Monopolistic competition in economic markets

Monopolistic Competition

Introduction to the Situation

Globalization has brought about increased opportunities for corporations to expand their businesses across national boundaries. In this process, several multinational entities were able to create economies of scale. This materialized in their incremental ability to satisfy a growing number of customers. The competition was significantly threatened and local mom and pop stores were forced to close their operations as they could not even ensure a recovery of their investments. The most relevant example in this sense could be offered by number one American retailer, Wal-Mart. Yet, threats of such situations are ever present within all industries, and could lead to the formation of monopolistic competitions. The studies in micro and macroeconomics to explain the monopolistic competition are generally difficult to comprehend. For ease of understanding, the Coca Cola Soft Drinks Company will be used to exemplify some of the most important features of a monopolistic competition.

2. Supply, Demand and Price on the Short-Term

In the immediate aftermath of a monopoly being established, the general tendency is for the supply to decrease. This is due to the fact that, despite the increased capacity and the scale economies from which the monopoly benefits, it still might find it difficult to cover the entire offering of the competitors it eliminated. Not just in terms of product quantities, this reduced demand might be more intensely felt in terms of product diversity. Basically, the same quantities of soft drinks could be available, but the variety of the offer could be limited.

The short run formation of the prices within a monopolistic competition is a fluctuating one, in which prices could be low, as to not create panic and attract customer dissatisfactions, but they could also be increased as to make a clear statement that the respective company controls the soft drinks market. Customer demand depends directly on pricing strategy implemented by the monopoly. If they promote a low price, demand is likely to increase; if they promote an increased price, demand is probable to decrease (McConnell and Brue, 2004).

3. Supply, Demand and Price on the Long-Term

The general misconception about monopolistic prices is that they are established at the discretionary wishes of the company which controls the market. While this could be true on the short run, its applicability on the long run is reduced. Otherwise put, the long-term prices within a monopolistic competition are expected to be relatively stable, still set by the features of the economy and still affordable to the public. This conclusion can be explained by two features. First of all, the price continues to be dictated by the industry as the manufacturing and distribution of the soft drinks remains pegged to the collaboration of the purveyors. Secondly, soft drinks are not products absolutely necessary for life, meaning that they can be easily replaced by substitute products, such as home made juices, teas or other non-alcoholic beverages. Given this situation, demand for the soft drinks could easily decrease if the retail price suffers a significant increase (von Mises, 1981).

Similar to the price of the soft drinks in a monopolistic market, the demand and the offer are also expected to reach levels of equilibrium, also generated by the confluence of the customers' needs and wants, the capabilities of the provider and the role of the purveyors.

4. Reasons for Differences in Supply, Demand and Price

Before presenting the two major reasons which generate changes within a monopolistic market, it is necessary to state that they refer to a general market, rather than the soft drinks market, which stands fairly increased chances of regulating itself on the long run. This being said, the two reason are the mechanisms of setting price and the control of the monopoly.

Within a well regulated market, in which economic agents compete through the implementation of the principles of friendly competition, the retail price of a commodity is established based on the assessment of the offer and the supply. This feature constitutes the primary reason as to why differences occur in the demand, supply and price, as these three elements are no longer established within the free market, but by the discretionary desires of the monopolistic organization.

The second element of the rationale behind the changes is given by the fact that the supply of soft drinks is no longer ensured by a multitude of organizations, but by a single large player. This means that the player, be it the Coca Cola Company, PepsiCo or any other entity, is able to manage supply of soft drinks as it wishes. However, it is possible that they offer a reduced product variety.

5. Economic Factors

There are generally three types of production factors required to operate the soft drinks business: natural, human and financial. Each of these resources has numerous distinct, but equally important, applications. For instance:

(a) the natural factors of production are required to offer the commodities to be used in the manufacturing of the soft drinks, such as the water, the sugar or other ingredients

(b) the human resource is required to handle the manufacturing and distribution processes

(c) the financial resources are required to set the two other categories of production factors into motion; additionally, they are required for additional investments, distribution and so on (Mulcrone, 2001)