Managing In Competitive,

Monopolistic, and Monopolistically

Competitive Markets
Managing In Perfectly
Competitive Markets
(Perfect Competition)
 1. Perfect Competition

It is a market structure in which there are many buyers and

sellers of a homogeneous product, the buyers and sellers
have perfect information about the market price, there are
no transaction costs, and there are no barriers to market
entry or exit.
The characteristics of a perfect
competition are as follows:
Homogeneous product: The product sold
by all firms in a perfectly competitive
market is identical. This means that buyers
are indifferent about which firm they buy
from.
For example: gasoline ( Petron and Shell)
Perfect information:
Buyers and sellers in a
perfectly competitive
market have perfect
information about the
market price. The
buyers and sellers are
price takers. They
cannot influence the
market price. This
means that the buyers
know exactly how much
they have to pay for the
product.
No transaction costs:
This one is self-
explanatory. For
example: When you
walk to any business
establishment, you
won’t be charged for
buying an item.
No barriers to market entry
or exit: Firms can easily
enter or exit a perfectly
competitive market. This
means that there are no
government regulations or
other obstacles that prevent
firms from entering or
leaving the market.
Demand at the Market and Firm Levels

Let’s take for example, a seller sells a

product. The number of products that
buyers want to buy is called the
“demand.” Now, the demand is
categorized into two parts: market level
and firm level.
1.Market Level: Let’s think of
the "market" as a big group of
people who all want to buy
products. So, at the "market
level," we're looking at how
many products in total all
these people/buyers want to
buy. If lots of people want
products, the market demand
is high, and if not many people
want them, the market
demand is low.
2.Firm Level: Now, let’s assume that
I am the one who is in the business
of selling products. I am one "firm"
in this big market. So, at the "firm
level," we're looking at how many
products only I can sell, not what
every buyer wants. If I have a lot of
products and the buyers want to buy
many of them, then my firm-level
demand is high. But if I don't have
many products or the buyers don't
want to buy them, then my firm-
level demand is low.
 Short-Run Output Decisions
The amount of output that a firm produces in the
short period of time. In the given example, a business
is renting a building for $10,000 per year. This is a
fixed cost which means that whether the business
produces zero or a million units of output, it has to
pay $10,000 rent for one year. Given this situation,
the seller must make a decision on how to maximize
his profit out of the available resources he has at the
moment.
Maximizing Profits
The process of finding the
production output at which
the difference between
revenues and cost is the
largest. Profit maximization
is the process of finding the
level of production that
generates the maximum
amount of profit for a
business.
 Minimizing Losses
When a company's short-run economic loss is
less than its entire fixed cost. This happens when
the price paid is lower than the average total
cost but higher than the average variable cost.
Short Run Operating Losses
A short-term loss is a loss taken on the sale or
disposition of a capital asset held for 12 months
or less when the sale price is lower than the
purchase price.
The Decision to Shutdown
A decision to shut down means that the firm
is temporarily suspending production. It
does not mean that the firm is going out of
business (exiting the industry). If market
conditions improve, due to prices increasing
or production costs falling, the firm can
resume production.
The Short Run Firm and Industry
A manufacturing planning period in which a
business tries to meet the market demand by
keeping one or more production inputs fixed
while changing other.
Example: If a hospital
experiences lower than
expected demand in a
given year but its entire
employment forces of
doctors, nurses, and
technicians is under
contract for the year then
the hospital has no choice
but to swallow a cut in its
profits.
Supply curve
A graphic
representation of
a goods or service
and the quantity
supplied for a
given year period.
Long Run Decision
A long
period of
time after
the begging
of
something.
2.MONOPOLY
A market situation
where one company
owns all the market,
shares and control
prices and output.
Example: Jollibee,
Mang Inasal,
Greenwich
 Monopoly Power
It is refers to the power of a
single firm or group of firms
to price profitably above
marginal cost.
It is occurs
when one business
Dominates an entire market.
Sources of Monopoly Power
The sources of monopoly power include economies
of scale, locational advantages, high sunk costs
associated with entry, restricted ownership of key
inputs, and government restrictions, such as
exclusive franchises, licensing and certification
requirements, and patents.
 Economies of
Scale
Are cost advantages
reaped by
companies when
production becomes
efficient.
.
 Economies of Scope
It means that the
production of one
good reduces the
cost of producing
another related
good.
 Cost Complementarity
It is exist in a multi-product cost function
reduces the marginal cost of producing one
output when the output of another increases,
giving multi-product firms a cost advantage,
potentially limiting market entry and resulting in
monopoly power.
 Patents and Other Legal
Barriers
The sources of Monopoly power can be derived from
technological sources, government grants, or the
patent system. Patents give investors exclusive rights
to sell new products, reducing competition and
incentive for innovation. However, patents rarely lead
to absolute monopoly, as competitors often develop
similar products or technologies. Managers enjoying
patent production are not immune to competitive
pressures.
This section explores how a monopoly manager
can maximize profits by analyzing the price
and output decisions that maximize the
monopolist's power, considering the manager's
role in the firm.
Marginal Revenue
It is the change in total revenue
attributed to the last unit of
output, and it lies below the
demand curve for a monopolistic.
This is because the marginal
Revenue schedule lies exactly
halfway between the demand
curve and the vertical axis,
meaning that for a monopolist,
marginal revenue is less than the
price charged for the good.
Marginal Revenue is the slope of the total
revenue curve, which decreases as output
increases from zero to Qo. As output expands
beyond Qo, the slopes of the total revenue
curve become negative, meaning that
marginal revenue is negative for outputs in
excess of Qo.
Patent, Trademark and Copyright
Protection
1. Patents: Patents protect inventions or novel ideas.
Examples of patented inventions include:
The electric light bulb patented by Thomas Edison.
The telephone patented by Alexander Graham Bell.
 The computer mouse patented by Douglas
Engelbart.
Thomas Edison, Alexander Graham Bell, Douglas Engelbart
2. Trademarks: trademarks protect brand names, logos,
or symbols.
Examples of trademarked brands include:
 The Nike "swoosh" logo.
 The Apple logo.
The Coca-Cola brand name and distinctive script.
3. Copyrights: Copyrights protect original
creative works like books, music, or artwork.
Examples of copyrighted works include:
The novel "To Kill a Mockingbird" by Harper
Lee.
The song "Imagine" by John Lennon.
The painting "Mona Lisa" by Leonardo da Vinci.
 The Absence of a Supply Curve
In perfectly competitive markets, supply curves exist as
firms base their production on price. However,
monopolists determine production based on marginal
revenue, which is lower than price. This means a
monopolist's quantity choice affects market price,
making it impossible to express how quantity would
change at different prices. Therefore, there is no supply
curve for monopolists or in markets with firms holding
market power.
Multiplant Decisions
It is refers to the choices made by a company
with multiple production facilities on how much
output to produce at each facility. The goal is to
find the optimal allocation of production across
plants to maximize profits, considering costs,
efficiencies, and market demand.
Implications of Entry Barriers
Entry barriers in a market prevent new firms from
entering and competing with existing firms. This can
allow monopolists to earn profits and maintain their
market power. However, entry barriers can limit
competition, reduce consumer choices, and
potentially lead to higher prices and less innovation.
3.MONOPOLISTIC COMPETITION
It is a market structure that
falls between monopoly and
perfect competition. In this
model, each firm produces a
product slightly different
from others, making them
close substitutes. This results
in a downward-sloping
demand curve for the firm,
with some consumers
switching to other firms.
However, some consumers may continue to eat at
McDonald's even if the price is higher.
Monopolistic competition also has no barriers to
entry, meaning firms enter the market if existing
firms earn positive economic profits. This model is
particularly relevant in industries like hamburgers,
where consumers may prefer different brands.
Profit Maximization
Under monopolistic competition is similar to a
firm operating under monopoly. The demand
and marginal revenue curves used to determine
a firm's profit-maximizing output and price are
based on the demand for the individual firm's
product, rather than the market demand curve.
This is because firms in monopolistically
competitive industries produce differentiated
products, making the notion of an industry or
market demand curve not well defined. In
contrast, in monopolistically competitive markets,
each firm produces a product that differs from
others', making the analysis more complex.
Long-Run Equilibrium
Monopolistically competitive markets have a long-run
equilibrium where firms earn short-term profits to
capture some of those profits. If existing firms incur
losses, additional firms enter the industry, and in the
long run, some firms exit. This equilibrium is
characterized by each firm earning zero economic
profits but charging a price that exceeds the marginal
cost of producing the good.
This implies that monopolistically competitive
firms produce less output than is socially
desirable, as consumers are willing to pay
more for another unit than it would cost the
firm to produce another unit.
Competition among firms leads to a situation where
no firm earns more than its opportunity cost of
producing. The price of output exceeds the minimum
point on the average cost curve, implying that firms
do not take full advantage of economies of scale in
production. Some argue that this is similar to the
cost to society of having product variety, as fewer
firms could fully exploit economies of scale but
would result in less product variety in the market.
 Implications of Product
Differentiation
Product differentiation is a crucial aspect of
monopolistic competition, where firms have
control over their prices due to the production
of differentiated products. This approach allows
firms to persuade consumers that their products
are better than those offered by competitors.
Examples of such
industries include
fast-food restaurants,
toothpaste,
mouthwash,
gasoline, aspirin, and
car wax.
Firms in monopolistically competitive industries use
two strategies to persuade consumers: comparative
advertising and niche marketing.

Comparative advertising is used to

differentiate a firm's brand from competitors,
increasing demand and adding brand equity. This
strategy can induce consumers to pay a premium
for a particular brand.
Niche marketing involves creating and
advertising new products or services that
meet specific market needs, such as
environmentally friendly products.
OPTIMAL ADVERTISING DECISIONS

A firm's optimal advertising spending depends

on the industry it operates in. In perfectly
competitive markets, advertising is not
profitable due to the lack of substitutes.