De-Industrialization And Entrepreneurship In Monopolistic Competitive Essay.

Characteristics of Monopolistic Competition

Discuss about the De Industrialization and Entrepreneurship.

As per the statement of Assenza et al., (2015), it can be mentioned that in the monopolistic competitive market structure, there are large number of producers. The products, which are sold by these producers, are differentiated from each others. Therefore, it can be stated that the products are not perfectly substitute. In addition, it can be mentioned that in the monopolistic competitive market, a firm considers the prices, which is charged by the rivals. Hence, Balistreri & Rutherford (2013) opined that the typical structure of monopolistic competitive market can be identified as the product differentiation.

On the other hand, it can be stated that the structure of monopolistic competitive market is the combination of monopoly and the perfect competition. In the monopolistic competitive market, it can be observed that there is free entry of the number of firms in the market. As the products are differentiated under this monopolistic competitive market, each company acts like a monopolist in the aggregate market of close substitutes. In the words of Baumol & Blinder (2015), the demand curve under this type of market structure is also downward sloping, which implies that this follows the law of demand. In addition, it can be stated that the demand curve under the monopolistic competitive market, would be able to reflect the price of the goods and the services.

Each of the firm aims to maximise the profitability. In this connection, it can be stated that each firm choose their output level in such a manner that the marginal cost is equivalent to the marginal revenue. Therefore, the first order condition of the profit maximisation under the monopolistic competitive market is equivalent to the condition of monopoly market, which can be expressed as MR=MC. The only difference between the monopoly market and the monopolistic competition can be determined as the marginal revenue curve relies on the residual demand curve instead of the market demand curve under monopolistically competitive market. Moreover, Bertoletti & Etro (2015) cited that residual demand is the type of demand for the goods and services of the other firms. More specifically, it can be mentioned that it is the aggregate market demand of net productivity of the other producers under monopolistic competitive market.

Monopolistic competition refers that a specific type of market model, there are a large number of sellers. They are mainly selling differentiated products. Nevertheless, these goods products are not identical in nature. Under monopolistically competitive market structure, the demand curve of the goods and the services are elastic in nature. According to Calvo & Pérez (2016), the reason of elastic demand curve can be described as the sellers sale differentiated products. In addition, the firms are closely substitutes to each other. As a result, it can be mentioned that if one firm raises the price of the goods, most of the consumers will have the option to switch to other commodities, which are produced by the other firms. Moreover, it can be mentioned that the demand elasticity of the goods are identical within the market competition. In the points of Collier & Venables (2014), it can be stated that the demand curve of the commodities are not perfectly elastic. In this context, it can be highlighted that as there are less number of rivals under monopolistic competition.

Profit Maximization and Long-Run Equilibrium

From the above figure it can be observed that the suppliers under the monopolistically competitive market are treated as the price makers. The above figure shows that the firm will manufacture at the level of Q. In this point, the marginal revenue would be equivalent to the marginal cost. The price would be determined under this market structure where the quantity meets the average revenue curve. This situation occurs as the firms under the monopolistically competitive market have the market power. This would in turn refer the social dead weight loss. In the above diagram, the violet shaded region highlights the profitability earning of the organisation, which has earned in the short run.

The above diagram depicted that under the long run, the organisations under the monopolistic competition will be able to manufacture up to that quantity, where the long run marginal cost curve would cross the marginal revenue curve. The price of the products can be determined where the quantity produced by the firms meets the average revenue curve. Therefore, Erku?-Öztürk & Terhorst (2016) mentioned that the long run firms will break even.

On the other hand, it can be mentioned that the monopolistic firm would be able to earn profit under the short run, the impact of it’s monopoly like pricing would be capable to reduce the demand under long run. This would in turn raise the necessities for the firms to make a differentiation in their products. This also increase the average total cost. In the opinion of Feenstra (2016), it can be stated that reduction in the demand and increase of cost reflects the long run average cost curve to become tangent at the level of profit maximising price of the products. Therefore, from this situation, it can be mentioned this would reflects two things. Firstly, the firms under the monopolistic competitive market would produce a surplus under the long run situation. Secondly, the organisations would be capable to break even in the long run and it would not be capable to earn economic profitability.

The above figure highlights the movement of the monopolistic competitive firm to the long run equilibrium. As per the statement of Feng, Wang & Zhang (2014), it can be stated that if the firms have earned positive and higher economic profitability under the monopolistically competitive market, other firms would get the opportunity to enter into the market. Therefore, in this scenario, it can be noticed that each firm would get smaller quantity of market share. More precisely it can be stated that the market demand curve under the monopolistic competition would shift to the left. This movement would be continued until the break even situation would arise in the market. In addition, Kirzner (2015) opined that other firms outside the market would not be able to enter into the competition.

Economic Efficiency and Deadweight Loss

In terms of the concept of economic efficiency, the organisations under the monopolistically competitive industry acts equals to the monopolistic firms. It is known that the firms have the power to set the price of the products. Therefore, it can be mentioned that the firms would be able to charge the prices whatever they are willing for their products without the influence of the market forces. This price is determined where the profit maximising level of production intersects the demand curve. This price level would be greater than marginal cost of the organisation. Therefore, the consumers require to pay the price, which is greater than the pricing structure under the perfect competition (Lucas, 2016). This would in turn reflect to reduce the consumer surplus. In addition, it can be inferred that the sellers under the monopolistically competitive market would produce less of the products in the comparison with the amount of production under perfect competition. As a result, the profitability earning would be offset that they would earn more profit by charging higher price. This would in turn reduce the producer surplus.

The above figure highlights that monopolistic competition creates deadweight loss and the inefficiency, which is represented by the brown coloured shaded region. In this connection, it can be stated that productive efficiency occurs when an organisation use all of the sources in an effective way. This occurs when the price of the commodity is determined at the level of marginal cost. This marginal cost is equivalent to the average total cost of the products. In addition, Nikaido (2015) cited that the organisations also aimed to set the process of the products higher than the marginal cost under the monopolistic competition. This would in turn reflect the ineffectiveness of the market. The amount is produced when Q_M and marginal cost curve intersect to each other. Likewise, it can be mentioned that allocative efficiency has taken place when a good is produced at the level, which can maximises the social well being. This situation occurs when the price of the product is equivalent to the marginal benefits and this also equal to the marginal cost. Nevertheless, the price of the goods under monopolistic competition would be higher than the marginal cost, and the market would not be allocative efficient.

In the words of Olabi (2016), it can be mentioned that an industry, where monopolistic competition would be prevailed is that of the hotel or pub industry. Hotels or pubs are considered as the monopolistic competitive market. In this context, it can be stated that there are several hotels in different sectors and there is no barriers to entry and exit. Moreover, it can be added that each of the hotel or pub are closely substitutes at the local super markets.

According to Parenti, Ushchev & Thisse (2017), it can be mentioned that the hotels raise the price up to a certain level above those of the specific hotels with which it make the competition. As it is known the hotels are dissimilar to the other hotels, some of the individuals would continue to support it. Within the restriction, the hotels will be capable to charge their individual and the definite price.

The Short run:

A hotel competes with the other firms within the market, in which there are no barriers to entry or exit. Therefore, it can be mentioned that the demand curve would be downward sloping. On the other hand, it can be stated of the hotel would raise the price compared to the other competitors, the visitors would prefer to visit other hotels where the price is comparatively lower. Hence, the marginal revenue curve of the hotel would lie under the demand curve as the demand curve is downward sloping. Moreover, the marginal revenue of additional food items of the hotel will be lower than the market price.

With the entry of new firms, the availability of food items in the hotel will be raised. Due to the reduction of demand for the food items, the demand curve of the hotel will be highly elastic. As a result, the demand curve for the hotel will move to the leftward. Therefore, new hotels will constantly enter into the market until the specific hotel would stop to make economic profitability. In addition, it can be mentioned that the zero solution would be noticed when the demand curve for the hotel would be tangent to the average total cost curve. Hence, the price of the foods of the hotel will decrease along with the decrease in output.

The characteristics of hotel under monopolistic competition can be discussed in the following:

• Each firm would be able to take independent decision regarding the price and the output, which is depending upon the products as well as the cost of production.
• Knowledge is widely spread among the participants; nonetheless, it is unlikely to perfect. On the other hand, consumers have the option o review all the food items, which are obtainable in the hotel before placing the order. However, they would not be able to appreciate the taste and quality of the hotel until they have taken the service.
• In the points of Park et al., (2015), it can be mentioned that the risks under the monopolistic competitive market is connected with decision making, the entrepreneur has a imperative nature compared to the other firms. In addition, it can be stated that the firms can freely enter or leave into the market. Therefore, it can be inferred that there is no barriers to exit as well as entry (Zhelobodko et al., 2012).
• It can be observed that there are four types of product differentiation within the market. The first differentiation is associated with the physical product differentiation. Here, the sizes, design, shape, performance of the products are being considered in order to make the products different from the others. Next differentiation is occurred based on the packaging and the other promotional methods of the goods and the promotional process. Thirdly, human capital differentiation is the type of other product differentiation. It is depending upon the skills of the employees. Lastly, the product differentiation is depending upon the through distribution and it considers the mail order as well as the internet shopping.
• As opined by Phelan et al., (2014), it can be stated that monopolistic competitive firms need to take the help of advertisement. As a result, it can be mentioned that the consumers would be able to know about the product specification and can also identify the differences between the products.

As per the case study it can be stated that Adani Group’s Carmichael coal mine situated in Queensland’s Galilee Basin. Due to their economic operation, third parties have been suffering from the negative externalities. In this context, the first and the second parties are identified as the producers and the customers respectively. An individual is supposed to be a third party. As per the opinion of Roberts (2014), it can be mentioned that negative externality is the cost or the benefit, which affect the party who are not supposed to incur the cost or benefit. Negative externalities are associated with the external cost.

The above figure shows the impact of the negative externality. The optimal production quantity has measured by Q₂ where the negative externality leads to the output level of Q₁. In the above figure, the shaded region highlighted the deadweight loss.

The negative externalities, which are related with the Adani Group’s coalmine, can be described as the following:

• It leads to reduce the life expectancy as it discharges several harmful gases such as sulphur dioxide, ozone and other heavy metals, which is dangerous for health.
• It would lead to the respiratory problems and admit in the health care centres.
• It would also lead to the severe ailment such as cancer, ataxia and renal dysfunction.
• It also leads to the reduction of the crop yields, which in turn affect the fertilisers.
• It also causes the loss of ecosystem as well as environmental degradation.

On the other hand, pollution is identified as the negative externality, which is occurred during the operation of Adani Group’s Carmichael coalmine. Moreover, it can be mentioned that the individual who are living to the surroundings, will pay for this pollution. On the other hand, the negative externalities will be larger in terms of the medical bills along with the poorer quality of life (Stiglitz & Rosengard, 2015). Therefore, it can be mentioned that coal mining by Adani Group’s leads to the negative cost to the surroundings of the company. In addition, it can be mentioned that Coal mine releases greenhouse gas, which leads to the issues in the atmosphere. Report says that in every year, Adani Group releases approximately 145 million tons of sulphur. Therefore, it pollutes water due to the emissions of the gravely toxic.  

In the opinion of Roper, Love & Bonner (2017), externalities highlights the observable fact of the lower efficiency, which is beyond the extent of the decision makers under the condition of resource allocation. In a synopsis, it can be stated that the operation of the coal mining reflect the expansion of the economy of the place massively. Therefore, it can be inferred that external diseconomy implies that pollution will damage the ecological and environmental balances.

The above figure explains the negative externalities, which is occurred due to the activities associated with the coal mining. The coal industry is assumed as the competitive market. In this context, it can be observed that marginal social cost is higher than the marginal private cost by the quantity of the external cost. Here, the external cost refers the ecological damages such as water pollution. On the other hand, it can be mentioned that as there are no marginal benefits related with the coal mining, therefore, the marginal social benefit would be equivalent to the marginal private benefit. With the help of the above diagram it can be explained that if the individuals consider their private cost then it will be ended with P₁ price and Q₁ quantity. Moreover, they will not consider the more effectual price P₂ as well as the effectual quantity Q₂. Therefore, free market is supposed to be unproductive as at the quantity level Q_1, the social cost will be higher compared to the social benefit. In this case, individuals of the surroundings will be better off if coal mining will generate between Q₁ and Q₂. The government of the country also needs to take charge of improvement as Adani group pays for this company.

This study is also important to mitigate the negative externalities by developing the ecological recompense mechanism. In other words, ecological services have a definite economic value and hence, it would be able to exchange the perfectly competitive market. Figure 5 explains the connection between the Adani Group’s marginal cost and the loss of ecological service.

As per the statement of Schweinberger & Suedekum (2015), it can be stated that market failure is related with the coal mining, which is imperative to monitor the resource developers in order to restore the affected locality and would be capable to pay for the sufferers. It is benefitted to increase the environmental and the ecological quality to improve the relationship among the resource improvement and the environmental protection. This is significant as the effective process, which will be benefitted to highlight the market failure and the policy failure.

References

Assenza, T., Grazzini, J., Hommes, C., & Massaro, D. (2015). PQ strategies in monopolistic competition: Some insights from the lab. Journal of Economic Dynamics and Control, 50, 62-77.

Balistreri, E. J., & Rutherford, T. F. (2013). Computing general equilibrium theories of monopolistic competition and heterogeneous firms. Handbook of Computable General Equilibrium Modeling, 1, 1513-1570.

Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.

Bertoletti, P., & Etro, F. (2015). Monopolistic competition when income matters. The Economic Journal.

Calvo, J. A. P., & Pérez, A. M. J. (2016). Optimal extraction policy when the environmental and social costs of the opencast coal mining activity are internalized: Mining District of the Department of El Cesar (Colombia) case study. Energy Economics, 59, 159-166.

Collier, P., & Venables, A. J. (2014). Closing coal: economic and moral incentives. Oxford Review of Economic Policy, 30(3), 492-512.

Erku?-Öztürk, H., & Terhorst, P. (2016). Innovative restaurants in a mass-tourism city: Evidence from Antalya. Tourism Management, 54, 477-489.

Feenstra, R. C. (2016). Gains from Trade Under Monopolistic Competition. Pacific Economic Review, 21(1), 35-44.

Feng, S., Wang, D., & Zhang, X. (2014). Study on Ecological Compensation for Coal Mining Activities Based on Economic Externalities. Journal of Geoscience and Environment Protection, 2(02), 151.

Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago press.

Lucas, A. (2016). Stranded assets, externalities and carbon risk in the Australian coal industry: The case for contraction in a carbon-constrained world. Energy Research & Social Science, 11, 53-66.

Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6). Princeton University Press.

Olabi, A. G. (2016). Energy quadrilemma and the future of renewable energy. Energy, 108, 1-6.

Parenti, M., Ushchev, P., & Thisse, J. F. (2017). Toward a theory of monopolistic competition. Journal of Economic Theory, 167, 86-115.

Park, S. J., Cachon, G. P., Lai, G., & Seshadri, S. (2015). Supply chain design and carbon penalty: monopoly vs. monopolistic competition. Production and Operations Management, 24(9), 1494-1508.

Phelan, A. A., Dawes, L., Costanza, R., & Kubiszewski, I. (2017). Evaluation of social externalities in regional communities affected by coal seam gas projects: A case study from Southeast Queensland. Ecological Economics, 131, 300-311.

Roberts, K. (2014). The limit points of monopolistic competition. Noncooperative Approaches to the Theory of Perfect Competition, 3, 141.

Roper, S., Love, J. H., & Bonner, K. (2017). Firms’ knowledge search and local knowledge externalities in innovation performance. Research Policy, 46(1), 43-56.

Schweinberger, A. G., & Suedekum, J. (2015). De-industrialization and entrepreneurship under monopolistic competition. Oxford Economic Papers, 67(4), 1174-1185.

Stiglitz, J. E., & Rosengard, J. K. (2015). Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.

Zhelobodko, E., Kokovin, S., Parenti, M., & Thisse, J. F. (2012). Monopolistic competition: Beyond the constant elasticity of substitution. Econometrica, 80(6), 2765-2784.