MONOPOLISTIC PRACTICES & COMPETITION COMMISSION IN INDIAN ECONOMY

Presented By

G.Abirami

B.Gayathri

R.Gowsalya

I.Preeithi

K.Sowmiyaa

J.Sridevi

R.Veena

M.B.A – Ist Year

INTRODUCTION

Monopolistic competition is a type of imperfect competition such that many producers sell

products that are differentiated from one another (e.g. by branding or quality) and hence are

not perfect substitutes . In monopolistic competition, a firm takes the prices charged by its

rivals as given and ignores the impact of its own prices on the prices of other firms

Main features of monopolistic competition

Many sellers

Product differentiation: similar but non-identical products

Free entry and exit

MAIN FEATURES

Many Sellers

There are many firms competing for the same group of customers.

Product examples include books, CDs, movies, computer games, restaurants,

piano lessons, cookies, furniture, etc.

This feature of monopolistic competition is shared with perfect competition.

So, the decisions made by one firm do not affect other firms in any perceptible way

MAIN FEATURES

Product Differentiation

Each firm produces a product that is at least slightly different from those of other

firms.

Rather than being a price taker, each firm faces a downward-sloping demand curve.

Demand

Quantity

Price

MAIN FEATURES

Free Entry or Exit

Firms can enter or exit the market without any difficulty.

The number of firms in the market adjusts until economic profits are zero.

This is another feature of monopolistic competition that it shares with perfect

competition

MARKET STRUCTURE

Market structure is the focus real-world competition.

Market structure refers to the physical characteristics of the market

within which firms interact.

Market structure involves the number of firms in the market and the

barriers to entry.

Perfect competition, with an infinite number of firms, and monopoly, with

a single firm, are polar opposites.

Monopolistic competition and oligopoly lie between these two extremes.

MONOPOLISTIC COMPETITION

Monopolistic competition is a market structure in which there are

many firms selling differentiated products.

There are few barriers to entry.

Oligopoly is a market structure in which there are a few

interdependent firms.

There are often significant barriers to entry.

CHARACTERISTICS

Monopolistic competition is a market with the following

characteristics:

A large number of firms.

Each firm produces a differentiated product.

Firms compete on product quality, price, and marketing.

Firms are free to enter and exit the industry.

COMPETITION COMMISSSION

Competition refers to economic rivalry amongst

Enterprises to control market for products (goods and services)

Level of Competition does not depends

Number of players in an industry but on degree of contestability

•Contest ability involves ease of entry and exit

•Concept of relevant market: Relevant geographical

BENEFITS OF COMPETITION

Competition in markets

promotes efficiency

leads to higher productivity

punishes the laggards

enhances choice, improves quality

reduces costs

facilitates better governance

MAIN FEATURES OF COMPETITION ACT -1 & 2

Prohibits Anti -Competitive Agreements.

Prohibits Abuse of Dominant Position.

Provides for Regulation of Combinations

Main features of Competition Act -2

Price fixing , Bid rigging

Quantity limiting

Market sharing

COMPETING ON QUALITY, PRICE & MARKETING

Product differentiation enables firms to compete in three areas:

quality, price, and marketing.

Quality includes design, reliability, and service.

Because firms produce differentiated products, each firm has a

downward-sloping demand curve for its own product.

But there is a tradeoff between price and quality.

Differentiated products must be marketed using advertising and

packaging.

TYPES OF MARKET STRUCTURES

• Tap water

• Cable TV

Monopoly

• Novels

• Movies

Monopolistic

Competition

• Tennis balls

• Cigarettes

Oligopoly

Number of Firms?

Perfect

• Wheat

• Milk

Competition

Type of Products?

Identical

products

Differentiated

products

One

firm

Few

firms

Many

firms

13

MONOPOLISTIC Vs PERFECT COMPETITION

Excess Capacity

There is no excess capacity in perfect competition in the long run.

Free entry results in competitive firms producing at the point where

average total cost is minimized, which is the efficient scale of the firm.

There is excess capacity in monopolistic competition in the long run.

In monopolistic competition, output is less than the efficient scale of

perfect competition.

MONOPOLISTIC COMPETITION IN THE SHORT RUN

Quantity0

Price

Profit-

maximizing

quantity

Price

Demand

MR

ATC

(a) Firm Makes Profit

Average

total costProfit

MC

15

These profits will

not last.

Short-run

economic profits

encourage new

firms to enter the

market.

This reduces the

demand faced by

firms already in the

market (incumbent

firms)

Incumbent firms’

demand curves

shift to the left.

Their profits fall…

MONOPOLISTICALLY COMPETITIVE FIRM IN SHORT RUN

Short-run economic losses encourage firms to exit the market. This:

Decreases the number of products offered.

Increases demand faced by the remaining firms.

Shifts the remaining firms’ demand curves to the right.

Increases the remaining firms’ profits.

MONOPOLISTICALLY COMPETITIVE FIRM IN LONG RUN

As in a monopoly, price exceeds marginal cost.

Profit maximization requires marginal revenue to equal marginal cost.

The downward-sloping demand curve makes marginal revenue less than price.

As in a competitive market, price equals average total cost.

Free entry and exit drive economic profit to zero

Contd…

Zero Economic Profit

In the long run, economic profit induces entry.

And entry continues as long as firms in the industry make an

economic profit—as long as (P > ATC).

In the long run, a firm in monopolistic competition maximizes its

profit by producing the quantity at which its marginal revenue

equals its marginal cost, MR = MC.

MONOPOLISTIC COMPETITION IN LONG RUN

Quantity

Price

0

DemandMR

ATC

MC

Profit-maximizing

quantity

P = ATC

19

We have seen that in

the long run profits

cannot be positive or

negative.

Therefore, profits

must be zero!

Note that P = ATC >

MR = MC in long run

equilibrium.

MR = MC

ADVERTISING

When firms sell differentiated products, each firm has an incentive to

advertise in order to attract more buyers to its particular product.

Under perfect competition, there is no such incentive

Under monopoly, there is some incentive to advertise, but not a whole

lot.

After all, the monopolist has no rivals.

Contd…

Firms that sell highly differentiated consumer goods—such as over-the-counter

drugs, perfumes, soft drinks, breakfast cereals—typically spend between 10 and 20

percent of revenue on advertising.

Firms that sell industrial products—such as drill presses and communications

satellites—typically spend very little on advertising

Firms that sell undifferentiated products—such as wheat, peanuts, or crude oil—

spend nothing at all

Overall, about 2 percent of total revenue, or over $200 billion a year, is spent on

advertising.

Contd…

Critics of advertising argue that firms advertise in order to manipulate

people’s tastes.

They also argue that it impedes competition by implying that products are

more different than they truly are.

Defenders argue that advertising provides information to consumers

They also argue that advertising increases competition by informing

consumers of their options and enabling them to do comparison shopping

BRAND NAMES

Economists have argued that brand names may be a useful way for

consumers to ensure that the goods they are buying are of high quality.

providing information about quality.

giving firms incentive to maintain high quality.

The question, however, is whether brand name products are better than

generics by an extent that justifies their higher prices

CONCLUSIONS

Competition enforcement leads to consumer welfare directly and

indirectly

Stakeholders need to recognize their role in promoting competition

Policymakers/Government need to prioritize competition reforms

CCI to remain independent

CCI to create a public buy in

Consumer movement: natural allies of a competition regime

THANK YOU