Monopolistic Competition versus Monopoly Essay Example | Topics and Well Written Essays - 1500 words

Monopolistic Competition versus Monopoly - Essay Example Monopolistic competition is comprised of a group of producers with identical products. The competition between the producers is not determined by the prices of the goods they supply but rather by how differentiated their products are (Salvatore, 2006, p.238). In this kind of competition the producers that are involved take the price that the rival producer is charging and use it on his own product not considering the consequences of the price. The scenario is different in a monopoly. Here, a single firm is the sole supplier of a given product as is the case when Wonks bought up the individual competitors and joined them to make up a single firm. The main characteristic of a monopoly is that the producer has a higher market share than that which is expected within a perfect competition. Another characteristic of the monopoly set up is the lack of substitute products in the market denying the consumers a choice. In this paper, we are going to analyze the consequences of a monopolistic competition being transformed into a monopoly. The hypothesis developed is; analyzing the effect that transforming a group of companies in a monopolistic competition into a monopoly will have on consumers, government and the company. Discussion In order to better understand the transformation, a closer look at the characteristics of both a monopolistic competition and a monopoly is required. In so doing, one can then draw parallels and differences that arise. In a monopolistically competitive market, a firm acts as a monopoly does in the short run, however in the long run, the market resembles a perfect competition since there is entry by more competitors and the gains accrued by having highly differentiated products diminish as does the possibility of the producers gaining economic profits. Consumers are very aware about the qualities of the products that the rivals offer since the differences are not evidenced by price. This model therefore is characterized by well informed custom ers and the producers rely on brand uniqueness to trigger a brand loyalty in consumers. In this model, there is no barrier to entry or exit. The model can thus be attractive to a large number of producers with identical products as there are no rules against entry. Likewise, there are no rules that may hinder a producer exiting the market when it is no longer attractive. Lastly, producers exercise a certain degree of control over the prices they charge. Although the control they have is limited, a producer can decide to price his products differently from the market price. The government can usually intervene in a monopoly in order to accomplish a determined goal or simply to cushion the consumers against extortion. Otherwise, when a monopoly is not coerced to perform in a certain way, the most typical goal is to maximize profits. The producer accomplishes this by producing few goods and charging them at a high price. The producer is thus a price maker in contrast to one in a monopo listic competition Monopolies often have barriers to entry where other sellers find it extremely hard to enter the market (Burkett, 2006, p. 155). This may be due to the structure adopted by the monopoly that discourages competition or may be sanctioned by the government. The major characteristic of a monopoly, however, is the fact that only a single producer is present in the given market. Here, it is assumed that