Non-competitive Markets

Monopoly is a market structure in which there is a single seller of a product that has no close substitutes, protected by barriers to entry. Features of Monopoly: 1. Single seller: One firm constitutes the entire industry. The firm IS the industry. 2. No close substitutes: The product has no close substitutes — consumers cannot easily switch to alternatives. 3. Price maker: Unlike a competitive firm, the monopolist has control over price. By varying output, it can influence the market price. 4. Barriers to entry: New firms are prevented from entering by legal barriers (patents, licences), natural barriers (high capital costs, economies of scale), or resource ownership. 5. Downward-sloping demand curve: The monopolist faces the entire industry demand curve, which slopes downward. Price and Output Determination (Monopolist's Equilibrium): • The monopolist faces a downward-sloping demand curve → Average Revenue (AR) = Demand curve slopes downward → Marginal Revenue (MR) < AR (Price) for all units beyond the first. • MR curve lies below the AR curve. Profit maximisation: The monopolist maximises profit where MC = MR (and MC is rising). • Unlike a competitive firm, P > MC at monopoly equilibrium — the monopolist charges a price above marginal cost, creating allocative inefficiency. • The monopolist can earn supernormal profit in both the short run AND the long run (because barriers prevent entry). Monopoly vs. Perfect Competition: 1. Output: Monopoly output < competitive output. 2. Price: Monopoly price > competitive price. 3. Efficiency: Monopoly is both productively inefficient (not at minimum AC) and allocatively inefficient (P > MC). 4. Profit: Monopoly can sustain supernormal profit in the long run; competitive firms cannot.

Monopolistic Competition is a market structure that combines elements of both perfect competition and monopoly: • Many sellers (like perfect competition), but • Each seller sells a differentiated product (like monopoly — each firm has a mini-monopoly on its own brand). Features of Monopolistic Competition: 1. Many sellers: A large number of firms, each with a small market share. 2. Product differentiation: Each firm's product is slightly different from competitors — in design, brand name, packaging, quality, or perceived attributes. Example: toothpaste, shampoo, restaurants, clothing. 3. Some price-making power: Because each firm's product is unique, it has some (limited) control over price. The demand curve is downward sloping but relatively elastic. 4. Free entry and exit: Firms can enter and exit the industry freely (like perfect competition). 5. Non-price competition: Firms compete through advertising, branding, and product design rather than just price. Comparison: Vs. Perfect Competition: • Like PC: Many sellers, free entry/exit. • Unlike PC: Differentiated products, downward-sloping demand, some price-making power, heavy advertising. Vs. Monopoly: • Like Monopoly: Downward-sloping demand, P > MR, some price-making power. • Unlike Monopoly: Many sellers, product has close substitutes, free entry, only normal profit in long run. Long-run equilibrium in Monopolistic Competition: • Free entry eliminates economic profit, as in perfect competition. • Long-run equilibrium: P = AC (normal profit), but P > MC (allocative inefficiency). • Firms operate with excess capacity — output is below the point of minimum AC. • Consumers pay more for variety and differentiation (the 'cost of monopolistic competition').

Oligopoly is a market structure dominated by a small number of large firms, each of which is aware of and responds to the actions of others. Key Features of Oligopoly: 1. Few large firms: A small number of firms dominate the market (e.g., the Indian telecom industry — Jio, Airtel, Vi; the global soft drink market — Coca-Cola, Pepsi). 2. Interdependence: Each firm's decisions (price, output, advertising) depend on and affect the other firms. Oligopolists must consider rivals' reactions to any strategy — this is called strategic behaviour. 3. Product may be homogeneous or differentiated: Steel, cement (homogeneous); cars, smartphones (differentiated). 4. Barriers to entry: High capital requirements, economies of scale, patents, and brand loyalty protect incumbents. 5. Price rigidity: Prices tend to be stable in oligopoly — firms are reluctant to change prices because of the fear of rivals' reactions. Kinked Demand Curve Model (Sweezy's Model): • This model explains why prices tend to be 'sticky' (rigid) in oligopoly. Assumption: • If one firm raises its price: Rivals will NOT follow — they keep their prices the same to attract the price-raiser's customers. So demand for the price-raising firm is elastic above the current price. • If one firm cuts its price: Rivals WILL follow — they match the price cut to avoid losing market share. So demand for the price-cutting firm is inelastic below the current price. Result: • The demand curve has a kink at the current price — elastic above, inelastic below. • The MR curve has a vertical gap (discontinuity) at the kink. • As long as the MC curve passes through this vertical gap, the profit-maximising output (where MC = MR) remains unchanged even if costs change. • This explains why oligopoly prices are rigid — firms have no incentive to raise or lower price. Limitation: The model explains price rigidity but does not explain how the current price was set in the first place.