Economists have classified industries into three types based on the degree of product differentiation, the ease of entry and exit from an industry (behavior in markets), and based on the number of firms that produce and sell a product (production processes). A monopolistic market falls in the category that is classified based on the number of firms that produce and sell a given product (Parenti, Ushchev, and Thisse 2017, p.86). The monopoly occurs when a particular firm sells a product that does not have close substances, and therefore no firm can enter their sector; the monopoly being the barrier to entry.
Monopoly Predictions and their Accuracy in Practice
In order to achieve perfect competitions, all buyers and sellers are supposed to have perfect knowledge and freedom of entry. Entering a market segment involves being able to produce the goods or services which most consumers in the sector want. As a result, a firm in a monopolistic market faces a constant need to respond to consumer needs or risk being driven into extinction (Bertoletti, Fumagalli, and Poletti 2017). The viability of a monopolistic firm depends on the amount of control it sells or the price at which it sells its output. The predictions strategies are, thereby, intended to determine the quantity to supply, consumer's demand will, and the price it can change in order to sell a particular quantity (Kokovin, Goryunov, and Tabuchi 2017). The figure below describes a method that can be used to predict the effect of monopoly taking over an industry with perfect competition; the main assumption is that costs remain the same during the process of monopolization.
Model Evaluation
The Arm(Dp) illustrated above refers to the monopolists' demand curve while it is perfect competition with the market demand curve. The MC represents the combined marginal cost curve of all the entities present in a perfectly competitive market sector. The illustration is whereby the combined marginal cost curve represents the industry's supply curve (Xu, Silva-Risso, and Wilbur 2017). The equilibrium, in this case, is achieved when the demand matches the supply hence the perfect competition. In a monopolistic industry, the costs remain unchanged and produce a situation whereby MC=R, resulting in an equilibrium price of OPm which is higher than OPc and an equilibrium where the quantity of OQm is lower than OQc (Dunn 2017, p.350).
A perfect competition market is whereby firms do not have the market power and they are simply affected by the market price to which they have responded to. In a monopolistic market, there is no competition and firms only respond to market power. As mentioned above, monopoly predictions depend on the maintained conditions of a monopoly market structure. Accuracy, in this case, refers to the degree to which the result of a calculation or measurement matches the correct standard. In a monopoly, the standards entail perfect competition and the assumption that costs remain constant during the process of monopolization (Nocco, Ottaviano, and Salto 2017, p.715). If these conditions are met, it leads to reaping of economies of scale (Campolmi, Fadinger, and Forlati 2018, p.660); it can be attained if several small producers can be replaced by one large producer. The large producers can have the capacity to lower prices and improve output. By so doing, it can be possible to forecast a social gain derivable from monopolization. In the figure above, the marginal cost curve from MC to MC1 represents the gaining economies of scale; a greater equilibrium of OPc is gained where MC1 intersects with the marginal revenue curve.
Findings and Conclusion
The monopolistic approach can be improved if firms within a sector choose a quantity or price but not either of them independently. The best way to achieve that is to take into account the demand curves of their output through the perspective of the competitive and monopolistic firm. For instance, in a competitive firm, the demand curve for its output is perfectly elastic or horizontal at the market price. In such a case, the consumers are willing to purchase any amount of products from the firm at whatever price the competitive firm wishes. Conversely, the monopoly experiences a demand curve that on a downward sloping market in regards to the demand curve of the products; such is caused by being the sole supplier in the market (Nocco, Ottaviano, and Salto 2017, p.706). If the monopolistic firm chooses high prices for its commodities, the customers would not want to by as much, but since there are no alternative suppliers and limited substitutes for the offered product, the demand will not get to zero.
References
Bertoletti, P., Fumagalli, E. and Poletti, C., 2017. Price-cost margins and firm size under monopolistic competition: The case of IES preferences. Research in Economics, 71(4), pp.653-662.
Campolmi, A., Fadinger, H. and Forlati, C., 2018. Trade and Domestic Policies in Models with Monopolistic Competition(No. crctr224_049_2018). University of Bonn and University of Mannheim, Germany.
Dunn, B., 2017. Class, Capital and the Global Unfree Market: Resituating Theories of Monopoly Capitalism and Unequal Exchange. Science " Society, 81(3), pp.348-374.
Kokovin, S., Goryunov, M. and Tabuchi, T., 2017. Continuous Spatial Monopolistic Competition: Matching Goods With Consumers (No. WP BRP 173/EC/2017). National Research University Higher School of Economics.
Monopoly v. perfect competition n.d, Microeconomics, viewed 27 November 2018, < http://www.sanandres.esc.edu.ar/secondary/economics%20packs/microeconomics/page_121.htm>
Nocco, A., Ottaviano, G.I. and Salto, M., 2017. Monopolistic competition and optimum product selection: Why and how heterogeneity matters. Research in Economics, 71(4), pp.704-717.
Parenti, M., Ushchev, P. and Thisse, J.F., 2017. Toward a theory of monopolistic competition. Journal of Economic Theory, 167, pp.86.
Xu, L., Silva-Risso, J.M. and Wilbur, K.C., 2017. Dynamic quality ladder model predictions in nonrandom holdout samples. Management Science.
