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Market analysis — FAQ
Frequently asked questions for 2281 Market analysis. Direct answers first, then deeper explanation — then practise with marking.
If firms in monopolistic competition only make normal profit in the long run, isn't that the same as perfect competition?
No. While the profit outcome is the same, the efficiency is not. In monopolistic competition, the firm produces at a point where price is greater than marginal cost (P>MC), indicating allocative inefficiency. Furthermore, it does not produce at the lowest point on its average cost curve, meaning it is also productively inefficient. This is due to product differentiation giving the firm a downward-sloping demand curve.
Are all monopolies bad for consumers?
Not necessarily. A natural monopoly can be more productively efficient than multiple competing firms due to economies of scale, potentially leading to lower prices if regulated. Also, the supernormal profits earned by a monopoly can be used to fund research and development (R&D), leading to dynamic efficiency and innovative products that benefit consumers in the long run. However, an unregulated profit-maximising monopoly is likely to charge high prices and restrict output.
Why don't firms in an oligopoly always compete by cutting prices?
Due to interdependence, firms are wary of starting a price war. If one firm cuts its price, rivals will likely follow suit immediately to avoid losing market share. The result is that all firms end up with the same market share as before, but at a lower price and with significantly lower profits. Therefore, it is often more rational for oligopolists to maintain price stability and compete on non-price factors like advertising, quality, and service.