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Market Structures - Characteristics of a Monopolistic Market

Essay by   •  July 24, 2011  •  Case Study  •  970 Words (4 Pages)  •  3,524 Views

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1. Characteristics of a Monopolistic Market

Firstly, this market has many sellers or producers and many buyers. Thus, each firm has a small percentage of the total market share.

Secondly, there are heterogeneous or differentiated products in this market. "Differentiation of the products is in terms of non-price differences such as quality, design, branding and packaging, location, and services." (Hardwick, Khan and Langmead)

In addition, there is easy entry into and exit from the monopolistic market as there are low start up costs, no sunk costs, and no exit costs.

Moreover, each monopolistic firm is independent and can determine its prices without considering its competitors' prices or what effect its prices will have on its competitors, as its actions will have negligible effect on them, and will not prompt retaliatory actions from them.

Another characteristic is that buyers in the monopolistic market have perfect information. The buyers know exactly what goods are available, where the goods sell, the differentiating characteristics of the goods and the prices of all the goods.

Further, firms in the monopolistic market rely on non-price competitive strategies, such as advertising, to flaunt their differentiated products, with the aim of attracting customers to purchase their product over another.

Finally, in the monopolistic market there is no collusion of firms to control outputs and prices. This is because there are very many firms and so it would be easy for one firm to cheat and charge a lower price.

2. Five Companies in the Monopolistic Market

Examples of companies that are in this market include Nokia, Samsung, Sony Ericsson, LG, and Motorola, which are in the mobile phone industry.

3. Compare and contrast a monopolistic competitive market with oligopoly market

An oligopoly market is where there are a few interdependent firms that dominate the market, for example, the major oil companies in the petroleum industry such as Shell Oil Company. A monopolistic competitive market is where there are many buyers and sellers, for example, in the mobile phone industry.

In the oligopoly market, the products are homogenous or differentiated. Some firms offer homogenous or standardized products, for example, firms in the petroleum industry. Other firms offer differentiated products, for example those in the automobile, and electronics industries; and they place emphasis on non-price competition, such as advertising. In the monopolistic market, firms offer differentiated products, and place emphasis on non-price competition.

In an oligopoly market, the firms are interdependent. A firm is pricing policy and profits will depend on its rivals' action. This is because one firm's action will lead to a reaction by its competitors, who will want to protect their interest. Thus, when a firm is making its decision regarding price or quantity or any other thing, it has to take into account the possible reactions of its rivals. This is not the case in monopolistic competitive markets, the firms are too small to have a significant impact on other firms; hence,



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