Executive Summary

The respective report provides a comprehensive assessment of MSL in light of imperfect competition and monopolistic behavior. The report initially identifies that MSL operates in an economic environment whereby the services provided by the business attract the consumers; however, they are also concerned with the increasing prices. The report also identifies the significance and types of imperfect competition in the form of oligopoly, monopolistic competition, and a duopoly, each of which demonstrates individual traits of imperfect competition. The factors that help create a market structure have been identified as the number of agents, strength of negotiation of agents, unique/differentiated products, barriers to entry/exit in the market, and the degree of concentration among the agents. The report further compared the general monopolistic behavior with that of MSL, depicting that the firm’s cost and price structure follows the general practice of a monopoly. Finally, the report discusses the graph of MSL representing the monopolistic competition.

Introduction/ Economic Environment of Karimnagar

The respective report provides a comprehensive assessment of a case study in an attempt to understand the behavior depicted by organizations and consumers in an imperfectly competitive market or a monopoly. The case study represents a business operating in the Home Service Industry that has assumed a monopolistic behavior. The company is working in Karimnagar, a municipal corporation that understands the fourth largest city in the Indian state of Telangana. The business was born in 2015 and provides a unique set of services in house cleaners, housekeeping staff, elder care, and lawn mowing etcetera. The certified personnel and skilled/semi-skilled workers working under MAKS attracted immediate attention. However, the lack of competition encouraged MAKS owners to set high prices for the services. The lack of a competitor, certified services, quick response, and trained workers urge people to hire MAKS.

Imperfect Competition

Research signifies that the market condition, whereby elements of monopoly allow firms to exercise control over market prices, is known as Imperfect Competition (Planer-Friedrich & Sahm, 2020). In simple terms, an imperfectly competitive market debunks the laws of supply and demand when determining prices. Monopoly, monopolistic competition, and oligopoly are some of the most common examples of an imperfectly competitive market (Planer-Friedrich & Sahm, 2020). An imperfect market assessment shows that the market in question has a large number of buyers and sellers, an aspect similar to that in a perfectly competitive market. Furthermore, an imperfect market has various products, allow free entry and exit to firms in the market, have varying selling costs, serves as a blend of competition and monopoly (monopolistic competition), and a market where firms are price-makers (Planer-Friedrich & Sahm, 2020). Since firms assume price-makers’ role, the welfare of the consumers is often neglected (as is the case of MAKS Service Limited). Furthermore, an imperfectly competitive market observes a loss of efficiency. A minute change in the market conditions brings about the development of multiple types of imperfect competition (Planer-Friedrich & Sahm, 2020). There is an ambiguity in the types of imperfect competition, whereby some claim that there are four kinds, and some claim that there are three. The following subsections provide a brief overview of the types of imperfect competitions:

Oligopoly

A market condition is referred to as an oligopoly if only a few firms sell a homogeneous or differentiated product (Chen, 2017). Generally, three to five firms that hold a strong position in the market constitute an oligopolistic market. For instance, the Big Five Tech Giants dubbed as “FAAMG,” i.e., Facebook, Apple, Amazon, Microsoft, and Google combine to form an oligopoly. The said firms sell different products/services; however, they hold significant power in the technological world, making up an oligopoly (Chen, 2017).

Duopoly

A market condition where only two (duo means two) sellers sell similar or differentiated products/services is referred to as a duopoly (Bárcena-Ruiz & Garzón, 2018). Both the sellers enjoy a strong position in the market, are the price-makers, are independent, and do not agree. There is intense competition between the said firms. Although the firms are considered to be independent, the decisions made by one firm affect the other (Bárcena-Ruiz & Garzón, 2018). For instance, the aircraft manufacturers Boeing and Airbus hold a duopolistic relationship. Despite the presence of many other manufacturers, these two firms hold a sign in the airline industry.

Monopolistic Competition

The term monopoly holds a strong significance in the market since it helps understand individual manufacturer behavior (Parenti, Ushchev, & Thisse, 2017). A market condition, whereby only one firm holds significant power in the market (in terms of deciding prices etcetera) and has no other substitute, is referred to as a monopoly. Research signifies that a monopoly’s characteristics reflect in the behavior of an imperfectly competitive market (Parenti, Ushchev, & Thisse, 2017). Although the term monopolistic competition brings to mind a market where only one firm decides the specifics of the market, it refers to a range of sellers that produce close substitutes, discouraging the said firms from making important decisions (Parenti, Ushchev, & Thisse, 2017).

Factors responsible for the creation of market structures

Economists and theorists have long debated the factors that play an active role in creating market structures (Market structure, 2020). Research signifies that the interaction between buyers and sellers helps determine the price of goods, following which the market structure is defined as characteristics that influence and are influenced by the behavior of agents (Market structure, 2020). An extensive assessment informs that there exist ranges of factors that influence the creation of market structures, some of which are listed as follows:

• The number of agents in a market, i.e., the number of buyers and sellers in a market, influences the market, shapes the market, and helps create market structures(Market structure, 2020).
• The extent to which goods/services in a market are unique or different also helps structure the market(Market structure, 2020). The respective factor plays an integral role in shaping the market, thus creating the market structures.
• The strength of negotiation between the agents, i.e., the buyers and sellers, determines many market factors, which also contribute to the creation of the market structure.
• The barriers (or lack thereof) to entry or exit from the market also plays an integral role in creating a market structure(Market structure, 2020).
• The degree of concentration among the agents also plays an imperative role in creating market structures(Market structure, 2020).

The following table demonstrates how the difference between multiple factors helps in creating different markets:

Monopoly

As mentioned in one of the previous sections, a monopoly is a market condition where one seller holds power to determine the price of goods sold (Crapis, Ifrach, Maglaras, & Scarsini, 2017). Since there is only one seller in the market, the consumers are bound to agree to any price set by the seller, a trait visible in the case-let MAKS Services Limited. The case also identifies a business MAKS with monopolistic behavior since it is the only home service provider in Karimnagar that provides certified skilled/semi-skilled workers to work for people. The associated benefits attracted not only the consumers but also the people looking for jobs in the respective field. As such, the consumers are bound to agree to the prices set by the business.

Revenue in monopoly incites a thought process for a monopolist. The fact that increasing price extracts an adverse reaction from the consumers, following which a monopolist must consider lowering the costs to increase the demand (Loertscher & Muir, 2019). Following this assessment, it is identified that revenue maximization for a monopolist follows an increasing curve to an extent. At one point, the curve starts sloping downward, following which the monopolist must reduce the prices (Loertscher & Muir, 2019). Studying this monopolizing behavior in light of the case, one can only observe increasing costs by MAKS, which shows that the owner has yet to reach the peak-point, following which it must reduce the prices to attract additional consumers. In simple terms, the price ranges depicted in the case study only describe one-half of the revenue curve in a monopoly.

A general monopolistic behavior shows that a monopolist sets the prices above the marginal cost, following which a monopoly always observes a positive economic profit (Crapis, Ifrach, Maglaras, & Scarsini, 2017). Studying this behavior in light of the case study shows that the owner of MAKS extends the services at prices higher than the marginal cost of the services and the benefits. As such, the owner of MAKS is observing positive economic profits. Although economically inefficient, MAKS’s behavior in the case study shows higher prices for lower quantity, following which the equilibrium price is higher than that in a perfectly competitive market (Loertscher & Muir, 2019). The price structure, price charged by MSL per person, and cost to MSL per person help in understanding the company’s profit, which keeps on increasing initially and then starts to decrease gradually. (Table 1)

Profit Maximizing Behavior of a Monopolist

Like any regular business, a monopolist must consider certain aspects and conditions when determining the revenue generation and profits. Under any market conditions, firms try to find a correlation between (equality) marginal revenue and marginal cost to find the point of maximum benefit (Phanse, 2019). Similarly, the profit maximization behavior of a monopoly is also located at the end of equality of marginal revenue and marginal cost. However, the general practice of a monopoly benefits the firm in the sense that an increase in prices increases the marginal revenue as opposed to the marginal costs, following which the profits are increased (Phanse, 2019). Furthermore, a reduction in rates increases the marginal revenue since the demand for the goods increase, following which the monopoly (yet again) observes a profit (Phanse, 2019). That is, a monopoly generally watches economically positive benefits; however, an accurate assessment can only be found by studying the cost structure of a firm. The following table provides a comprehensive assessment of costs, profits, and revenue of MSL, which helps understand the profit-maximizing behavior of MSL.

Table 2: MSL Cost, Profit, and Revenue Behavior

The respective table shows that MSL will only observe maximum profit if it extends a price between 17000 and 18000 per person.

Graph

The following is the graph of MSL. The respective figure represents the Total Cost, Marginal Cost, Total Revenue, Marginal Revenue, and Average Total Cost. The chart in question will help understand the profit maximization point of MSL:

An assessment of the graph informs that MSL is likely to benefit from its endeavors if it keeps its prices between 17000 and 18000. Furthermore, the optimal quantity of workers for MSL is between 5 and 6, following which the firm is likely to experience maximum profit.

Conclusion

The report has conducted an extensive analysis of economic markets and discussed the respective case study in light of the general behavior. Unsurprisingly, the expression of MAKS is reflected in the practice of general monopoly.

References

Bárcena-Ruiz, J. C., & Garzón, M. B. (2018). Privatization and vertical integration under a mixed duopoly. Economic Systems, 42(3), 514-522.

Chen, T. L. (2017). Privatization and efficiency: a mixed oligopoly approach. Journal of Economics, 120(3), 251-268.

Crapis, D., Ifrach, B., Maglaras, C., & Scarsini, M. (2017). Monopoly pricing in the presence of social learning. Management Science, 63(11), 3586-3608.

Loertscher, S., & Muir, E. V. (2019). Monopoly pricing, optimal rationing, and resale. The University of Melbourne.

Market structure. (2020). Retrieved from https://policonomics.com/market-structure/#:~:text=The%20main%20aspects%20that%20determine,ease%2C%20or%20not%2C%20of%20entering

Parenti, M., Ushchev, P., & Thisse, J. F. (2017). Toward a theory of monopolistic competition. Journal of Economic Theory, 167, 86-115.

Phanse, V. R. (2019). Profit Maximization, Monopoly, and High Barrier of Entry for SaaS products: An application of the Golden Rule and the Optimal Pricing Strategy. Innovative Journal of Business and Management, 8(7), 101-109.

Planer-Friedrich, L., & Sahm, M. (2020). Strategic corporate social responsibility, imperfect competition, and market concentration. Journal of Economics, 129(1), 79-101.