This document discusses monopoly and monopolistic competition. It defines monopoly as a market with one seller and no close substitutes. Monopolistic competition involves many small sellers selling differentiated but close substitute products. The document outlines the characteristics of perfect competition, monopoly, oligopoly, and monopolistic competition. It compares the demand, revenue, and cost curves of monopoly and monopolistic competition. It also explains how a monopoly and firm under monopolistic competition determine price and output, and compares their short-run and long-run equilibriums. The document discusses product development and marketing under monopolistic competition, including using advertising to signal quality. It provides De Beers, the diamond monopoly, as a case study.

1. Monopoly & Monopolistic
Competition
Presented by
Sunny Saurabh

2. MONOPOLY MARKET
“Pure monopoly is a market
situation with one seller
with no close substitutes”
P.C. Dubey
MONOPOLISTIC
COMPETATIONS
• It’s found in the industry
where there is large
number of small seller,
selling differentiated but
close substitute
products.”
J.S. Bian
DEFINATION

3. TYPES OF MARKET FORMS

4. Market
structure
Example Number
of
producers
Types of
product
Power of
firm over
price
Barriers
to entry
Non-price
competition
Perfect
competition
Parts of
agriculture are
reasonably close
Many Standardized None Low None
Monopolistic
competition
Retail trade Many Differentiated Some Low Advertising
and
product
differentiation
Oligopoly Computers,
oil, steel
Few Standardized
or
differentiated
Some High Advertising
and
product
differentiation
Monopoly Public
utilities
One Unique
product
Considerable
Very
High
Advertising
CHARACTERISTICS OF MARKET TYPES

5. CHARACTERISTICS
Monopolistic competition
 Each firm produces a
differentiated product.
A large number of firms
 Firms compete on
product quality, price, and
marketing.
 Firms are free to enter
and exit the industry.
Monopoly
 One seller
large number of buyers
 No close substitutes
 Unique product
 Very high barrier to
entry/ completely blocked
entry

6. O
P1
P
Q1 Q
D
D
Q2
Y
X
P2
Quantity
Price
NATURE OF DEMAND CURVE IN MONOPOLY AND
MONOPOLY COMPETATIONS

7. REVENUE CURVES
MONOPOLY MONOPOLISTIC COMPETITION
MR
AR
Y
XO
MR
AR
Y
XO
 In both, the demand curve(AR) slopes downward to the right and the corresponding
marginal revenue curves is below it.
 Demand curve(AR) under monopolistic competition is “More Elastic” then monopoly.
AR &
MR
QUANTITY
AR &
MR
QUANTITY

8. REVENUE CURVES
MONOPOLY MONOPOLISTIC COMPETITION
Y
XO
 In both, AC, MC and Average Variable Cost (AVC) are also “U” shaped.
MC AC
 AR of production refers to cost of per
unit of output
 While MC refers to cost of producing
an additional unit
COST
QUANTITY
&

9. DETERMINATION OF PRICE & OUTPUT OR
EQUILIBRIUM UNDER MONOPOLY & MONOPOLISTIC
MONOPOLY MARKET DEMAND FUNCTION
MR
AR
Y
XO
MR
AR
Y
XO
 MC=MR
 MC curve cuts MR curves from
below.
AR &
MR
QUANTITY
AR &
MR
QUANTITY
MARKET DEMAND FUNCTION
Quan. Price TR MR
0 10 0 0
1 9 9 9
2 8 16 7
3 7 21 5
4 6 24 3
5 5 25 1
6 4 24 -1
7 3 21 -3
8 2 16 -
9 1 9 -
Q2
MC>MR
MR>MC

10. SHORT RUN EQUILIBRIUM
It’s a time period in which there two
types of production- fixed and variable,
In this period volume of production can
be changed but capacity of plant can’t be
changed
New factories and plant equipment
can’t be installed
Firm can earn profit as well as losses
LONG RUN EQUILIBRIUM
Its long period which is long enough to
fully adjust the supply to the change of a
product
In this period, all factors of production
are variable
But in the long term a monopolist firm
earns only profit
If price is less than long -run THE
MONOPOLOSTIC would like to close
down until rather than suffer the loss

11. SHORT & LONG RUN EQULIBRIUM
Monopoly firm in the long-run is not contented with normal profits alone
rather it is in the position to earn supernormal profit.
In long run monopolistc firm can fully exploit this situation.
1. Supernormal profit – AR>AC
2. Normal profit – AR=AC
3. Minimum loss – AR<AC
1.
2. 3,

12. Product Development And Marketing
under MONOPOLISTIC COMPETITION
 Innovation and Product Development
We’ve looked at a firm’s profit-maximizing output decision in the short
run and the long run of a given product and with given marketing effort.
To keep making an economic profit, a firm in monopolistic competition
must be in a state of continuous product development.
New product development allows a firm to gain a competitive edge, if
only temporarily, before competitors imitate the innovation.
Profit-Maximizing Product Innovation
Innovation is costly, but it increases total revenue.
Firms pursue product development until the marginal revenue from
innovation equals the marginal cost of innovation.

13. Product Development and Marketing
Efficiency and Product Innovation
Marginal social benefit of an innovation is the increase in the price that people
are willing to pay for the innovation.
Marginal social cost is the amount that the firm must pay to make the
innovation.
Profit is maximized when marginal revenue equals marginal cost.
 In monopolistic competition, price exceeds marginal revenue, so the amount of
innovation is probably less than efficient.
 Selling Costs and Total Costs
Selling costs, like advertising expenditures, fancy retail buildings, etc. are fixed
costs.
Average fixed costs decrease as production increases, so selling costs increase
average total costs at any given level of output but do not affect the marginal cost of
production.
Selling efforts such as advertising are successful if they increase the demand for
the firm’s product.

14. Product Development and Marketing
 Using Advertising to Signal Quality
 Why do Coke and Pepsi spend
millions of dollars a month
advertising products that
everyone knows?
 One answer is that these firms
use advertising to signal the high
quality of their products.
 A signal is an action taken by an
informed person or firm to send
a message to uninformed
persons.

15. Product Development and Marketing
For example,
Coke is a high quality cola and Oke is a low quality cola.
If Coke spends millions on advertising, people think “Coke must be good.”
If it is truly good, when they try it, they will like it and keep buying it.
If Oke spends millions on advertising, people think “Oke must be good.”
If it is truly bad, when they try it, they will hate it and stop buying it.
So if Oke knows its product is bad, it will not bother to waste millions on
advertising it.
And if Coke knows its product is good, it will spend millions on advertising
it.
Consumers will read the signals and get the correct message.
None of the ads need mention the product. They just need to be flashy and
expensive.

16. CASE STUDY ON MONOPOLY
DE BEER THE DIAMOND
MONOPOLY
De Beers is the sole seller of
diamonds with no close substitutes