Monopolistic Ion

MONOPOLISTIC COMPETITION A market structure in which, several or many sellers each produce similar, but slightly differentiated products. Each producer can set its price and quantity of its productions without affecting the marketplace as a whole. (Adapted from http://www.investorwords.com/3111/monopolistic_competition.html)

CHARACTERISTICS: • • •

•

Many Producers and Consumers in an industry. Consumers have clearly defined preferences – indicating that each has his or her own ‘ideal’ needs, wants and expectation of a product. Producers attempt to differentiate their products from their competitors – indicating the need for innovations; hence goods and services are dissimilar. Few/ Low barriers to entry and exit.

Examples of industry in Monopolistic Competition includes automobiles, toothpaste, furnaces, restaurant meals, motion pictures, romance novels, wine, beer, cheese, shaving cream and many more due to economies of scale in production and for product differentiation.

NATURE : Monopolistically competitive firms are inefficient. (E.g. costs of regulating prices for every product that is sold in monopolistic competition by far exceed the benefits. Basically, in Monopolistic Competition model, firms are free to set price and quantity) Monopolistic competition fosters advertising and the creation of brand names. (These advertising induce customers into spending more particularly the consumers products because of the name associated with them rather than because of rational factors. Such nature of the industry leads to a competitive environment It also allows increasing returns to scale in production, and presence of differentiated products.

INTRA-INDUSTRY TRADE Intra-industry trade refers to the exchange of products belonging to the SAME INDUSTRY, or broad product group. The term is usually applied to international trade, where the same kinds of products and services are both imported and exported.

CHARACTERISTICS: • •

Involves the exchange of differentiated products Take advantage of important economies of scale in production and product differentiation. (which leads to International economies of scale – sharp increase in international trade in products and components, setting up of facilities abroad etc)

•

Enjoys internal economies of scale present in industries. E.g. Internal economies of scale is where the cost per unit depends on the size of an individual firm but not necessarily on that of the industry which leads to imperfect competition.

•

Stimulates innovation and benefits consumers because of the wider range of choices available at lower prices. (E.g. the average cost per unit lowers as the number of goods produced increases).

NATURE : Cost efficiency & Product Quality Benefits Economies of Scales, consumer needs and wants differs as well as differences in consumer behaviours (in terms of expectations) Examples on Intra Industry trade:1. Entrepot trade An entrepôt - a trading centre, or simply a warehouse, where merchandise can be imported and exported without paying import duties, often at a profit. (E.g. Instead of having the ships to travel the entire length of a long trading route, it can chose to sell to the entrepôt – a form of imported goods (whereby in domestic country could also be producing relatively similar product), however, this entrepôt has the benefit of reselling(export) its buys at a higher price. 2. Seasonality For example, in agricultural products, apples, which may be exported all around the world during its growing season, but imported during its poor growing seasons in order to meet its domestic needs.

3. Transport costs Intra-industry trade may occur when transportation cost can be saved. Take for instance, both country A and B are producing the same goods. Both decides to sell to Country C. Country B is assumed to be located further away from country C as compared to Country A. To save transport cost, Country A and B may decided to engage in an Intra-industry trade activity whereby, Country B sell its productions as a lesser profit margin to A and A in turn may export it at a much higher profit margin.

WHY MONOPOLISTIC COMPETITION MODEL TO EXAMINE INTRA-INDUSTRY TRADE? MONOPOLISTIC COMPETITIONS MODEL NATURE 1) Many firms in an industry

•

•

•

2) No barriers to entry and exit

• • •

• •

3) Differentiated goods

•

•

INTRA-INDUSTRY TRADE IMPLICATIONS Increase in competition, lower price > more attractive to engage in Intra trade- possibility to make profits by re-exporting similar goods elsewhere, grasp potential market share outside the domestic market. Enjoy economies of scales, better use of factor of productions. By engaging in Intra-industry trade may lead to increase production to enjoy economies of scale, both local and oversea consumer gets to buy cheaper products due to increase in competition. Many firm> more innovations as (MC Firms) tends to differentiate own product from others. Intra-industry trade will imply the need for repackaging of products for the purpose of re-exporting, value +, benefits oversea consumers. Greater varieties, more choices. Ease of trade, potential benefits in the case where it is cheaper to import than to produce internally= intraindustry trade takes place. Overall national welfare is improved, allow competitions, decrease prices domestically, allow domestic consumer to enjoy lower price and more consumer goods. Increase consumer spending- facilitate economy Intra-industry trade made easier, tends to bring about fewer social and political problems that are often brought about by increased trade as consumers from both countries engaging in trade tends to benefits esp. consumers. Good for Intra-trade where local consumers gets a feel of foreign products- maybe better or more inferior. Differences in consumer behaviour such as different expectations, preferences and consumption capacity.. Feed the needs of consumer who wants foreign products, especially those who do not regard home goods and foreign goods as identical.

•

Quality assessments and new innovations of products are kept in mind in MC – in order to stay competitive.

MORDERN DAY EXAMPLES:Example of intra-industry trade: US trade with Mexico The table below lists the top 7 exports and imports to and from Mexico for 1998. The top 3 imports from Mexico to US are Electrical machinery and equipment, vehicles, nuclear reactors, boilers, and related items. Interestingly, the US’ top 3 exports to Mexico are also these 3 categories. The similarity of exports and imports between US and Mexico represent intra-industry trade, giving consumers variety of choice of available products. Out of these imports and exports, about 80% represent intra-industry trade

** additional explanation needed along the way… ** Definitions of imperfect competition on the Web:

• •

any market structure in which there is some competition but firms face downward-sloping demand curves www.wwnorton.com/stiglitzwalsh/economics/glossary.htm It refers to a situation under which prices can be changed by one or more persons because of abnormal market conditions or undue advantages secured by some buyers or sellers. www.indiainfoline.com/bisc/jmfi.html

Definitions of monopolistic competition on the Web:

•

the form of imperfect competition in which the market has sufficiently few firms that each one faces a downward-sloping demand curve, but enough that each can ignore the reactions of rivals to what it does www.wwnorton.com/stiglitzwalsh/economics/glossary.htm

--------------------------------------------------------------------------------------------------

http://www.washburn.edu/sobu/dnizovtsev/200P10ans.htmlc. …allocation of resources in both market structures is inefficient. TRUE. The long-run equilibrium in a monopolistically competitive market corresponds to the case when the demand curve each firm is facing is tangent to its ATC curve. Due to the negative slope of the demand curve, such tangency never occurs at the minimum of ATC. Hence allocation is inefficient. (It would be if the demand curve was horizontal.) A monopolist is concerned only about profit maximization (MR=MC), and cost minimization is not necessary. The quantity where MR=MC can be anywhere on the ATC curve. 2. In the long run, firms in monopolistic competition a. produce at the point where the average total cost curve is tangent to the demand curve. b. earn positive economic profits. c. produce at the minimum point of their average total cost curves. d. face steeper demand curves than in the short run. e. produce at a point where MC>MR. > Compared to H-O model which is based on comparative advantage or differences in factor endowments (labor, capital, natural resources and technology) among nations, intra-industry trade is likely to be larger among industrial economies of similar size and factor proportions (when factors of production are broadly defined) > Socially, intra-industry trade is more readily accepted as all the nation’s factor endowments benefit from this as compared to the strong opposition to inter-industry trade that usually involve lower real wages and massive reallocations of labor to other industries in industrial nations. (refer Salvadore Lecture 6 page 173 - 2nd paragraph)