Monopolies and Monopolistic Competition

Monopolies and Monopolistic Competition

Type of Market inefficiencies and Profitability in Monopolies

Monopolies are firms operating in the market single-handedly without any competitor offering similar or same product lines. Most monopolies benefit from barriers to entry of market due to regulations that are imposed since they offer social goods. The firms have inefficiency in the market as they offer less output in the market at higher prices unlike if the market was competitive (Mankiw, 2021). Therefore, the firms in the monopoly will produce where the equilibrium quantity is equal to the price that is also equal to the marginal cost resulting in inefficient resource allocation. Due to market dominance, monopolies tend to abuse their power and are not innovative due to a lack of competition occasioning market failure. The profit-maximizing output for monopolies will be at a point where Price will be greater than marginal cost.

Simulation Results with left hand side showing monopoly price/ profits and left hand side showing monopolistic firms price / profits.

Type of market inefficiencies and Profitability in monopolistic firms

Monopolistic firms are firms operating in the same market offering similar products that are highly differentiated since they are close substitutes to each other. Market inefficiencies occur in monopolistic firms since at the optimum output, the price for their products will exceed marginal costs. Thus, the firms will maximize profits at a point where marginal revenue equals marginal costs. The firms have a downward sloping demand curve that makes them yield market power leading to a profit-maximizing level of production occasioning net loss of consumer and producer surplus (Mankiw, 2021). Monopolistic firms operate with excess capacity where the profit-maximizing output will be less than the output level associated with the minimum average cost. In the long run, since the firms will operate at a price level that equals average costs the firms will have idle capacity resulting in market inefficiency.

Reference

Mankiw NG, (2021). Principles of Economics (9th Edition), Cengage Mind Tap. Retrieved from: https://ng.cengage.com/static/nb/ui/evo/index.html?snapshotId=2412533&id=1187428948&deploymentId=5981412353502464190243042516&eISBN=9780357133576

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