In fundamental microeconomic theory, competitive markets have the effect of driving market price down to the point where producers are operating at the point of minimum total cost per unit (i.e. at the point of greatest efficiency). Conversely, monopolies will be able to maintain higher prices, specifically at the point where the total market demand curve crosses their marginal cost curve. That is, they do not have to share the market with anyone, so they...
In fundamental microeconomic theory, competitive markets have the effect of driving market price down to the point where producers are operating at the point of minimum total cost per unit (i.e. at the point of greatest efficiency). Conversely, monopolies will be able to maintain higher prices, specifically at the point where the total market demand curve crosses their marginal cost curve. That is, they do not have to share the market with anyone, so they will raise prices until the quantity demanded is such that marginal cost equals that price. The key here is that monopolies face no competition. For a pure monopoly to exist, not only must there be no competitors producing the same good or service, but there should be no effective alternative goods or services to that one. True monopolies are extremely difficult to maintain in the long term, as the higher prices they charge stimulate research and investment into alternatives (e.g. solar as an alternative to electric company provided power). Additionally, it is unusual for a monopoly to be allowed by democratic governments without substantial price regulation (e.g. utility commissions).
Monopolistic competition is the situation in which there are multiple firms producing a good or service, but they are able to differentiate their products to an extent. In other words, each firm’s product is an imperfect substitute for its competitors’ products, and vice versa. The result is that price can be maintained above the minimum total cost level, but not as high as in a true monopoly. Profits are thus not as high in monopolistic competition, quantity produced and consumed is higher, and price is lower. Monopolistic competition tends to place a premium on marketing, product features, and additional services associated with a product. Anything which ties a consumer into a particular firm’s products over an extended term fosters monopolistic competition. An example would be attempts to associate prestige with a particular brand (e.g. cars, cosmetics). Another example is making capital goods incapable of operating on consumables produced by other firms (e.g. HP ink cartridges, or Keurig’s producing machines which will only operate with K-cups produced by them).
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