me individual assignment 23-7-07
Post on 08-Mar-2015
68 Views
Preview:
TRANSCRIPT
ABP/B-TECH INDIVIDUAL ASSIGNMENT DECLARATION
I DECLARE THAT THIS WORK IS AN ORIGINAL WORK AND ANY OTHER SIMILAR WORK HAS BEEN APPROPRIATELY REFERENCED IN THIS ASSIGNMENT.
MATERIAL REFERRED TO / QUOTED HAS BEEN REFERENCED IN MY BIBLIOGRAPHY
SIGNATURE: …………………………….
MODULE: Managerial Economics
NUMBER AND TITLE OF ASSIGNMENT SUBMITTED:
Examine the Market form of Monopolistic Competition and provide examples of how this Market Form impacts on the Strategic Behavior of Businesses
WEEKDAY SATURDAY
DATE SUBMITTED: 23 July 2007
STUDENT NUMBER: 20619988
SIGNATURE: …………………………………………………
Assignment mark(For lecturer’s use only)
LECTURER’S SIGNATURE: …………………………………………………………
DATE: ……………………………………………………………………………………
X
CONTENTS
Introduction Page 2
Definition and overview Page 4
Short-run Price and Output determination Page 5
Long-run Price and Output determination Page 7
Product Variation and Selling Expenses Page 10
Examples of Monopolistic Competition
Marketing game Page 11
Conclusion Page 14
Reference Page 15
Introduction
Market structure refers to the competitive environment in which the
buyers and sellers of the products operate. The Market Structure
strongly influences the Price and Output determined, by organizations in
the real world.
According to Dominick Salvatore (2004:324) there are primarily four
types of Market Structures that are identified:
Perfect competition,
Pure monopoly,
Monopolistic competition,
Oligopoly.
Characteristics of the four types of Market structures
Perfect competition
Many buyers and sellers of a product, each too small to affect the price
Product is homogeneous
Perfect mobility of resources
Economic agents have perfect knowledge of the market conditions
Monopoly
A single firms sells a product for which there is no close substitutes.
Entry into the industry is very difficult or impossible (as evidenced that
there is a single firm in the industry.
Monopolistic competition
There are many sellers of a differential product and entry into or exit from
the industry is rather easy in the long run. Dominick Salvatore (2004:324)
Oligopoly
There are a few sellers of a homogeneous differential product. Entry into
the industry is possible, however it is not as easy due to the small number
of firms in the industry. Dominick Salvatore (2004:324)
Companies operate in one of the above four mentioned Market
Structure’s by virtue of their product/service they offer. For the
purposes of this assignment, we need to focus on Monopolistic
Competition, and the impact it has on the strategic behavior of
business.
Definition and overview of Monopolistic Competition
As implied by the name, Monopolistic Competition is combination of a
Monopoly and Competition. The competitive element is a result of the fact
that there are many sellers of the differentiated product each too small to
affect each other. The monopolistic element arises from the product
differentiation; the product sold by each seller is somewhat different from
the product sold by another seller. The monopoly power is however
severely limited, due to the availability of the many close substitutes.
Hence, if the seller increases his price even moderately, it would stand to
lose a great deal of its sales.
Monopolistic Competition, is most common in the retail and service
sectors of our economy; i.e. Fast-food outlets, drugstores, video rental
stores and pizza parlors. Firms in each of these businesses have some
monopoly power over their competitors based of their product
differentiation, location, service, range of products and cost. However,
due to the availability of market substitutes, their market power is very
limited.
Due to each firm retailing or providing a differentiated service, we cannot
draw the market supply or demand curve. Also there is no single
equilibrium price for the product but instead a cluster of them.
In contrast to a perfectly competitive firm, monopolistically competitive
firms can determine the characteristics of the products and the amount of
selling expenses to incur, as well as price and quantity. Dominick
Salvatore (2004:349)
Short-Run Price and Output determination
Due to Monopolistically Competitive firms producing differentiated
products, the demand curve is negatively sloped, this is attributed to there
being so many close substitutes for the product, which results in the
demand curve being highly price elastic.
The fewer the products, the higher the Price elasticity of demand is.
Dominick Salvatore (2004:351)
As in the case of firms in the other forms of market structure examined
the best level of output of the monopolistically competitive firm in the
short run is given by the one at which marginal revenue equals marginal
cost, provided that the price exceeds the average variable cost.
MR = MC Dominick Salvatore (2004:351)
Short-run Price & Output ~ Monopolistic Competition
0
5
10
15
0 3 6 9 12 15 18Q
$
D
MR
ATC
MC
As per the internet site in the short run, then, the monopolistically
competitive firm faces limited competition. There are other firms that sell
products that are good, but not perfect, substitutes for the firm's own
product. In the words of British economist Joan Robinson, every firm has
a monopoly of its own product. When the product is differentiated, that
means the firm has some monopoly power -- maybe not much, if the
competing products are close substitutes, but some monopoly power, and
that means we must use the monopoly analysis, as if Figure 1 below.
We see that, as usual in monopoly analysis, the marginal revenue is less
than the price. The firm will set its output so as to make marginal cost
equal to marginal revenue, and charge the corresponding price on the
demand curve, so that in this example, the monopoly sells 1000 units of
output (per week, perhaps) for a price of $85 per unit.
But this is just a short run situation. We see that the price is greater than
the average cost (which is $74 per unit, in this case) giving a profit of
$11,000 per week. We remember too that this is economic profit -- net
of all implicit as well as explicit costs -- so this profitable performance will
attract new competition in the long run. What that means is that new firms
will set up, and existing firms will change their products, so that there will
be more, and closer, substitutes in the long run. That will shift the
demand for this firm's profits downward, and perhaps cause the cost
curves to shift upward as well, squeezing the profit margins.
Long-Run Price and Output determination
In the short run firms in a monopolistically competitive market earn profits,
and then more firms will enter the market in the long run. The demand
curve will shift to the left for each monopolistic competitor until it becomes
tangent to the firm’s LAC curve. Eventually in the long run all
monopolistically competitive firms will break even and produce on the
negatively sloped portion of their LAC curve. Dominick Salvatore
(2004:352)
The demand curve facing a typical or representative monopolistically
competitive firm in the long run is referred to as D’. As more firms enter
the monopolistically competitive market in the long run, (that is the
demand curve D’ is lower and more price elastic than the demand curve
D that the firm is faced with in the short run) therefore each monopolistic
competitor is left with a smaller share of the of the market and more price
elastic demand curve because of the greater range of competition in the
long run. Dominick Salvatore (2004:352)
Long-run Price & Output ~ Monopolistic Competition
0
2
4
6
8
10
0 3 6 9 12 15 18Q
$
As per the internet in monopolistic competition, when one firm or product
variety is profitable, it will attract more competition -- more substitutes and
closer substitutes for the profitable product type. Thus, demand will shift
downward and (perhaps) costs will increase. This will go on as long as
the firm and its product type remain profitable. A new "long run
equilibrium" is reached when (economic) profits have been eliminated.
This is shown in Figure 2:
In this example, the firm can break even by selling 935 units of output at a
price of $76 per unit. The profit -- zero -- is the greatest profit the firm can
make, so profit is being maximized (as usual) with the output that makes
MC=MR .Zero (economic) profit is also the condition for long run
equilibrium in a p-competitive industry. But this equilibrium is not the ideal
that the long run equilibrium in a p-competitive industry is. Many
economists feel that the long run equilibrium in a monopolistic industry
has some problems:
Inefficiency
Notice that, either in the long run or in the short, the price is greater than
marginal cost. But the condition for efficient production is that price is
equal to marginal cost. Thus, an individual firm's output is less that would
be efficient, according to the traditional standard.
Excess capacity
We see that, in the long run, the firm is not producing at the bottom of its
long run average cost curve. Instead, it is operating on a scale that is
smaller and less efficient -- the firm has a capacity to produce more at a
lower average cost. To put it a little differently, each firm is serving a
market that is too small, and there are too many firms, so that the product
group as a whole has the capacity as per the internet site.
Product Variation and Selling Expenses under Monopolistic
Competition
A firm can increase its expenditures on product variation and selling effort
in order to increase the demand for its product and make it more price in
elastic under monopolistic competition. A change in characteristics of the
product that a monopolistic competitor undertakes in order to make its
product more appealing to consumers is referred to as Product variation.
Selling expenses, are the cost incurred in order to sell the product;
i.e. advertising cost, increasing sales force and providing better service
for products.
Product variation will increase the firms sales and profits, however they
also add to the running expenses. More emphasis must be spent on
Product variation and selling efforts as long as the MR, from these efforts
exceeds the MC, and until MR=MC.
i.e. advertising cost, increasing sales force and providing better service
for products. Dominick Salvatore (2004:352)
Example of a Monopolistic Competition
The Marketing game
A good example of Monopolistic Competition is the exercise that was
given to us for the Market Management course. Four groups made-up
the total product market and in this market we were made to compete
against each other, all having a similar product. The differentiation was in
the features and after sales service that was provided to the consumer.
All groups were given the same budget for the first year thereafter the
budget changed according to how much of the market segment the group
was able to capture.
Through the game, we could see that all the groups competed very
vigorously against each other, each trying to have the little extra that
would help it achieve maximum sales. Through active marketing and
proper market analysis we were able to start taking the lead in the
market.
As we progressed through the weeks we compiled the following data that
is reflected in the following graphs.
Sales per segment
In the attached graph we can see the sales per market segment;
Sales per segment
0
5000
10000
15000
20000
25000
30000
1 2 3 4 5 6 7 8 9 10
0
20000
40000
60000
80000
100000
120000
Students home users assistants creatorsmanagers parents Total
Market Share
In the attached graph we can see the manner in which each group used
its capital, resulted in it gain or losing market share.
Summary
Advertisement vs Quantity sold
In the attached graph we can see the impact the advertising cost has on
the number of units that are sold.
market share
0
10
20
30
40
50
60
1 2 3 4 5 6 7 8
echat champion voiceman raasib
Conclusion of the Market Game
As we progressed through the game, we learnt that we needed to firstly
identify the Market in which we wanted to be in and their requirements.
Once that was done we did our market research and decided that our
product must be feature filled and value for money. As each week
progressed we had to adapt based on the information we got from the
market surveys and make new strategic plans to counter our opponents.
By having a very aggressive market domineering strategy; ie.
increasing/reducing the features, increasing/reducing the advertising
expense, increasing/reducing the sale force, etc. thereby ensuring that
the product was differentiated by both features and service from our
competitors, we realized our objective of making the most amount profit
and having the largest market share.
Strategic plans are in place to guide the organization in achieving its
strategic objectives. With the changing environments, it is important that
for the objectives to remain static and realistic, the strategic plan has to
be manipulated to ensure that the organizations objectives are not
jeopardized. This not only entails capturing potential opportunities that
arise with the changing markets, but also to alleviate any threats that
emerge from negative marketing environmental influences.
Conclusion
As can be seen, in Monopolistically competitive markets it is very important for a company to differentiate its product so as to ensure that it grows its Market share. Thereby consuming a large portion of the existing/fixed market. Business need to ensure they are competitive in both price as well as quality, as this can only allow them to gain more share.
References
Salvatore, D, 2004, 5th ed, Managerial Economics in a Global Economy, New York, Harcourt College Publishes, Fort Worth.
Internet Site International Trade Theory and Policy Last Updated on 2/15/07
top related