The Gap Between Perfect Competition and Monopoly
The gap between perfect competition and monopoly is only one of degree, not kind. Perfect competition has an elastic demand curve. This is because there are many firms, and the price of a product is decided by the industry, and every firm must utilize that pricing. A monopolistic firm's average revenue curve, on the other hand, slopes downward. The marginal and average revenue curves are distinct from one another (Neary, 2003).
Primary Difference Between a Competitive Firm and a Monopoly
The primary difference between a competitive firm and a monopoly is the ability of a monopoly to determine the price of the products in the market. Competitive firms are referred to as price takers while monopoly firms are termed as price makers. Monopoly firms have a downward sloping demand curve since they are a sole producer of a good or a service. On the other hand, the perfectly elastic demand curves of competitive firms are because they sell products with numerous alternatives (Hudson, 2000).
Water Supply Services are often Produced in a Monopoly Market
Water supply services resemble monopoly in the market because in many places water is usually supplied by city councils in major cities. A monopolistic market is characterized by a single seller and a large number of buyers. This is where there is only one firm in the industry or a single seller selling a product without a close substitution. Second, a monopoly enterprise often sells a product that has no substitute causing an absolute product differentiation. The buyers or consumers could not find the substitute of the product. For instance, water supply from the local public utility does not have a close substitution. In a monopoly market, strict barriers exist for new firms to enter the market. The barriers to entry are either legal restrictions or natural forces restricting the entry of a new firm into the industry. These barriers to entry make monopolists face no competition. These barriers may be in the form of limit pricing where companies can adopt predatory pricing policies through lowering prices to a level where new entrants would operate at a loss (Hunt, & Duhan, 2002).
Moreover, a monopoly controls the distribution and production of products making it difficult for other enterprises to enter the market creating a high barrier to entry. For example, the company that offers water services is usually fully responsible for the distribution of the water to the consumers.
Type of Firm likely to have Zero Economic Profit in the Long Run
In monopolistic competition, firms tend to market heavily. In the short run, the economic profits of monopolistic competition are positive but approach zero in the long run. Monopolistic competition entails an industry where many firms offer similar goods and services that have no perfect substitutes. The decision of one firm in the industry does not affect those of its competitors directly. All firms in this competition have a significantly low degree of market power since they are price makers. Furthermore, the demand is highly elastic in the long run indicating that it is sensitive to changes in price (Behrens & Murata, 2007).
Firms can make more economic profits in the short run because some firms offer incentives to enter the market and barriers to entry are low, increasing the competition until the economic profit is zero. Accounting profits and economic profits differ, in a manner that a firm with a positive net income may have zero economic profit since economic profit incorporates opportunity costs.
The monopolistic competition combines the elements of a perfect competition and a monopoly. This competition tends to cause heavy marketing since different companies need to differentiate widely similar products. A company may lower the price of its product, at the expense of a higher profit margin to get higher sells. Another company may decide to raise the price of its products and use packaging that suggests complexity and quality. Since all products serve the same purpose, limited options exist for firms to differentiate their product offerings from other sellers. Lower quality varieties that are discounted exist, but it can also be difficult to tell if the higher-priced varieties are of better quality. Therefore, a firm in a monopolistic competition is likely to experience zero economic profit in the long run (Behrens & Murata, 2007).
Expiry of Patent Licenses
Patent licenses should not be expiring because of the benefits of the patent to the firm that originally held it. When a patent expires, several enterprises hit the market with similar products. Although this might seem good to the public since it indicates that the invention is availed to everyone, it usually leads to a loss of income for the organization that originally held the patent. A patent does not provide the right to sell an invention, and rather it provides the right to exclude other enterprises from a legal standpoint, from offering for sale or selling an invention for two decades from the filing date. From an economic point of view, a patent is regarded as conferring is proprietor a right to exclude. A patent is referred to as a property right that is limited offered by the government to inventors to share details of their inventions with the public. A patent may be transferred, sold, or assigned like any other property right. The licenses of patents should not expire to allow the inventor to accumulate capital from the invention which may enable him to start managing a manufacturing buildup. Thus, the inventor can spend more time and energy on innovation and allow others to concentrate on manufacturing the product (Neary, 2003).
A patent should not have expiry dates since being an exclusionary right does not permit the owner to exploit the invention subject to the patent. Patents should also not have expiry dates because of the benefits they come with. First, patents provide incentives for economically efficient research and development. Studies show that large international organizations invest more in their research and development departments. The initial investments are considered as inputs of the research and development, patents and products are the outputs. Individuals who support patents claim that without patent protection, research and development spending will be eliminated inhibiting the possibility of technological advances. In nations with higher levels of economic freedom, educational attainment, and economic development patent protection policies promote the revenue collection of firms. Moreover, an optimal level of patent protection will help increase domestic innovation. Second, patents should not have an expiry date because they are intended to encourage and facilitate the exposure of innovations into the public domain. If investors fail to get the legal protection of patents, they may prefer to keep their innovations undisclosed, and this will harm the economic growth of a country. Thus, patents avail the details of new technology in public for exploitation by everyone or further improvement by other investors. Finally, in most industries particularly the ones with low marginal costs and high fixed costs, when an invention exists, the commercialization cost is more than the initial conception cost. The long-term use of a patent will enable competitors to design around the patented invention. This will enhance healthy competition between manufacturers, leading to gradual improvements in the economy and the technology base of a country or a region. Thus, it will help confer better living standards and augment national economies. Therefore, patents should not have an expiry date (Hudson, 2000).
Conclusion
The primary difference between a competitive firm and a monopoly is the ability of the monopoly to determine the price of the products in the market. Competitive firms are referred to as price takers while monopoly firms are termed as price makers. Water supply services resemble monopoly in the market because in many places water is usually supplied by city councils in major cities. Moreover, a monopoly controls the distribution and production of products making it difficult for other enterprises to enter the market creating a high barrier to entry. Furthermore, a firm in a monopolistic competition is likely to experience zero economic profit in the long run. Firms can make more economic profits in the short run because some firms offer incentives to enter the market and barriers to entry are low, increasing the competition until the economic profit is zero.
References
Behrens, K., & Murata, Y. (2007). General equilibrium models of monopolistic competition: a new approach. Journal of Economic Theory, 136(1), 776-787.
Hunt, S. D., & Duhan, D. F. (2002). Competition in the third millennium: efficiency or effectiveness? Journal of Business Research, 55(2), 97-102.
Hudson, J. (2000). Generic take-up in the pharmaceutical market following patent expiry: a multi-country study. International Review of Law and Economics, 20(2), 205-221.
Neary, J. P. (2003). Globalization and market structure. Journal of the European Economic Association, 1(2‐3), 245-271.
