As with copyrighted materials, the patented item enters the public domain after the patent expires. Many patented items are inventions that resulted from research and development. For instance, drugs are constantly being developed and patented by drug companies. Obviously, drug companies would not be able to charge such high prices if they cannot prevent competitors from entering the market and providing the drug at a lower cost.
Hence, the express purpose of patents is to motivate innovators to develop new ideas and products that will benefit society by giving them an exclusive monopoly over their invention.
Because monopolies are very profitable, companies will frequently try to prevent competition by creating artificial barriers to entry, such as lowering prices to prevent startup firms from earning a profit in their early years, or by making deals with companies that influence the marketing of the product.
For instance, Microsoft tried to corner the browser market in the s by offering its Internet Explorer as part of its Windows operating system and by reducing prices on its operating systems to manufacturers of computer systems if they would include Internet Explorer on their desktop.
A company lowering its prices below its ATC to prevent competition is using a tactic called predatory pricing. Predatory pricing is particularly effective when the marginal cost of additional product is virtually zero, as it is for software, for instance. Indeed, monopolies are so profitable that the company will sometimes give the product away in the hope of recouping large profits later. Microsoft successfully used this tactic to promote Microsoft Office, which is why it is the dominant office suite today.
During the s, computer manufacturers included Microsoft Office on the systems that they sold, usually at no additional cost to the consumer. Tell us what you think about Amos WEB. Like what you see?
Have suggestions for improvements? Let us know. Click the User Feedback link. As seen from the short-run equilibrium graph, Q gives the current profit-maximizing output at a price P. Therefore, advertising will increase the quantities of the product the consumers are willing to purchase, leading to a shift or a move in the demand curve to a higher level.
The new demand curve will correspond to higher levels of quantity demanded and the prices given by Q1 and P1 Arnold As such, the role of advertising in monopolistic competition is monumental. In monopolistic competition, the firm faces a comparatively elastic demand, and this limits the prices that can be charged on the product. To reduce demand elasticity, the demand curve will be relatively steeper, implying that consumers are likely to change their quantity demanded as a result of a change in price.
As illustrated in the diagram, the firm can now charge a slightly higher price P1 for the same quantity, and this means the firm can collect more revenues for the same quantity Q sold at a profit-maximizing level of output McConnell and Brue However, a monopolistically competitive firm cannot maximize profit when faced with inelastic demand because the marginal revenue MR is negative, implying that the marginal cost MC would be negative.
Such a situation is not possible, where marginal revenue MR and marginal cost MC are both negative Arnold Excessive advertising could lead to inelastic demand, and the firm will have to increase the price to make demand elastic because profit is not maximized when demand is inelastic.
McConnell and Brue Advertising is expensive, and the firm will keep on advertising as long as the revenues generated from advertising are more than the cost of advertising. Monopolistic competitors advertise because the demand may increase and become inelastic, and, on the other hand, the marginal cost MC and average cost AC are likely to rise at the same time.
Advertising in monopolistic competition is excessive, and as long as revenues per product are more in comparison to an increase in average cost per product, it may not result in loses. One of the characteristics of monopolistic competition is relatively easy entry. Firms in a monopolistic competition market will use advertising to maintain their profits because advertising affects the products of the firm by increasing its demand.
For each purchase you need to make, perhaps five or six firms will be competing for your business. Because the products all serve the same purpose, there are relatively few options for sellers to differentiate their offerings from other competing firms. There might be "discount" varieties that are of lower quality, but it is difficult to tell whether the higher-priced options are in fact any better.
This uncertainty results from imperfect information: the average consumer does not know the precise differences between the various products, or what the fair price for any of them is. Monopolistic competition tends to lead to heavy marketing because different firms need to distinguish broadly similar products. One company might opt to lower the price of their cleaning product, sacrificing a higher profit margin in exchange—ideally—for higher sales.
Another might take the opposite route, raising the price and using packaging that suggests quality and sophistication. A third might sell itself as more eco-friendly, using "green" imagery and displaying a stamp of approval from an environmental certifier. In reality, every one of the brands might be equally effective.
Hair salons, restaurants, clothing, and consumer electronics are all examples of industries with monopolistic competition. Each company offers products that are similar to others in the same industry. However, they can distinguish themselves through marketing and branding.
Firms in monopolistic competition face a significantly different business environment than those in either a monopoly or perfect competition. In addition to competing to reduce costs or scaling up production, companies in monopolistic competition can also distinguish themselves through other means. Monopolistic competition implies that there are enough firms in the industry so that one firm's decision does not require other companies to change their behavior. In an oligopoly , a price cut by one firm can set off a price war , but this is not the case for monopolistic competition.
As in a monopoly, firms in monopolistic competition are price setters or makers, rather than price takers. However, their nominal ability to set prices is effectively offset by the fact that demand for their products is highly price-elastic. In order to actually raise their prices, the firms must be able to differentiate their products from those of their competitors by increasing their quality, real or perceived.
Due to the range of similar offerings, demand is highly elastic in monopolistic competition. In other words, demand is very responsive to price changes. In the short run, firms can make excess economic profits. However, because barriers to entry are low, other firms have an incentive to enter the market, increasing the competition, until overall economic profit is zero.
Note that economic profits are not the same as accounting profits ; a firm that posts a positive net income can have zero economic profit because the latter incorporates opportunity costs. Economists who study monopolistic competition often highlight the social cost of this type of market structure.
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