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Perfect and Monopolistic Competition in Markets

Perfect Competition: The Egg Market

I do not remember seeing an individual egg producer’s advertisement and I do not anticipate coming across one in the near future. This is primarily because the egg market is a perfectly competitive market. In this regard, the producers of eggs (and consumers too) are price-takers rather than price-setters, and a single producer or a tiny fraction of producers/suppliers in the market cannot influence the market price of eggs; it is determined by the forces of demand and supply in the market (Rittenberg & Tregarthen 2009:225). So, it would not make much sense to place advertisements for eggs because this would only escalate production costs, for which only a few “sinks” are available for an egg farmer.

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Under perfect competition, a general assumption is made that the market has a significantly high number of suppliers of the commodity under consideration, and that the commodity is consumed by an equally large number of consumers/buyers (Rittenberg & Tregarthen 2009: 255). Yet another strong assumption made under the theory of perfectly competitive markets that the producers of the commodity offer for sale largely identical items. In light of these two assumptions, it is virtually impossible to differentiate between eggs produced by one farmer and those produced by others, which would have allowed price differentiation as well.

A further assumption is made under perfect completion markets to the effect that new firms can easily enter the market as barriers to entry are considerably few (Rittenberg & Tregarthen 2009: 254). It is similarly easy for an existing supplier to exit the market. Just anyone can start an egg production unit with only a single layer, and may close shop the following day without much ado, if they so wished.

Finally, the perfectly competitive market model makes the assumption that information about the commodity as well as its suppliers (market conditions) is easily and cheaply available in the market, and can similarly be accessed by any interested party. There is not so much about egg production to be learned: the process is plain and simple.

Moreover, individual egg buyers purchase only a significantly tiny proportion the of aggregate egg production; hence there is considerably insignificant possibility for buyers to be given a volume discount. Therefore, since buyers and sellers are capable of trading the volume of eggs they are willing and able to, the market is perfectly competitive as both are price-takers (Hirschey 2008: 383).

Thus, the production of standard eggs combined with egg-pricing by market forces are the principle characteristics that make the egg industry a competitive market, besides enhanced consumers’ well-informed understanding of the advantages or disadvantaged linked with each of the distinguished egg types.

Monopolistic Market: De Beers Firm

De Beers is a monopoly firm that produces diamond jewelleries. It holds an enormous percentage of the diamond supply market in the world, which makes it practically a monopoly. As such, De Beers is in effect able to set prices of diamond in the market based solely on its output. De Beers monopoly in the diamond jewelry industry dates back to 1929 (DeBeers.com n.d).

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The major characteristic that makes DeBeers a monopoly is that it possesses the market power to establish the price in its market, which it has employed to charge higher prices than its competitive firms. In addition to this, the diamond industry creates highly strong barriers to entry of new firms by means of the existing firms obtaining exclusive rights to the diamond mines across the world (Taylor 2007: 257).

In this respect, DeBeers’ monopoly in the supply of diamonds enables it to set the prices for diamonds. Also, by having power over the supply of diamonds, De Beers can limit – if it so wishes- the quantity of diamonds available for sale in the market so as to allow it to sell them at higher prices. For a company to be a monopoly, it must have the power as well as the willingness to exercise the power to mount strong barriers to entry of new competitors into its market.

Over the years, De Beers has effectively managed to keep at bay its competition largely through purchasing all the rough diamonds it could lay its hands on. For example, amidst a potential flooding of diamonds in the market, De Beers quickly purchased large quantities of diamonds and accumulated them in its London vaults in a spirited attempt to keep the prices for diamonds high.

The near-absence of rivals for De Beers only serves to propagate its price-setting power.

Hence, all the above characteristics make De Beers a monopolistic firm.

Monopolistically Competitive Market: Luxury Watch Industry

The high-end watch industry is a monopolistically competitive market (BusinessWeek.com n.d). In a monopolistic competition, the market has several sellers of a product, although the product of each seller varies with the other sellers’ in one or several ways. As such, product differentiation is the main characteristic of monopolistic competition. Product differentiation is possible in a number of ways: including but not limited to unique brands, trademarks; as well as product color, shape and quality. Moreover, it can be in the form of disparity in facilities as well as services provided by the seller to the consumer (Jain & Khanna n.d:146).

The luxury watch industry is a monopolistically competitive market because has a relatively high number of watch manufacturers/suppliers. Moreover, entry of new firms into the market as well as exit of those already participating in the market is not tightly restricted (Rittenberg & Tregarthen 2008: 276). However, each of the participating firms, as opposed to monopolistic markets, has its own distinct collection of luxury watches, which enables them to set their own prices significantly independent of their competitors’ pricing regimes. Differentiation of the products of the market players also takes the form of unique advertising, product quality, manufacturer’s reputation, as well as the intrinsic components of the watch.

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The fact that there are many firms producing a wide variety of watches makes the market full of substitutes, which in turn makes the price-setting power to be limited in a monopolistically competitive market when compared to the same power that is enjoyed by true monopolies (Rittenberg & Tregarthen 2009: 276 ).

In respect of the monopolistically competitive luxury watch markets, Frank Muller Collection has a diverse collection of high end watches for ladies and gents. In addition, the Frank Muller frequently does add new features in its high-end watch collections to keep them updated. Currently, the watch maker has a set of brands that comprises of Pierre Michel Golay, Martin Braun, Rodolphe, Pierre Kunz, Backes & Straus, Rodolphe, ECW Alexis Barthelay, and Smalto timepieces (GrimaldiForum.com 2010). Such a wide collections enables the firm to set prices on its brands with significantly high independence from other firms’ pricing regimes.

References List

Businessweek.com (n.d). The Top Ultra Luxury Watches. Web.

De Beers.com (n.d) About De Beers. Web.

GrimaldiForum.com (2010) Frank Muller in Time for its World Presentations. Web.

Hirschey, M. (2008) Managerial Economics. 12th ed. Mason, OH: Cengage Learning.

Jain, T.R., and Khanna, O.P. (n.d) Economics (for BTM-1). New Delhi: FK Publications.

Rittenberg, L., and Tregarthen, T. (2009) Principles of Economics. New York, NY: Flat World Knowledge. Web.

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Taylor, J.B. (2007) Economics. Boston, MA: Cengage Learning.

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