Monopolistic Competition and Effective Demand

Question: Discuss about the Monopolistic Competition and Effective Demand. Answer: Introduction: The imperfect competition where there is existence of a few producers selling differentiated products in the market in known as monopolistic competition (Nikaido, 2015). As the products are differentiated, hence they cannot be perfect substitutes. The market for monopolist products has the following characteristics. They are: Differentiation of products Existence of multiple firms There is no barrier in the entry or exit of firms Imperfect information Power of taking independent decision (Assenza et al., 2015) There are very few firms that exhibit the monopolistic nature in the economy. The coffee industry, chain of restaurants and industry for beverages are the few industries that exhibit this nature of monopolistic market. Both these industry produces different products in the market (Bertoleti Epifani, 2014). Say there can be difference between Brazilian coffee and coffee purchased from South India. Similarly two different restaurants offer different cuisines to their customers and hence show the monopolistic nature. In this answer the concept of natural monopoly has been elaborately discussed after from the perspective of the coffee industry in Australia. Background of the industry: Australias coffee industry was first resurrected during the 1980s after its collapse in the 1800s. Over the recent years the country has seen enormous growth in their coffee industry. The peoples love for the hot beverage makes the caffeine industry grow in leaps and bound (Adams et al., 2016). The country has special liking for strong coffee and instant brewing coffee. According to Senior Consumer Analyst Niraj Lalka, Australias love for this caffeine product grew with its introduction in the country by the migrants of Europe. But the European were more habituated at having strong liquors of coffee whereas the Australian prefer their coffee mixed with milk and fresh cream. The caffeine industry within the country in the last decade saw enormous growth and is expected to grow further. But in contrast to this scenario, the famous American caffeine brand, Starbucks saw faced severe crash in their growth portfolio in Australia (Wong, 2014). According to the analysis on the industrys gro wth and trend it has been observed that the country is expect an increase in their revenue by 6.9%. The expected revenue that the country predicts to earn in the year 2016-17 is $5.5 billion (ibisworld.com.au, 2015). Also the people have been inclined towards this drink as it reduces their scope of early death. According to an survey on health it has been observed that regular drinker of coffee and other caffeine products has lower risk of death via type 2 diabetes, heart problems, suicide and neurological disease. The answer now focuses on the monopolistic features of this industry and its impact on the economy. Key features with example: The monopolistic market is the structure where there is existence of a large number of sellers who produces similar kind of goods and services with a bit of product differentiation to make their products more appealing in the market. As already discussed above the coffee industry shows this nature, we now look at the different brands that are being preferred in the country. Also unlike the perfectly competitive market the various brands in this market has individual say and control (Stiglitz Rosengard, 2015). Amongst the different types of sellers in the market there are quite a few specialized brands that are responsible for selling coffee within the whole of Australia. Starbucks coffee, Frisco-Bay, Gloria Jeans, Seatles Best coffee, Green mountain coffee, Maxwell house and Folgers are few named to be mentioned in this respect. This different brand reduces the concentration of power within the industry. The firms earn short-run economic profits. But under this monopolistic situatio n the firms are not guaranteed with long-term profit, rather it can be said that there is no such profit in the market of monopolistic competition. Behaviour of firm and impact on consumer: The behaviour of the firms under the monopolistic market can be shown in two parts, the short run stage and the long run stage. The diagram below helps in elucidating the scenario: In the diagram above it is seen that the monopolistic firm in the short run earns profit. The quantity of goods and service supplied by the monopolist is decided at the intersecting point of marginal revenue and marginal cost curve (case, Fair Oster, 2012). Though the monopolistic firm is characterized by a few sellers but still the firm cannot charge any random price like the monopoly firm. This is because each firm produces similar goods with little product differentiation and increase in price of one good may induce the consumers to switch over their choices and consumes other brands. So here in this diagram we see that the short run profit of the coffee industry with monopolistic nature has profit equal to the upper rectangle as marked in the diagram. This diagram shows the monopolistic firm in the long run. The firm maximizes their production by selling at the point where MC =MR. Beyond this point, production implies loss as the cost is greater than the revenue. Even in the long run the monopolistic firm is unable to attain the allocative efficiency as shown by point B in the figure where MC= market price. So under this scenario the firm is able to earn only normal profit in the economy. The normal profit is the situation where the firm just has the capacity to survive in the market by having their total revenue equals to total costs. As the firms cannot randomly charge any price they want barred by their cost constraint, hence the consumers are better off in this situation than in complete monopoly. The existence of multiple numbers of firm ensures that people has a wide variety to choose from and this gives them the capability to create an impact on the market price as well. Adani mining group has planned to invest in a project of thermal coal mine. According to e report of 2014, the subsidiary group has planned to invest a whole lot of $16.5 billion in the project of Galilee Basin (abc.net.au. 2016). The company has a plan to make this project as the biggest mining project of Australia as well as one of the leading mines in the world. The company targets to produce around 60 million tonnes of coal each year from this mine. But no project is pareto optimal. If it has been pareto optimal it would have already been implemented by now and not left over for the Adani Wilmar group to do so. The cost associated with this project not only affects the company but also affects the environment, the people and the economy as a whole. The negative impacts can be connoted as the negative externality of the industry. Here through this answer it has been tried to focus on the externalities associated with the project. Negative externality is an economics term which means the loss or negative impact on a people, group or society as a whole due to a transaction in the economy (Henderson, 2014). In other word, if anyone other than the producer and consumer get affected by the production and consumption process then it is negative externality. It is shown as follows: The government of Australia has been very serious with this project of Coal mine. On other hand Larissa Waters, Senator of the Greens declares that this has been a hasty action of the government without any far-sight associated with it. The problems associated with the mines are as follows: immediate impact on air pollution, water pollution and long term impact on human health and ecosystem (Morrice Colaguri, 2013). The negative externality can be reduced by strict regulations set by the higher authority of the government. Few steps that they can take are as follows: The very first step that government can take is to ensure strict property rights and disallow the company to use the land in establishing the industry that has high risk associated with it (Betz, 2015). In certain cases the government cannot help but allow the industry to grow due to several reasons. In such cases there are other ways of regulating the market. The government should try on investing on projects that involves growth of renewable energy. Nowadays the whole world is trying to shift their energy use into the renewable type. Investing in this sector can have greater long term positive impact on the economy by generating employment, reducing pollution and creating an overall improved standard of living. They can set permits and quotas beyond which the industry cannot pollute the country (Betz et al., 2015). High level of taxes can be imposed on per unit of pollution caused by the firm so that the firm reduces their pollution emission to reduce their cost of production. The government can also help the affected people by providing better yet cheap health facilities and subsidies in the health sector. These subsidies can be collected from taxing the polluters heavily. References: Adams, B., Gans, J., Hayes, R., Lampe, R. (2016).Does Organizational Form Drive Competition? Evidence from Coffee Retailing(No. w22548). National Bureau of Economic Research. Assenza, T., Grazzini, J., Hommes, C., Massaro, D. (2015). 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