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Monopolistic Competition Research Paper

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Updated: Oct 15th, 2019

It is important to understand the nature of competition and the competition that exists within the marketplace for the sake of businessmen and consumers. In an ideal setting, all businessmen a rewarded from their efforts and that all consumers are able to get their money’s worth. But in reality completion and monopoly makes life more interesting.

The proponent of this study would like to know more about competition and monopoly by looking into monopolistic competition, a type of completion that contains both elements of monopoly and competition. Furthermore, these principles of economics must be used to know more about the US computer software industry.

Monopolistic Competition

A firm has a monopoly of the market if it is the only company that supplies 100 percent of the market (Kew & Stredwick 14). A monopoly is achieved if the firm has control of the price. Thus, the same company can manipulate the quantity that can be produced in a particular span of time. It can easily create an inefficient system because firms no longer have an incentive to achieve cost-efficiency in their respective operations.

It is important to understand a monopoly so that prospective entrepreneurs are informed if they can enter a particular market. In the case of the computer software industry it is of grave importance to find out if the barriers of entry are low enough to enter or high enough to discourage investors.

In a monopoly there is only one firm that has the capability to manufacture and supply a particular commodity. This set-up is disadvantageous for all parties because competitors cannot benefit in the same market while consumers are forced to absorb high prices and in most occasions poor service.

It is therefore welcome news to find out that a monopoly is difficult to achieve. As long as there is a demand for a particular product, businessmen work hard to provide that particular commodity. A scenario that is more common is monopolistic competition. It is the existence of many firms competing in a particular market.

It contains elements of both monopoly and competition (McEachern 226). A monopolistic competition is achieved when there are similar firms that differentiate their products even if actual difference does not exist. Each firm struggles to create a mini-monopoly of its product as described below:

As the product is differentiated, the firms in the market have slightly more freedom in setting prices. They can decide to charge slightly higher price and sell a slightly lower volume of goods, and vice versa. To a small extent they are price makers.

They can build up customer loyalty, and loyal customers will be prepared to pa a higher price for what they perceive as higher quality, or a closer match with their precise requirements, either in the product itself, or in the services which surround its deliver (Kew & Stredwick 14).

Another way of understanding this type of competition is the existence of many producers that “offer products that are substitutes but are not viewed as identical by consumers (McEachern 226). Thus, the suppliers in a monopolistic competition have the power to lower or increase the price of the goods sold.

The moment businessmen are able to understand the intricacies of a particular market, then, they are able to figure out how to develop substitutes in order for them to capitalize on the strong demand for a particular type of product or service needed by consumers. If there is a strong demand for a refreshing drink in the midst of a sports activity then companies scramble to develop a product that can satisfy a particular need. But they cannot offer the same type of drink.

The consequence would be disastrous for the investor because competitors would be forced to lower their price to attract the attention of consumers. The trend will continue until they achieve zero profits and inevitably bankruptcy. It is important to differentiate their products from others.

There are four ways to differentiate the products and these are: a) physical differences; b) location; c) services; and d) product image (McEachern 227). When it comes to physical differences, firms invest in packaging. It is important that the product stands out. Firms that are involved in a monopolistic competition try to differentiate the availability of the product. The availability is determined by the location of the product and how it can be accessed by the consumers.

Another way to differentiate is through the terms of accompanying services (McEachern 227). A good example is the way some pizza parlors offer home delivery of their products. For some firms their products can be delivered through the Internet. There are also firms that provide nothing in terms of after-sales support.

Finally, the fourth way to differentiate a product is through the image that the company tries to impact to customers. Most firms hire the best advertising firms that money can buy in order to create a message that resonates with customers. Thus, similar products can have different means of appealing to a target market.

For example, there are cigarettes for women and there are cigarettes for men. Sportswear may use the same materials and relatively the same type of technology to produce them but this is differentiated through the different product endorsers such as star athletes or celebrities.

Software Industry

One of the most profitable industries is the computer software industry. The most important firm in the market is Microsoft. The graphical-user-interface was reversed engineer by Microsoft and in 1997 it went on to capture 92 percent of the market share when it comes to the operating system (McGuigan, Moyer, & Harris 334). Although Microsoft has cornered the market for operating systems, the computer software industry is not only about operating systems but also other product that cater to different types of needs.

It is an attractive market because of the profitability of the industry. Consider for instance the sustainability of growth in a business that requires fewer resources each succeeding year.

In other words the moment that the business is established it takes little to manufacture the same product. However, the barrier to entry is prohibitively high. It will require years of research and testing before a successful product launch can be achieved. With regards to the idea of monopoly it is difficult to dominate this industry.

According to one commentary, “Virtually the only organization with anything approaching a world-wide monopoly is Microsoft, whose operating systems have about 90 percent of the PC market” (Kew & Stredwick 14). There are inherent strengths and weaknesses of the computer software industry that makes it difficult to have total domination of the market.

Even the suggestion that Microsoft has total domination of the operating system market must be reconsidered. A close examination of a true monopoly would reveal that the market must be defined in its broadest terms. If one considers users of pirated Microsoft software, then, it must be pointed out that a significant number of consumers use illegal copies. Therefore, the company is in effect unable to penetrate this segment of the population and hence no monopoly was achieved.

When it comes to computer software, one can argue that this industry embody both competition and monopoly. It is not even accurate to say that it is characterized by monopolistic competition. There are certain products that dominated the market and can therefore be considered as having a monopoly of that market.

A good example is of course Microsoft’s operating system. On the other hand there are computer software products that have numerous substitutes and these are differentiated in accordance to the design, purpose, and after sales support (Mankiw 336). The reason why monopolistic competition is evident in the computer industry can be explained through the following commentary:

Consumers often continue to prefer Campbell’s Soup, Nike, Oil of Olay, Rubbermaid, Tide, and other favorite brands long after comparable products have been introduced by rivals. Given the lack of perfect substitutes, monopolistically competitive firms exercise some discretion in setting prices – they are not price takers. However, given vigorous competition from imitators offering close but not identical substitutes, such firms enjoy only a normal risk-adjusted rate of return on investment in long-run equilibrium (Hirschey 500).

Computer software is in high demand that businessmen have high incentive to develop substitutes. It is a multi-billion dollar industry worldwide. In the United States alone it is a lucrative market. Interestingly the ability to offer substitutes can be accomplished through two different processes. The first one is through research and development while the second one is through piracy.

Thus, it can be argued that monopolistic competition includes both the availability of differentiated substitutes as a process of legitimate product development and also through the creation of illegal copies.

In the case of the former the barriers to entry is prohibitively high thus the number of competitors for a particular type of product remains low. For instance, there are only a few companies that can offer operating systems. Microsoft of course dominates the market while Apple computers and other open source systems supply the remainder of the market.

In a monopolistic competition, the barriers to entry are low and therefore it is easy to enter the market. At the same time, it is also relatively easy to leave the market. But in the case of the computer software industry it is both difficult and easy to enter the market. Businessmen that produce illegal copies find it easy to enter the market but they are confronted with the treat of substitutes. In the sale of pirated copies they are faced with tough competition that drives their profitability to zero.

Conclusion

It is difficult to achieve perfect domination of the computer software industry because there are two types of competitors. The first group is comprised of those that can invest in research and development to develop a substitute. The second group is comprised of those that create illegal copies of the software.

But even if the analysis is focused on legitimate businessmen the computer software industry is characterized as a monopolistic competition because various competitors can offer substitutes differentiated by after sales support and perceived value to the consumers.

Works Cited

Hirschey, Mark. Fundamentals of Managerial Economics. OH: Cengage Learning, 2009.

Kew, John and John Stredwick. Business Environment: Managing in a Strategic Context. UK: Chartered Institute of Personnel and Development, 2005. Print.

Mankiw, Gregory. Principles of Economics. OH:Cengage Learning, 2009. Print.

McEachern, William. Economics: A Contemporary Introduction. OH: Cengage Learning, 2009. Print.

McGuigan, James, Charles Moyer and Frederick Harris. Managerial Economics. OH: Cengage Learning, 2011, Print.

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