Monopoly and Monopolistic Competition - Assignment Example

Competition is directly related to the methods and procedures by which the companies produce and sell their products. Different market structures are found in different industries which implies that there are different kinds of the buyer to seller relations in every market. A monopolist firm, they are able to increase or reduce the prices of their products (due to product differentiation), however, they cannot do so with full liberty, they have to abide by the unfriendly forces of the market. Sellers’ rivalry against each other involves sales-promotion costs along with the expenses of differentiating their products in order to attract customers. As a result, buyers get more variety in the products but in the long run, the prices of the products involve the additional costs involved. Since the sellers in a monopolistic competitive market are not likely to be equally flourishing in their product policies and sales promotion, some of them will be successful in achieving profits exceeding the basic interest on their investment, such profits will be earned from the buyers that have been attracted. (Karier, 241)

The market and the monopolist’s demand curves are found to be the same. The demand for the monopoly is the demand of the industry and is hence illustrated by a downward curve. However, the prices in a monopoly just exceed marginal profits because the purpose of a monopolist is to lower the price in order to increase sales. The following figure illustrates the demand curve of a monopoly.

For every price cut of a product by a monopolist, profits increase by an amount equal to the cost of the last unit sold deducting the price cuts which are taken on all previous units of production. However if the price increases, everything works in reverse order. The reason why the marginal profit is below the demand curve is due to the trade-off between price and sales in a monopoly. Hence, the flexibility in price settings has an essential role in a monopoly. (Scherer, 315-317) The following figure defines the link and relationship between the total cost and the total revenue of a monopoly. Where TC= Total Cost and TR= Total revenue.