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Monopolistic Competition

 Monopolistic Competition

Meaning

       Monopolistic competition denotes to a market state of affairs where there are many firms selling a distinguished produce. “There is competition which is keen though perfect, among many firms making very similar products.” No firm can have any noticeable pressure on the price productivity strategies of the other sellers or can it be inclined much by their performance. According to Salvatore, “Monopolistic competition refers to the market organisation in which there are many firms selling closely related but not identical commodities.”

       Monopoly competition and perfect competition has to satisfy the following situation, though they are different in their characteristic that is the point of equilibrium of monopoly competition and perfect competition has to equate both Marginal Revenue and Marginal Cost.

       Let us see an illustration in which both marginal revenue and marginal cost intersects and how the level of profit optimisation is determined with this characteristic.

Illustration

Given that, profit of the firm under monopolistic competition, Price of the monopoly product and the level of productivity under monopolistic competition are provided. You have to determine these:

  1. Point of Equilibrium occurring with equal amount of marginal revenue and marginal cost.

  2. Suggest the monopolist the best possible combinations considering almost all aspects, which could yield optimum profit, optimum revenue and should also contain the condition of the above point (i).

  3. Calculate with the below given values in the tablet, Total Cost, Total Revenue, Marginal Cost, Marginal Revenue and Average cost.

  4. Additional Information: Consider those productivities less than 100 units as zero units and compute the above conditions.

Tablet contains - Level of Productivity under monopoly competition, Profits of monopoly competition and the price of the monopoly product.

Level of Productivity (Value in Units)

Price of the monopoly Product
(Value in $)

Earned Profit under monopoly competition
(Value in $)

<100

10

-200

100

15

1000

150

20

2450

200

20

3350

250

23

5000

300

25

6500

317

29.969

6500

Note: Value to be rounded off to nearest decimal point dollar in the solution part

Solution

To determine condition (i) and condition (ii), we have to first determine the condition (iii). Let us prepare the tablet fulfilling solution for condition (iii).

Condition (iii)

Level of Productivity (Value in Units)

Price of the monopoly Product
(Value in $)

Earned Profit under monopoly competition
(Value in $)

Total Revenue (Value in $)

Total Cost (Value in $)

<100 = 0

10

-200

0

200

100

15

1000

1500

500

150

20

2450

3000

550

200

20

3350

4000

650

250

23

5000

5750

750

300

25

6500

7500

1000

317

29.969

6500

9500

3000


Average Cost
Value in $

Marginal Cost Value in $

Marginal Revenue Value in $

0

0

0

5

300

1500

3.67

50

1500

3.25

100

1000

3

100

1750

3.33

250

1750

9.46

2000

2000

Workings of Condition (iii)

  1. As told in the problem any productivity less than 100 has to be treated as zero and based on which the calculations of total revenue, total cost, marginal revenue, marginal cost and average cost are ascertained.
  1. While in the problem, it has provided only earned profits from which we have to determine all other items. To first, we have to determine the total revenue from which we can ascertain marginal revenue, total cost and from which we can find out marginal cost and average costs.
  1. To ascertain the total revenue, two aspects we require are price and productivity of monopoly products and we are provided with these.
  1. Total revenue is determined by multiplying productivity with price of the monopoly product i.e. 317 x $29.969 = $9500 (rounded off to nearest dollar).
  1. After ascertaining total revenue it is easy to calculate marginal revenue, which is deducting one unit upward of total revenue i.e. $9500 - $7500 = $2000.
  1. Only after determining the total revenue, we can obtain the total cost, since total cost is obtained by deducting monopoly earnings from total revenue i.e. $0 – (-200$) = 200$.
  1.  Average cost is obtained by averaging total cost and monopoly productivity i.e. $1000 / 300 = $3.33.
  1. Marginal Cost is like ascertaining marginal revenue, merely by deducting one unit upward of total cost i.e. $3000 - $1000 = $2000.

With this information we can now compute condition (i)

Condition (i)

The point of equilibrium happens in the combination of productivity level 317 in which both the marginal cost and marginal revenue are the same. Hence at this stage we can say that the monopoly productivity has achieved both revenue and costs equated.

Condition (ii)

We can suggest the monopolist to opt for producing 317 units of products which would yield him

  1. Optimum Profit $6500, which occurs in producing both 300 and 317 units.
  1. Optimum Revenue $9500
  1. Satisfying equilibrium condition of point of intersection of marginal cost and marginal revenue of $2000.
  1. Hence with producing 317 units of output, the monopolist would get optimum profits, optimum revenue and break even points of marginal cost and revenues. In case of producing 300 units only the earned profits are high i.e. $6500 but other conditions being stagnant, we cannot let the monopolist stop his production with merely 300 units.

Hence the monopoly competition should merely justify with breaking even of marginal cost and marginal revenue. This condition also prevails in the case of Perfect competition and we are next going to see the similarities and dissimilarities of both monopoly competition and perfect competition in the succeeding notes below.

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