. (Figure9) (Ref 12)
A monopolistically competitive market has                              Figure 9
features which represent a cross between a perfectly competitive market and a
monopolistic market (hence the name). Below are listed some of the main assumptions
of the model.
1) Many, many firms produce in a monopolistically competitive industry
2) Each firm produces a product which is differentiated (i.e. Different in character) from
all other products produced by the other firms in the industry.
3) The differentiated products are imperfectly substitutable in consumption. This means
that if the price of one good were to rise, some consumers would switch their purchases
to another product within the industry. Consumer demand for differentiated products is
sometimes described using two distinct approaches: the love of variety approach and the
ideal variety approach.
Love of variety: the love of variety approach assumes that each consumer has a demand
for multiple varieties of a product over time.


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Ideal variety: the ideal variety approach assumes that each product consists of a
collection of different characteristics. For example each
automobile has a different color, interior and exterior
design, engine features, etc. (Ref 7)
4) There is free entry and exit of firms in response to
profits in the industry. Thus if firms are making positive
economic profits, it acts as a signal to others to open up
similar firms producing similar products. If firms are
losing money, making negative economic profits, then,
one by one, firms will drop out of the industry. Entry or               Figure 10

exit affects the aggregate supply of the product in the market and forces economic profit
to zero for each firm in the industry in the long run
5) There are economies of scale in production (internal to the firm). This is incorporated
as a downward sloping average cost curve. (Figure10)
These main assumptions of the monopolistically competitive market show that the
market is intermediate between a purely competitive market and a pu rely monopolistic
market. The analysis of trade proceeds using a standard depiction of equilibrium in a
monopoly market. However, the results are reinterpreted in light of the assumptions
described above. (Ref 5)
Output, Price, and Profit of a Monopolistic Competitor
A monopolistically competitive firm prices in the same manner as a monopolist —where
MC = MR. But the monopolistic competitor is not only a monopolist but a competitor as
well. (Figure11)(Ref 14)




                                     Figure 11




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Output,   Price,   and   Profit    of   a   Monopolistic
Competitor
At equilibrium, ATC equals price and economic
profits are zero. This occurs at the point of tangency
of the ATC and demand curve at the output chosen
by the firm. (figure12) (Ref 19)

                                                                           Figure 12
Product Development and Marketing in Monopolistic
Competition


Firms engaged in monopolistic competition invest in product development and marketing so
as to differentiate themselves from other firms in the industry. By doing so, they hope to gain
more monopolistic pricing power. Since advertising increases costs, it will shift supply curves
up and to the right. Ultimately, over the long run, consumers pay for the advertising in the
form of higher prices.


In comparison to the pure competitive market, prices will be higher and quantities produced
will be lower when there is monopolistic competition. However, there will be a greater
variety of goods. This may be a worthwhile tradeoff. (Ref 20)


Criticism of Wal-Mart


Wal-Mart has been subject to criticism by various
groups and individuals. Labor unions, community
groups, grassroots organizations,religious
organizations, and environmental groups protest
against Wal-Mart, the company's policies and business practices, and Wal-Mart
customers. Other areas of criticism include the corporation's foreign product sourcin g,
treatment of product suppliers, environmental practices, the use of public subsidies,
and the company's security policies. Wal-Mart denies doing anything wrong and
maintains that low prices are the result of efficiency. (Ref 8)
In 2005, labor unions created new organizations and websites to influence public opinion
against Wal-Mart, including wake up Wal-Mart(united food and commercial workers)
and Wal-Mart watch (service employees international union). By the end of 2005, Wal-

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Mart had launched working families for Wal-Mart to counter criticisms made by these
groups. Additional efforts to counter criticism include launching a public relations
campaign in 2005 through its public relations website, which included several television
commercials. The company retained the public relations firm Edelman to interact with
the press and respond to negative or biased media reports, and has started interacting
directly with bloggers by sending them news, suggesting topics for postings, and
sometimes inviting them to visit Wal-Mart’s corporate headquarters. (Ref 9)
Economists at the Cato institute suggest that Wal-Mart is a success because it sells
products that people want to buy at low prices, satisfying customer's wants and needs.
However, Wal-Mart critics argue at the same time Wal-Mart's lower prices draw
customers away from other smaller businesses, hurting the community.
Wal-Mart is anti-capitalist, anti-competition, pro-corporate welfare. Even the staunchest
capitalist would admit that monopolistic competition is not conducive to consumers or
profit-makers. This is exactly what a multinational retailer like Wal-Mart does. By
undercutting local business, regional/national chains, and even smaller international
retailers, Wal-Mart makes huge profits which it then sits on allowing said money not to
cycle back into the economy. (Figure 13)(Ref 10)
Monopolistic competition, provided that it is not coerced by physical force, is not
destructive to capitalism. If, at a particular time, it is most efficient to have one business
control an industry, then there is no "loss" to the economy, provided there is no
government coercion involved. If Wal-Mart is inefficient and "sits on profits", holding
that money back, then it will soon cease to be the world's largest retailer. Wal-Mart is
big because people choose to shop there. If Wal-Mart has accepted "corporate welfare",
they deserve to be criticized for that, but calling them a "monopoly" is pointless.




                                      Figure 13

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      Conclusion
      Within this topic we have focused on the monopoly and monopolistic competition, the
      properties of demand and supply, price takers and searchers, and demand and supply for
      resources and capital. For a quick review, we've summarized the characteristics of the various
      market types below. (Ref 22)
                        Table: Comparison Between Monopolistic, Oligopoly, Monopoly

  Types of       Quantity                  Price            Marginal        Marginal         Demand               Average total
   market                                                   Revenue
                 Produced                                                      cost                                       cost
Pure           Expand output      Take market price         Same       as   Will equal     Firm is small         In the       long run
competition    unit MC is
                                                            market          market         compared         to   ,market price must
               equal to price
                                                            price           price          overall               equal      or    exceed
                                                                                           market         ,can   ATC will expand
                                                                                           sell as much          production             if
                                                                                           as it wants at        expected long run
                                                                                           market price          price    exceeds       at
                                                                                                                 ATC
Monopolistic   Expand output      Search for best           MR will be      P >MC in       May face              In long run profit
competition    unit MR=MC         price unit                less than       short run      highly elastic        maximizing price
                                  MR=MC                     AR (price)                     demand                must equal or
                                                                                                                 exceed ATC to stay
                                                                                                                 in business ;will
                                                                                                                 tend to expand
                                                                                                                 long term output if
                                                                                                                 price exceeds ATC

oligopoly      Firm has           Will try to avoid         MR will be      P>MC           Elasticity      of    Price will tend to
               control over       severe price
                                                            less     than                  demand           is   exceed ATC ,may
               quantity of        competition :
               output but it      price set                 AR (price)                     very                  not expand output
               must take into     somewhere                                                dependent             even if price is
               account the        between
               reaction of        competitive price                                        upon            the   greater than ATC
               competitors        and monopolistic                                         pricing          of   due     to      potential
                                  price
                                                                                           policies         of   reaction              of
                                                                                           rivals                competitors
monopoly       Firm will tend     Search for price          MR will be      P>MC      in   As firm faces         Price will tend to
               to set output      so as to maximize         less     than   both short     the         entire    exceed ATC ; price
               such        that   profit           ,price   AR (price)      and     long   market                and quantity will
               maximum            exceed MC both                            run            demand curve          not to be set where
               profit       are   in long run and                                          for its product       ATC is minimized
               produced           short run                                                ,demand will
                                                                                           tend      to    be
                                                                                           inelastic


                                                                                                                   Page | 14
Reference:
By Internet:
1)http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=monopoly,+cha
racteristics (5-1-2010)
2) http://www.buzzle.com/articles/characteristics-of-monopoly.html (5-1-2010)
3)Mark.wsc.ma.edu/101/monopoly.ppt (8-1-2010)
4) http://www.progress.org/fold140.htm (5-1-2010)
5) http://ingrimayne.com/econ/international/monocomp.html (8-1-2010)
6)http://www.businessbookmall.com/economics_25_monopolistic_competition.ht
m (6-1-2010)
7) http://internationalecon.com/trade/tch80/t80-5a.php (11-1-2010)
8) http://www.youdebateit.com/score.php?score=578 (5-1-2010)
9) http://en.wikipedia.org/wiki/criticism_of_wal-mart (25-1-2010)
10)http://wiki.answers.com/q/does_wal_mart_have_the_characteristics_of_a_firm_i
n_pure_competition (25-1-2010)
11)http://www.answers.com/topic/monopolistic-competition (25-1-2010)
12)http://thismatter.com/articles/microsoft.htm (8-1-2010)
By Books:
13)Author :sloman, j, (2001) essentials of economics (2nd) p133 (22-1-2010)
14)Author :sloman, j, (2001) essentials of economics (2nd) harlow, person
education ltd. (22-1-2010)
15)Author :gillespie, a, (2001) advanced economic through diagrams oxford
university press (22-1-2010)
By Journals:
16) economic review (09/2003) volume 21 no.1 (15-1-2010)
17) economic review (02/2003) volume 20 no.3 (15-1-2010)
18) economic review (09/2000) volume 18 no.1 (15-1-2010)
19) handout, 2004, the â‘public interestâ’ (25-1-2010)

20) handout, 2004, the model of perfect competition (22-1-2010)
21) handout, 2004, allocative efficiency & market structure (28-1-2010)
22) handout, 2004, price discrimination (22-1-2010)




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