Introduction
In simple terms, imperfect competition can be referred to as a type of market structure that does not operate in conformity with the laid rules of perfect competition. In imperfect competition, there are so many barriers that prevent fair competition among the market players and also the accessibility to goods by users is limited and not all transparent. Limitations and barriers to such a market may include: prices being influenced by one or a few suppliers, barriers to the entry and exit of a market are quite significant and information about products and their pricing is very limited. Examples of imperfect competition are mainly monopoly, oligopoly, monopolistic competition and oligopolistic competition. Others are monopsony and oligopolistic. (Perloff, 2008, p. 483). Oligopoly encompasses a market structure where the number of firms in operation is very small and thus gives buyers a very limited range of choices to choose from. It can also describe a market where a small number of firms own the majority share of the market. Monopoly on the other hand is the situation whereby a single company or group owns almost the whole market if not all of it for a given service or product. In both competitions, there are limitations in the market to both other players and buyers as market trends and decisions are decided on by the major companies. A situation where prices are set by the buyers instead of the market is also a type of imperfect competition.
Keys, Assumptions and parameters of Monopolistic Markets
In the monopolistic competition model, producers do refer to the price by their rivals as a given. As such, they strive to set the prices themselves and this at times is done alone and therefore its impact on other firm’s prices. What they are always gearing towards is optimum profit making as increasing a commodity’s price unreasonably, may lead to customers pulling out or seeking out cheaper options. Therefore, they are not driven by the need to maximize on profit but by the need to attain optimum profits. The barriers in such a market are not at all stringent and they do give chances to start ups or new entries into the markets as they is no entry or exit cost. The products available are largely homogenous and branding and quality is what serves to differentiate them. Because of the high competition between the many sellers in the market, prices remain very stable all through and chances of fluctuation are very low. Interdependence levels are quite low as firms hardly ever come together to share ideas on setting of prices, quality control and also collusion to do away with some competitors.
Monopolistic levels are a measured quantity whereby the ratios and levels of concentration are used to determine what the market share of a particular firm or producer is (Ayers and Collinge, 2013, p. 280). Companies in the industry are aware of the need, in the formation of economic policy, to take into account the reaction of the competitors on the sales volumes, prices, advertising costs, investments (Mankiw, 2014). This entrenches them all to a free market system where all the profit is split by them in accordance to their level of participation and input in the market.
Mobile phone operating systems development is one obvious case of a rising monopolistic competition drom its recent nature of oligopoly. The Apple iOS and Google’s Android have been the two most common operating systems used by most of the phones. Deep relationships with mobile phone manufacturers have made it possible for them to have their operating systems preinstalled in phones before they are unveiled for sale in the market. In January 14th this year, information released by an Oracle attorney revealed that the Android operating system had raised Google Inc. about $31 billion in revenue and a profit of $22 billion since its inception in 2008 (Lowensohn, 2012). The law suit was filed as the database developer claimed that Google had used its Java software to develop the Operating System without making payments for it. These figures were not released by Google itself, but are an approximation that was made by the oracle. Money is made mainly from mobile advertising where they display ads as users use their services. They also earn money on pay per click basis where users click some links and they get payment for it though this method doesn’t pay much. Also for the sale of every app on their platform, they make a 30% cut. The revenue that was generated from Android apps in 2014 alone was estimated to be at $10 billion and so Google was able to keep about $3 billion while the rest was paid out to the app developers.
Google’s fortunes have nonetheless been plummeting in the recent years. In 2014 alone, its profits are said to have to go down by about 44% and the reason behind this is competition from their apple counterparts and the market entry by new developers a s well. Apple is said to have been able to vacuum about 90% of the profits in the business of smartphones in the same year. The reason behind this is the fact that Apple users usually have more money to spend and further more they spend more time on their phones than Android users do. Another reason why Google was losing out, was due to the fact that it was paying Apple (their main competitor) billions of dollars to make its Search engine the default search provider across all Apple devices. This in turn marks the fierce advertising by players that is usually evidenced in the monopolistic competition as Google not only marketed in its platform but went further to do that in the competitor’s domain. Google actually makes more money from ads placed on Apple devices than it does on its very own Android platform. Basing on all these facts, Google’s profits and market share on the Operating System platform are expected to go down as it seems Apple is taking up a larger percentage of the market share while other market share seems to be getting sucked up by the newly established mobile platforms in the Asian countries and also Microsoft. This, coupled with the disgruntlement among smartphone manufacturers, is a clear indication that very soon Google will be forced out of the market. Smartphone manufacturers are apparently feeling short changed by Google, as they say that the company ends up taking the lion’s share in the profits generated from the sale of the smart phones.
In the short term, Google’s Android will end losing its market dominance to the fast expanding operating system developed by Apple, iOS and the new entrants. A survey conducted by Cowen & company comes up with results that suggested that about 16% of new iPhone purchases happened to be a switch from Android devices. This percentage was higher in China as it stood at a whopping 29%. Losing out to apple in the short term may not seem as an entirely negative effect to Google as they generate most revenue on the iOS platform. Growth in Apple devices means more profits to Google as people will use their search engine even more and they will end up spending more money. An abnormal profit making curve will therefore be experienced in the short term as there is an existence of very few market players and in this case there will be one dominant player. Profits are therefore being split between the two leading companies. In the long run, however, this turn of events will end up with the detriment of Android as it is rapidly losing its hold in the market. Whereas Apple and Microsoft are ousting it from the high-end of the smartphone market, the lower end is also under even greater threat from the now breaking away Android players such as Cyanogen and Xiaomi. The latter is quickly gaining popularity in the Chinese market, which has already banned Google services and apps like G-mail service and Google maps. What this has done, is it has made the products of the all the firms that are already in existence elastic. As such, this has pushed the demand curve to the left and therefore pushed the profits for the big players downwards as the new entrant or entrants also start taking up a market share of the available profits to be made. If nothing is done to salvage the current situation, Google will be forced to bow to market pressure as it is evident its current competitors are working to phase it out and turn the market from a monopolistic market to an oligopoly. This is however to be contested as there seems to be the emergence of two small but rapidly growing developers. Their impact is yet to be felt through and that leaves Apple and their counterparts, Microsoft, at a vantage position to turn the market into an oligopoly. The best way to ensure its survival, is to find a way to further entrench itself in the other developer’s mobile platforms. This might eventually lead to increased gains in the long term and lead to reduced costs in terms of development and maintenance of their own platform. It might also help them spread out and end up covering the whole smartphone market with a range of their products. Continued use by users will eventually lead to them being the preferred developers of some apps. Dependence on them by mobile platforms is what will eventually emerge. Then, they will have the opportunity to brand themselves and enter the market, providing all these products in their own platform. They will also have the chance to limit or do away with offering their services and products in the other platforms when this time comes. The most probable outcome of this will be exodus of users from the other platforms as they try to access the now unavailable features in other phones (Davies and Cline, 2005, p. 797).
Limitations of Monopolistic Competition
Some of the differentiation that takes place does not contribute in creating utility, but rather generates wastage which is considered unnecessary. This wastage may come in the form of excess packaging (David, 2008, p. 283). This translates to waste of resources. In a way, advertisements can also be viewed to be wasteful none the less despite the fact that they are usually geared towards informing the buyers rather than coercing them into purchasing a particular product or commodity.
There is also inefficiency in this type of a market as there is usually allocative inefficiency in both the long term and also the short when profit is put in assumption. In both cases, the prices always turn out to be above the marginal cost and what happens in the long term is that the firm will become less allocatively inefficient. The bottom line is, it is still inefficient because it can never be able to exploit its fixed factors due to the difficulty in mass production.
Differences in Reality between Google Inc. and the Monopolistic Market
The type of market system in which Google Inc. operates is not entirely a monopolistic market as there are many outstanding pointers that entrench it more to oligopoly. Some factors such as market dominance largely by two major players brings about a picture that serves to represent a market system that leaves very little room for new players. Even the emergence of new players does prove to be of much significance as the change of the demand curve is almost unnoticeable. Though the new startups serve to act as competition, they don’t achieve much as user preferences are largely centered between Apple and Google products. Also restrictions and barriers by the two giants are evident through patents and copyrights. This leaves new market players with limited choices and room for playing any major role in the market system.
Conclusion
Monopolistic competition comprises of a number of sellers occupying a market niche and focusing largely on providing similar products to buyers. Product branding and marketing is what serves as a distinction between the homogenous products available. Competition in this market is cut throat as it is largely dominated by entrepreneurs whose sole purpose is to make a profit (Joshua and Mankiw, 2003). Decisions by entrepreneurs are independent as everyone tries to find a uniqueness that will endear more customers to his/her brand. Eventually, more entrance into the market by new player changes profit making from an abnormal curve to a normal one.
References
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Hollensen,S.(2014). Marketing Management: A Relationship Approach, 3rd ed. New York: Pearson.
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Ayers, R.; Collinge, R. (2003). Microeconomics: Explore & Apply. Pearson. p. 280. ISBN 0-13-177714-9.
Perloff, J. (2008). Microeconomics Theory & Applications with Calculus. Boston: Pearson. pp. 483–484. ISBN 978-0-321-27794-7.
Antony Davies & Thomas Cline (2005). "A Consumer Behavior Approach to Modeling Monopolistic Competition". Journal of Economic Psychology 26 (6): 797–826. doi:10.1016/j.joep.2005.05.003
Colander David C. (2008). Microeconomics (7th ed.). New York: McGraw-Hill/Irwin. p. 283. ISBN 978-0-07-334365-5.
Josh Lowensohn. (2012). Jury clears Google clears Google of infringing on Oracle’s patents. Retrieved 2012-05-2015
http://www.economicsonline.co.uk/Business_economics/Monopolistic_competition.html
