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Competing brands?

Image of bottles of laundry detergent on a store shelf.
The laundry detergent market is one that is characterized neither as perfect competition nor monopoly. (Credit: modification of work by Pixel Drip/Flickr Creative Commons)

The temptation to defy the law

Laundry detergent and bags of ice—products of industries that seem pretty mundane, maybe even boring. Hardly! Both have been the center of clandestine meetings and secret deals worthy of a spy novel. In France, between 1997 and 2004, the top four laundry detergent producers (Proctor&Gamble, Henkel, Unilever, and Colgate-Palmolive) controlled about 90 percent of the French soap market. Officials from the soap firms were meeting secretly, in out-of-the-way, small cafés around Paris. Their goals: Stamp out competition and set prices.

Around the same time, the top five Midwest ice makers (Home City Ice, Lang Ice, Tinley Ice, Sisler’s Dairy, and Products of Ohio) had similar goals in mind when they secretly agreed to divide up the bagged ice market.

If both groups could meet their goals, it would enable each to act as though they were a single firm—in essence, a monopoly—and enjoy monopoly-size profits. The problem? In many parts of the world, including the European Union and the United States, it is illegal for firms to divide up markets and set prices collaboratively.

These two cases provide examples of markets that are characterized neither as perfect competition nor monopoly. Instead, these firms are competing in market structures that lie between the extremes of monopoly and perfect competition. How do they behave? Why do they exist? We will revisit this case later, to find out what happened.

Introduction to monopolistic competition and oligopoly

In this chapter, you will learn about:

  • Monopolistic Competition
  • Oligopoly

Perfect competition and monopoly are at opposite ends of the competition spectrum. A perfectly competitive market has many firms selling identical products, who all act as price takers in the face of the competition. If you recall, price takers are firms that have no market power. They simply have to take the market price as given.

Monopoly arises when a single firm sells a product for which there are no close substitutes. Microsoft, for instance, has been considered a monopoly because of its domination of the operating systems market.

What about the vast majority of real world firms and organizations that fall between these extremes, firms that could be described as imperfectly competitive ? What determines their behavior? They have more influence over the price they charge than perfectly competitive firms, but not as much as a monopoly would. What will they do?

One type of imperfectly competitive market is called monopolistic competition . Monopolistically competitive markets feature a large number of competing firms, but the products that they sell are not identical. Consider, as an example, the Mall of America in Minnesota, the largest shopping mall in the United States. In 2010, the Mall of America had 24 stores that sold women’s “ready-to-wear” clothing (like Ann Taylor and Urban Outfitters), another 50 stores that sold clothing for both men and women (like Banana Republic, J. Crew, and Nordstrom’s), plus 14 more stores that sold women’s specialty clothing (like Motherhood Maternity and Victoria’s Secret). Most of the markets that consumers encounter at the retail level are monopolistically competitive.

The other type of imperfectly competitive market is oligopoly . Oligopolistic markets are those dominated by a small number of firms. Commercial aircraft provides a good example: Boeing and Airbus each produce slightly less than 50% of the large commercial aircraft in the world. Another example is the U.S. soft drink industry, which is dominated by Coca-Cola and Pepsi. Oligopolies are characterized by high barriers to entry with firms choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the market. In this chapter, we first explore how monopolistically competitive firms will choose their profit-maximizing level of output. We will then discuss oligopolistic firms, which face two conflicting temptations: to collaborate as if they were a single monopoly, or to individually compete to gain profits by expanding output levels and cutting prices. Oligopolistic markets and firms can also take on elements of monopoly and of perfect competition.

Questions & Answers

why do banks charge fees and charges?
Shirley Reply
What is Labour
Angela Reply
the service provide by the labourer is termed as labour.
Prtj
Meaning of Standard of living
Fazrat Reply
pls what is the meaning of opportunity cost
Fazrat Reply
the cost of next forgone alternative is called opportunity cost. for example you have two choices, either work or study and you choose to study then the opportunity cost for study is the earnings which you can earn while opting job.
Prtj
so what if I choose work it is the same as study
Fazrat
if you choose to work, then the cost of study is the opportunity cost for work
Prtj
ohk tnx
Fazrat
welcome. much love .
Prtj
how can inflation be defined
Mboko Reply
rise in general price level is called inflation.
Fardin
when the price of goods and services rise, the cost of living also increases. basically the increase in general price level is call inflation
Khushtar
when demand increase and supply decrease .leads to fall of quality and volume index's leads to inflation .
Khaja
inflation is a monitry policy that leads to continues increase in price of commodity in a geographical location with some period of time
Osola
what is economic
Enock Reply
economics is a science under which we study all those human activities which is related to scarcity with unlimited wants. By proff. Robbins .
Vibhu
it is a social science
ashiru
what is the difference between macro economic and micro economic
Bubu
Economic is a social science which studies human behaviour in relation to ends and scares means which have alternative uses
Nana
Economic is a social science that studies individuals, busnisses,governments, and deal deal with the entire society as a scarcity.
Mo
what is the differences between ends and wants?
Richard
Economics is a social science which studies human behavior in relationship to ends and scares means which have alternative uses
Musu
what is the indicator of economics development
Bibu Reply
how can you answer economic development
Mankaa Reply
how
Fatema
Two things, first economic growth, just takes into account the increase in per capita income... Which is absolutely vague, important, but vague.On the other hand, Economic development, is a much more wider term. Visit my blog to know more about the differences, ***thetheoryofeconomics.blogspot.in
Taha
Problems faced by the trade union
Appiah Reply
Excuse me am new here
ashiru Reply
Hi
Sereena
This app is used for studying and discussions. Hope it wil be useful for you.
Sereena
If u have any questions, please feel free to ask.🙂
Sereena
Hi
Fardin
sereena i have a question.
Fardin
I also have a question
ashiru
can u tel me what are the must major part of economics which helps and is must to know before doing any business?
Fatema
You can say me about question.
Soe
plz suggest me some books of economics & history for pg entrence exam.Only books for crack pg exam!
Wani
i think the most important part is marketing
Fardin
is ny 1 replyin to my question
Fatema
fatema i told your answer
Fardin
thanks Mr fardin.. Dats really nice of u
Fatema
you are welcome. the most important part in marketing for investment and making business is consumer behavior.
Fardin
right
Fatema
explain excess supply
Shalom Reply
surplus .
Kho
an excess supply or economic surplus is a situation in which the quantity of a good or service supplied is more than the quantity demanded, and the price is above the equilibrium level determined by supply and demand
Rahat
what is elasticity of demand
ashiru
what is equilibrium?
Richard
equilibrium is when quantity demand is equal to quantity supply
Osola
equilibrium is when quantity demanded of a commodity is equal to the quantity supplied of that commodity
Nana
equilibrium is wen quantity demand is equal to quantity supply
Sammy
how to differentiate long run and short run in monopoly?
shar Reply
Short run is a time period in which at least one factor of production is fixed; long run is when all factors of production are variable
Kevin
what is exceptional supply
Wencelyne Reply
what is the relationship between quantity demanded and price in the function Qd =f(p)
Ahmed Reply
it means qty demand varies inversely with price
mac
well, him in some places I saw it also as price function depending on offer, auctions style
Sorin
it qty demand varies inversely with price
Emmanuel
what is damand curve
Appiah Reply
it is the relationship between the quantity of goods and the price at which that quantity satisfies the demand
Sorin
refers to the graphs that show the relationship between quantity demanded of commodities and that of the price of goods and services at thesame particular time.
Alasana
is like a slope that shows the relationship between quantity that is demanded and also the price of G&S at the very same time
Palesa
Can anyone provide any production function showing returns to scale with MPL
Heron

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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