In economicsthere are two main market structure that are discussed and those are monopolisticcompetition and monopoly. Also less discussed, and only in theory, exists theperfect competition.
The main characteristics for a perfect competition arefirstly, the large number of companies that produce the product, cannot changethe price of the product because of demand and supply law. The product of allthe companies is homogeneity, and finally the free entry and exit of firms inthe industry. In a perfectly competitive market, the price for every firm isgiven and it is identify from the demand and supply power. An example of aperfect competition is the stock market.The purchase ofa product can be described as a monopoly, when the product is produced andoffered from only one firm in the industry. If there are no substitutes,products that satisfy the same need, then there is monopoly.On the otherhand in a monopolistic competition there are many companies that produce andoffer a product, so that every company can take decisions without taking underconsideration the reaction of others, thus there is not the element ofindependence.
Additional, the differentiation of the product in that categorycould be important, not important or also fantastic. That considers the qualityof the product, which means for example the shape, the package and the color ofit.I will presentyou in detail two examples of companies belonging to the monopoly and themonopolistic competition.A monopolizedmarket is characterized by barriers to entry. Only one firm can produce andoffer a product and also there are no other substitutes, products that offerthe same need, are the two main characteristics for monopoly. For example,electricity firm can consider as a monopoly. (Mceachern, W.
A., 2003).The monopolybusiness of Electricity Authority of Cyprus (EAC) dominates in market that itcan produce, because there is no competition; thus the company defines theprice of her product. However, the business must be careful with the price sothat it could not be higher because it increases the demand. For that reasonthe company has two options. The first is to define the price and see what isthe quantity that the buyers will accept in that price and the second is todefine the quantity that the company can produce and then see what the pricethat the buyers will take is. In monopoly, companies have opportunity to earnhigh long- run profits because they are alone in the market. Also they arewilling to maximize their profits without developing new products but relax andearn excess profits.
The raw materialthat is necessary for the produce of electricity service owns in one company.Also the company should have the knowledge and the technology that is requiredfor the produce. The state undertake with law the exclusive production of aproduct, electricity’s purpose is the customer service and not to maximize theprofit. The electricityproduction system of Cyprus consists from three power stations of theElectricity Authority of Cyprus.
The main object of the Company is to continueits leading role in the electricity sector as a time-consuming supplier of theplace, thus ensuring the new liberalized environment a reliable, high- quality powersupply. It is worth to comment that on November 2000, the House ofRepresentatives proceeded and approved a modification of the existingElectricity Legislation so that EAC can engage in other areas of activity. EACnow has the right to operates in areas related to exploitation and develop ofits assets and services according to the approval of the Minister of Commerceand Tourism.As BresnahanT.F. and Reiss P.C. said ‘many technological and strategic forces shape marketstructure, including: economies of scale, cost differences among firms,entrants’ expectation and entry barriers.
‘The situationswhere the long- run average costs could be lower if an industry were undermonopoly is called natural monopoly and it is created when economies of scaleexists.The company willincrease profits by increasing its output, when the marginal cost is less thanthe marginal revenue. If the marginal cost is greater than marginal revenue,the firm will increase profits by reducing its output. Eventually, theenterprise adjusts its production until it reaches Qmax, where the marginalrevenue is equal to the marginal cost. Both competing businesses and monopoliesfollow the same profit maximization rule. The total revenue of a monopolisticmarket maximized when MC = MR.Monopolies can have also some advantages. One of thoseare the economies of scale as monopoly is the only supplier of product orservice in the market.
Another advantage is the ‘possibility of lower costcurves due to more research and development and more investment’ as Sloman J.and Wride A. said. Furthermore monopolies can afford to invest in latesttechnology in order to avoid competition and be efficient.
Because monopolies makelots of profits this can be a development for the long- run term.This form of themarket has monopoly and an element of competition, which is the reason that iscalled monopolistic competition. The purpose of the company here is to maximizetheir profits, while the company is free to entry or exit from the industry atany time in the long- run. We can present that with the equation of marginalcost when it is increasing, with the marginal revenue, which is descending,since the price is not stable for the market.Undermonopolistic competition a company has the opportunity for uniqueness and tryto compete other companies so that she can differentiate herself. For exampleCyprus Institute of Marketing has some competitors but it has the elements thatmakes it different from the rest.
The first picture when somebody visits theInstitute is the very careful building where it is housed. As a Business Schoolis offering many programs and attract different type of students. As well thelecturers of the Institute impart different knowledge to their student, as theyare educated and very qualified. Furthermore it provides library, internetconnection and lecture theatres that are very well organized for the properconduct of the courses. CIM invests in their students promoting well theservice. As we also studying in Marketing Management we have to first identifyand then satisfy all the needs. In Marketing Mix we implement the four Ps whichare: the Product, the Price, the Promotion and the Place.
As far as it concernsthe product, we have to specify and identify what is the need that we want tocover. The results of the marketing audit lead to the definition of marketingobjectives (David Jobber, Fiona Ellis- Chadwick).The argumentscomparing monopolistic competition with monopoly are very similar to perfectcompetition and monopoly where company in every market structure has the same purposeand this is to maximize their profits while she reduce production costs and increaseits sale. As Sloman J. and Wride A. said ‘on the one hand, freedom of entry ofnew firms and hence the lack of long-run supernormal profits under monopolisticcompetition are likely to help keep prices down for the customer and encouragecost saving.
On the other hand, monopolies are likely to achieve greatereconomies of scale and have more funds for investment and research anddevelopment’. Although governmentcan use plenty of policy instruments. One way is to replace the market andprovide goods and services itself.
And another way is to try to convinceproducers, consumers or workers to act differently. Government can use manypolicy instruments in between those ways and one of this is to change the waymarkets operate. These include taxes, subsidies, laws and regulatory bodies (SlomanJ., Wride A.2009).As Anant et al (1995)said ‘von Furstenberg et al.
(1986) findrecently that the sequence ‘spend now-tax later’ has much more empiricalvalidity than the conventionally accepted pair of ‘spend and tax jointly’ ‘.Regarding theanalysis of the main market structures of monopolistic completion and monopolywe analyze how we can recognize those two structures by mentioning theircharacteristics. However the characteristics that differ on each other thereare some similarities of the markets. In both situations the equilibrium pointis below the price line (AR) and also there is excess capacity. As well in bothmarkets, the producer is a price- maker, he can raise or lower the price.