Chapter 9.2, Problem 1R

To determine

To state: The importance of terms namely; monopoly, economies of scale, barriers to entry, copyright, patent, oligopoly, cartel, product differentiation and monopolistic competition.

Explanation of Solution

Monopoly:

Monopoly is defined as the market structure where there exists only a single seller of a specific product or service and he controls the sale of the product and service. Since there exists only a single seller, he thus enjoys the power to determine the prices of the products or services sold by them.

There are no substitutes for the goods and services and limitations are there on the entry of new firms in the market, therefore, the sellers hold a great control over the market supply and thereby control the price determination.

Barriers to entry:

One of the biggest obstacles that a firm usually face in a market is entry of new competitors in the market. Under the monopoly market, the firm is protected as there are several restrictions that have been imposed on the entry of the new firms in the market. Often a times, state laws prevent the new entries or sometimes huge initial capital investment discourage the competitors to enter the market.

Economies of scale:

Economies of scale refers to the advantages that firms acquire due to the scale of operation i.e. the firms can manufacture huge amounts of products and services at a low cost. It implies that with increase in the output produced, the cost per unit decreases.

Patent:

Patent refers to a right approved for an invention. This right enables that the invention cannot be used or sold by any other person except for the patent owner, thus helps in safeguarding your invention.

Copyright:

Copyright, also referred to as an intellectual property, is a process which protects the ownership of the creative work. When a person does a creative work like writing a book, painting, etc., one can protect his work through copyright. Copyright law helps to promote the creative arts and science by defending their works from being copied by others.

Oligopoly:

Oligopoly refers to the market structure in which there are lesser number of sellers and thus all of them exercise a significant influence in the market. It is another type of imperfect competition. Interdependence is an important aspect in an oligopoly market. If any of the selling firms make a slight change in their product prices, it will directly hamper their rivals and they, in return, would change their prices too to sustain the market.

Product differentiation:

Product differentiation is defined as the procedure for distinguishment of goods or services to make it valuable for a particular targeted market. In product differentiation, the unique and different qualities of a good or service is being communicated to the customers so that it becomes more attractive than its other competitors.

Product differentiation helps in increasing brand loyalty and the product can sustain in the market even if it has a slightly higher price than its competitors.

Cartel:

Cartel is an arrangement amongst the manufacturers to reduce competition by controlling price, production or distribution of products and services.

Since, cartels reduce competition, they enjoy monopoly power and products can be sold at high prices so as to bag big profits.

Monopolistic Competition:

Monopolistic competition, also known as imperfect competition, is a market structure that contains both the aspects of oligopoly and perfect competitive markets. In a monopolistic competition, there are no entry and exit limitations for the firms just as in perfect competitive market but the products are differentiated as in oligopoly. Product differentiation provides enough choices for the buyers to choose from one.