There are various different market structures that operate in different settings; mainly, these structures are divided into four: perfect competition, monopolistic competition, monopoly, and oligopoly. Monopoly and perfect competition are two extremes, with monopolistic competition and oligopoly being somewhere in the middle.
Monopolistic competition has a unique setting and structure; it is a market full of products that are substitutes for one another, yet they are differentiated in many ways. That is, they are substitutes under a broader banner, but then within one banner in detail, the products are differentiated. This competition of differentiation is also based on regions most of the time; that is, the barbershop might be just one in a lane having control over the prices and being a monopoly on its own; but it is not the only barbershop in the neighborhood. The characteristic of having differentiated products is one for monopolistic competition, nonetheless. Other examples can also be of restaurants, clothing, department stores, etc.
Other characteristics include: the number of units and businesses in the market are many – these include suppliers and consumers both. There is a low degree of control of one business, but no business has a complete monopoly over the market and does not have the sole power of affecting market prices (Sowell, 2004). There is competition in the market, but it is usually non-price and the competition is based on other characteristics of the product. There are a limited number of barriers to entry and exit in the market, unlike monopolies. These barriers include – intimidation, control over retail outlets and factors of production, experience and established business unit, lower cost per unit, and even aggressive marketing.
Keeping all the above conditions in mind; we need to see what factors of production are needed for a business of handmade rugs and how these can be used as a competitive advantage for the business. Factors of production are the basic material needed for production: land (natural resources), labor (human resources), enterprise (risk-taking and profit-bearing abilities), and capital (man-made resources). For a handmade rugs business, the natural resources required are the animal skin that is needed for fur and the raw material with which the rug is made. Although many people produce rugs, the competitive advantage can be the type of animal skin and hair used – Pashmina is a type of animal hair that is very soft and has very high quality. The labor required is the expertise and the technical skills that are needed for craftsmanship; not everybody is adept with the right talent and know-how of producing these rugs, therefore, laborers who are skilled at this are required. To make it competitively disadvantaged, laborers coming from rural areas who are skilled at making these rugs can be hired for low prices instead of urban employees who get training; however, if those craftsmen with this knowledge since childhood are not available, training is another way of competitive advantage. Although these are handmade rugs, some machinery is needed including sewing machines which become part of the capital. Enterprise, in this case, would be the fact that the producer should set the store somewhere where no other rug shops are present; but risk-taking is involved here, meaning opening a shop where other rug dealers are present. These approaches to factors to production are fit for monopolistic competition; because having these conditions gives them a good amount of control to an extent, but still does not give them monopoly control.
In cases of monopolistic competition, the elasticity of the goods plays a critical role. In the short run, if a customer wants a handmade rug and he is in vicinity ‘A’ with all other rugs being machinery made, he will have no choice but to buy the ones available at whatever prices charged keeping in mind that their own competitors are other handmade rug dealers. Therefore, here prices are high and the supplier earns a supernormal profit. In the longer run, however, the customers have a chance to move out into other markets and vicinities and buy handmade rugs from somewhere else (Sloman, 2003). Also, in the long run, other handmade rug dealer shops could have emerged in vicinity A, thus, increasing competition. Therefore, in the short run, although the handmade rugs were not a monopoly, they did hold control over prices. This shows that in the longer run, the supplier will only break even and earn zero profit. We can conclude that the demand curve here is downward sloping, unlike the perfect competition which is a perfectly elastic demand curve.
References
- Sloman, J., Sutcliffe, M., (2003), Economics, Published by Prentice Hall/Financial Times, ISBN 0273655744
- Sowell, T., (2004); Basic Economics: A Citizen’s Guide to the Economy; Published by Basic Books, ISBN 0465081452