 We will start our discussion today with the bilateral monopoly. So, if you remember in the previous session we talked about a market firm which is known as Monospony and it is in the other side it is not on the basis of the seller, it is on the basis of the single buyers and this firm of market is known as Monospony because there is only one buyer and there are number of sellers into that. Now, we will take a situation where there is only single buyer and single seller. How generally this price and output determination is done or maybe how this equilibrium price is obtained because there is a single seller, single buyers who influences the price more, who decides the output more that we will discuss in case of a bilateral monopoly. So, bilateral monopoly is one where there is a single seller and single buyer. So, we can call it a labor union like a monopoly operates in a Monospony labor market that is a typical example of a bilateral monopoly when the union the act is a monopoly seller face a Monospony buyer that is the one single plant who generally employ all the laborers from this union they becomes the buyer of this. So, seller is the union labor union that is single seller and buyer is the single plant or single industry who generally gives employment to the labor from the labor union. So, bilateral monopoly is a market with single seller and single buyer. Typical example like a labor union like monopoly operates in a Monospony labor market and when the union that is monopolist faces the monospony that is single large industry or single large plant who employs them it is generally the case of a bilateral monopoly. Generally we find the evidence of bilateral monopoly in case of a labor market because that can be only we can organize into the Monospony buyer and the monopoly seller. So, wage rate determination is generally in this case how the wage rate is decided the wage rate determination is by collective bargaining through the union of worker and the employer. It is not strictly on the basis of the demand and supply because there is a single seller and single buyer. So, the evidence in the wage rate is decided by collective bargaining through the union of worker and the employer. This shows that if someone is having a more bargaining strength they generally influence price or the wage rate more as compared to the other. But ideally if you look at the monopolist depend on monospony is to generally maximize the profit and monospony is depends on monopolist to maximizing their profit. As you know that monopolist has no supply curve there is a absence of supply curve means the monopoly. So, there is no supply function and generally the monopolist select a point from the buyers demand curve which maximize the profit. There is no supply curve for monopolist and to maximize the profit generally they select a point from the buyers demand curve and similarly from monosponist point of view also there is no demand curve there is a absent of demand curve in the monospony market and they select a point on his seller supply function which maximize the profit. So, one is in case of monopolist there is no supply function to maximize the profit they select a point from the buyers demand function and in case of monospony there is no demand function there is no demand function and in order to maximize the profit they select a point from the seller supply function and maximize the profit. So, if you look at there is a interdependence when it comes to maximize the profit only monopolist or only monosponist influencing the price and output decision they cannot maximize the profit and it is not possible also to independently influence the price and output. So, it is not possible for the sellers to behave as a monopolist in this kind of market and not possible also for the buyers to monosponist at the same time. Seller cannot exploit the demand curve and buyers cannot exploit the supply curve which does not exist and which leads to a few situation. So, for the seller there is no demand curve as it is a case of a monosponist market and that is the reason they cannot exploit the demand curve. Buyers since there is a absence of supply curve for the monopolist they cannot also exploit the supply curve. So, there is there is there is absence of a situation where seller is exploiting the demand curve and buyer is exploiting the supply curve and that leads to few kind of situation which we can summarize. Firstly, it may happen that one of the participants either monopolist or monopsony may dominate and force the other to accept his price and quantity decision. So, it may happen that either monopolist will force the monosponist to accept his price and quantity decision or monosponist will force the monopolist to accept his price and quantity decision. Secondly, the buyers and sellers may collude or bargain to set the price and quantity. They can come to a collusion and they bargain to set the price and quantity. So, they will form a form a collusion they come to a collusion and on the depend upon their bargaining strength they bargain to set the price and quantity according to their own choice and thirdly, if no one is able to dominate or the collusion is not taking place the market mechanism breakdown and it may not exist as a bilateral monopoly. So, case one, one may dominate other has to follow, second both of them come to a collusion and they set their price and quantity on the basis of the bargaining and third one when the market mechanism will break down if none of this above two are possible. Now, how the equilibrium takes place in case of a bilateral monopoly? Equilibrium cannot be determined by the traditional tools because there is absence of the demand curve in case of a monosponist and there is a absence of a supply curve in case of a monopolist. So, since demand curve and supply curve is absent for the buyers and sellers equilibrium cannot be determined by the traditional tool that is the typical demand supply or profit maximization cannot takes place through the marginal revenue and marginal cost on the basis of the price determined by the demand and supply. So, here the economic factors like bargaining power, negotiating skill or other strategy like how to influence the or how to force the other party play an important role in the determination of price. So, more to do with the non-economic factor like bargaining power and negotiating skill when it comes to price and output. So, if it is more bargaining strength or more negotiating strength the price and quantity goes in their favor. We will understand this equilibrium in a graphical format that how the equilibrium takes place in case of a bilateral monopoly. This kind of market like typical monopoly market will get our average revenue, will get our marginal revenue, will get the marginal cost, will get the marginal expenditure. So, monopolist equilibrium if you look at it is a point where marginal cost is equal to the marginal revenue and we get the corresponding monopoly price. We can call it a monopoly price. Producer cannot be the price maker as there is a single bear. So, P M even if it is a monopolist price and how we got this monopolist price through the MC MR rule and through that we got the price to be P M and quantity is Q M, but producer cannot be the price maker as there is a single buyer. So, there we introduce the supply curve of buyer that is MC and MC is what MC is the supply for the buyers. This is the supply curve of the buyer and marginal is equal to the P and the buyer will purchase additional Q to maximize the profit till the time this marginal expenditure is equal to P. So, the buyer will go on producing the additional or go on purchasing the additional Q to maximize the profit till the time ME is equal to P. So, monopolist equilibrium will be at the point E 2 and which one is point E 2 over here, E 2 is the point where ME is equal to P and ME is equal to P at this point E 2. So, E 2 is the point where corresponding to that we get the price which is equal to P 2 and how to find out the price over here, the price is P 2 and correspondingly we get a price that is P 2. Now, we have E 2, we have corresponding to this, we have this is the monosponist equilibrium point, this is the monopolist point, this is the monosponist equilibrium point and corresponding to E 2 we get price E 2 and how we get this price E 2 whether this has to be the price or maybe corresponding to this we get a point where in the MC curve because if you look at MC is the again deciding point here, we get one more price level here or we can call it maybe we can call it P star. So, now what is the ideal level here? Ideal level is maybe this is the monosponist price because this is the point corresponding to this where we get is equal to the MC, this is the monopolist price and always the through bargaining neither they will accept this P m nor they will accept this P star because this is the level of price what we are what the what they will propose now which is between this P m and P star. This is the monosponist price, this is the monopolist price and they will device a price between P m and P star whether it is P 2 or any other price because that will be decided through the through the through the market or this will be decided through the bargaining strength of both the buyers and seller that they has to charge a price which is between the monopoly price and the monosponist price. So, generally now how we get all these three price point? One with respect to the monopoly price that is P m that is through MC MR rule and how we get this P star? P star we get through this is the supply curve of the buyer and if you remember in case of the in case of monosponist always the P has to be equal to the marginal cost or they have to pay the price with respect to the supply of the input. So, in the first case we just identified the point where till the which time the quantity level has to be produced and that is Q star and how we get this quantity level? We guess the quantity level where ME is equal to P and after identifying the quantity level P 2 E 2 will then find out what is the price and to find the price we need to pick a point corresponding to this output level where this is equal to the MC and that is the reason we get the P star as the monosponist price. Now what is the level of output? Now maybe there is one more suggestion if this is P 2 there is one more suggestion may also come where the competitive price that is P 2 that is MC is equal to P this is the competitive price. So, may be they can also 0 down on a price P 1 which is between P star and P m and that decides on the basis of the bargaining strength of the monopolist and the bargaining strength of the monosponist. So, between P m and P star they can pick up a price P 1 P 2 or the number of other options over here are decided on their bargaining strength which brings some amount of the profit to both the buyers and sellers. So, typically in the bilateral monopoly since single seller and single buyer no one will influence the price and quantity either one has to dominate which is not appearing when we are deciding it in the graphically because the monopolist price is not accepted to the monosponist price is not accepted to the monopolist. So, in this case they will try to come to a price between the price P m and P star which will give some amount of the profit through their bargaining and through their collusion. So, this talks about a second situation where ideally the price is decided on the basis of the bargaining strength of both the buyers and sellers. Then well since we have discussed so many so many types of monopoly we have so discuss different aspect of monopoly and previously we have also discussed about the perfect competitive market structure will come to a comparative studies between the perfect competition and the monopoly how these two markets different from each other. So, when it comes to the goal of the firm in both these cases the goal of the firm is the profit maximization whether it is a case of perfect competition whether it is case of a monopolist both the case the goal of the firm is to maximize the profit and there is no separation of ownership and the management. So, the there is no difference between the ownership and management and profit maximization of the goal of the firm which is uniform as a characteristic or feature to the both the type of market that is perfect competition and the monopoly. When it comes to assumption in if you look at there is a different difference in the assumption that is taken by the perfect competitive market structure and the monopoly market structure. When it comes to product since there is a single product in case of monopoly it has to be uniform there is no close substitute whereas in case of a perfect competition it is a homogeneous product which is similar or the similar product and all the products are closely substitute to each other. Similarly, the number of sellers and buyer in case of monopoly the number of seller is 1 there are large number of buyers, but in case of perfect competitive market structure the number of there are large number of sellers and buyers. Entry condition in case of perfect competition there is free entry and free exit whereas in case of monopoly there is entry barrier, but the exit is if you are incurring a loss over there. Then in case of cost condition we have analyzed the perfect competitive market structure typically in case of supply curve of the perfect competitive market structure in three different cost that is cost and cost increasing cost and decreasing cost that we have not analyzed through monopoly, but in general the cost condition if you look at the monopolist is not not conscious about the cost condition because since they have they can also influence the price and if the cost goes on a higher side they can always justify and they can charge a higher price because since they are the price maker, but in case of perfect competitive market since the price is decided by the market forces they will always try to reduce the cost of production so that the profit can be more because whenever there is a increasing cost of production they are not charging a higher price because price is decided by the market power. Nevertheless it is not that the monopolist never try to reduce the cost, but at least when they have they are the price taker the if at any case there is a increasing in the cost function at least they can increase the price to at least supplement the increase in the cost of the production or that they can get it through the from the buyers or the increase in the cost they can pass to the buyer in the form of increase in the cost of production or increase in the price. Then when it comes to behavioural rules of the firm the shape of the demand curve in case of the monopolistic firm is downward sloping the regular demand curve, but in case of a perfect competitive market if you look at it is horizontal because there is no change in the price at the same price whatever the buyer is willing to buy they can buy and how much the seller is willing to seller they can sell. But in case of monopolist the shape of demand is demand curve is downward sloping and even whenever he has to increase the price whenever he has to increase the quantity demanded he has to reduce the price to increase the quantity demanded. So, the shape of the demand is depends upon the price and quantity relationship in case of a perfect competitive market structure and the monopoly market structure. Then the atmospheric behaviour of the independence that is present in case of a monopolist firm, but that is absence in case of a perfect competitive market structure. Then we have some policy variables in the firm and that is the main decision. So, if you look at this regulation typically the regulatory and thus that comes more to the monopoly, but in case of perfect competitive market it is always a free market the price quantity decided by the market forces and supply forces. So, more it is into a free market economy where the invisible hand principle works whenever there is imbalance that is taken care by the demand and supply. Then we have a comparison between the monopoly and perfect competition on the basis of the long run equilibrium. So, in the long run again the price is decided by the demand and supply that is following the MC and MR rule. The output if you look at again it is increased at a increasing cost decreasing or cost or the constant cost. Long run in case of long run in the monopoly market all the firms they get the normal profit even if not the super normal profit because if they are getting super normal profit that it takes the new firms to enter into the market and increase the competition. When it comes to capacity utilization the capacity utilization is full in case of perfect competitive market structure because the maximize the optimal quantity in case of a perfect competitive market structure is decided by the maximum output at the minimum cost of production and the maximum output generally if you look at it produce at the bottom of the minimum point of the average cost. Whereas, in case of monopoly the capacity is not fully existed and always the output is produced at the decreasing portion of the average cost and that leads to some excess capacity in case of a monopoly market structure. When it comes to prediction of model there is a shift in the demand curve shift in the cost if it is a fixed cost in nature in both the case perfect competitive monopoly market structure it will not disturb the equilibrium situation, but whenever there is a increase or decrease in the variable cost generally they disturb the equilibrium position. Similarly, the change in the demand whether it is elastic or inelastic accordingly the equilibrium position will change and also the corresponding profit maximizing output price and whether the firm is getting super nominal profit normal profit or economic loss. So, we take a case we just take a small example to understand how this unregulated monopoly or the monopoly works in case of a real world situation. So, as you know DBRs if you look at there the monopoly in the diamond market. So, DBRs will take a case of how it is become a unregulated monopoly and how the different act of monopolization is done by DBRs in order to become a monopoly leader in the market. So, it founded in 1880 in South Africa and control about 99 percent of the world's diamond production until about 1900. So, they used to control 99 percent of the diamond production. Now, at present the firm produces 15 percent of world diamond, but still controls sales of 80 percent of the diamond market. So, they just produce 15 percent, but still they controls sales of 80 percent in the diamond market. DBR controls the price of diamond with a slogan take it all or leave it. They are not going to they are following a price rigidity they are not going to reduce the price in order to increase the increase the quantity demanded. Their philosophy is that you take it all or leave it. It is up to the buyer whether they are ready to buy at that typical price or not. So, if you summarize this the fact case fact at least that even if they were controlling the market with their production controlling the production then when they are not controlling the production they are now controlling the market through the sale of 80 percent of the total share of the diamond market. So, they just produce 15 percent, but when it comes to sale they sell more than 80 percent and that way they immerse as a monopoly market. They follow a price rigidity they never reduces the price in order to increase the price. If buyers really need it they have to buy it in that typical price. If the demand for the diamond falls as it did in early 90s DBR stands ready to buy diamond to support the price. So, here it comes to the act of monopolization. The demand for diamond decreases in 90 and what DBR they did they did not want the demand to decrease. If the demand to in decrease then that will reduce the price. So, that time DBR what they did they buy the diamond they acted as a buyer to support the price at the same level because if they are not buying and the in generally the demand is decreasing that leads to decrease in the price. So, DBR stands ready to buy diamond to support the price and this if you look at this is the activity through which they still want to maintain the monopoly market as the monopoly market because they are not allowing the demands to reduce. So, in one way they are limiting the quantity supply and also by doing this activity they cleverly plus the demand for the demand for the diamond to the also increasing when there is a decreasing trend of demand for diamond in 90. And they catch a slogan that demand diamond is forever they talk about the quality of the product they talk about the durability of the product and if it is a diamond when you are buying it you are buying it for lifetime. So, you should not think about the price. So, and this is how they maintain the price rigidity this is how they maintain the quality and durability of the product. So, if you look at DBR it is not a regulated monopoly through their activity through their control over the supply and demand they have become the monopoly in the diamond market. Similarly, we have many more examples like if we can take up example of a Microsoft whether it is a monopoly or it is a act of monopolization or similarly you can take Indian railway whether it is a if you look at it is a kind of regulated monopoly because there is no other player is in that that market. And if you look at there is also no close substitute. So, there are many other other example what you can find there is a close resemblance of that market in the in the form of monopoly market. So, then we will after discussing the perfect competitive market and monopoly market will move into a new kind of market which is in between the perfect competitive and monopoly market structure. And this is the form of imperfect competitive imperfect competition or this is a part of a imperfect market structure. So, imperfect competition refers to those market structure that fall between the perfect competition and pure monopoly. So, it is a market structure that is strictly between the perfect competition and the pure monopoly market that have some feature of competition and some feature of monopoly. It has taken some feature of a perfect competition and some feature of the monopoly. And this concept of monopolistic competition generally comes from the seminal work of Professor Chamberlain theory of monopolistic competition. And the basic assumption of the monopolistic competition is same as perfect competition except the homogeneity of product. So, if you look at it more close to the perfect competitive market structure, because the basic assumption of the monopolistic competition is same as the perfect competition except typically the homogenous product, homogenous nature of the product. So, let us discuss the features of the monopolistic competition and then we will see whether how it is different from a perfect competitive market structure or a monopoly market structure. So, there are large number of firms each satisfying a small but not microscopic share of the market and share of market demand for a similar not identical, because there is not a homogenous product. The share of the market demand is for similar product not for the identical product. There are large number of firm each satisfying a small but not a microscopic share means large number of where they share a small, but it is not very insignificant also. Products are close substitute, but they are not perfectly substitute. Each product is different from the other in term of some of the component. Seller of each product group can be considered competing firm within the industry. So, seller of each product group that is substitute product can be considered as the consider competing firm within the industry. Market is monopolistic. Product differentiation create a degree of the market power. It is why we call it is a monopolistic market because each product is different from the other product. So, when you are doing that independently each product is a single product with no close substitute and that product differentiation create a degree of the market power. Market is competitive. There are because there are large number of firms and there is easy entry into the market. One of the important feature of the monopolistic competition is the product differentiation and how this product differentiation makes it different. Each firm produce a product that is at least slightly different from those of other firms. Rather than being price taker each firm faces a downwards looping demand curve. So, each firm produce a product that is at least slightly different from those of other firms and we will discuss about the parameter on what basis the product has to be different from the others and they are not the price taker each firm follow a downwards looping demand curve. So, whenever they have to increase the output they have to reduce the price. The firm in the market do not consider the reaction of the rivals when choosing their product price or annual sales target. It means the price and output distance of the firm is not getting influenced by the reaction of the rivals. There is a relative freedom of entry and exit. There is no barrier as such apart from product differentiation creating as a barrier. Neither opportunity nor the incentive exist for the firms in the market to cooperate in any way that decrease the competition and the number of firms in the market adjust until the economic profit are 0. Now, since we are talking about a feature product differentiation and that makes the market different from the other market structure. Now, we will see how the product differentiation is being practiced. The product has to be different from each other either on the basis of the product quality or in the basis of the services or in the basis of the location or in the basis of advertising and packaging. So, when it comes to product quality maybe you can take a case of a toothpaste or you can take a case of a soap. You get a soap which ranges from may be 500 rupees to 5 rupees. How they are different from each other? They are different from each other in term of the quality or you can take the case of detergent powder you will it ranges from 200 to 2 rupees and how they are different from each other? They are different from each other in term of the quality. The raw material that is used and also the usefulness of the product. Similarly, services like if you take the case of a typically this is the after sale service if you take the case of a grocery store or you take a case of a supermarket. Now, what is the service? Some supermarket they do a home delivery, some supermarket they will the their assistant will help you to put your grocery in your vehicle, some super store they may be they will take your typical coupon or all this thing. So, these are the services extended to the consumer and the product is different from each other in term of the service associated with the store service associated with the product. Like you take the after sale service of a vehicle, after sale service of a electronics product. For someone it is free, for someone some for a typically if you are sending your vehicle for a servicing in some store they come and pick you pick your vehicle. In some store at least they will pick your vehicle, but you need to pay a charge. For someone they will just give a reminder. So, these are all small small activities, small small service given by the given by the store or given by the specific product and that makes the product different from one to another. Location, the location decides how they are different from each other. May be the same brand shop when it is in a mall or when it is from the outskirt area that makes the difference and that creates the product differentiation. Like if you take a grocery store near to the petrol pop in the highway and the grocery store near in the nearest locality that makes the difference between the products. Advertising and packaging again may be if you look at for someone the focus is more on the packaging. So, packaging has to be neat, packaging has to be attractive. So, that makes the difference if the packaging is good you are buying the product and advertising who is doing a massive scale of advertising and who is not doing it. So, generally if you look at the brand loyalty also comes from the fact is that who is advertising for the product and that somehow influence the product has to be different from the other product. Because if it is a well known celebrity you always feel that whatever the endorse that is has to be a good product because the celebrity is endorsing the product. Rather than endorsing the same product by someone else there the comes the product differentiation because that takes out the consumers perception about the product. If it is a celebrity it has to be good rather than the other one who is advertising for the product. Then we will talk about the price and output determination in case of a monopolistic competition. This is similar to the monopoly as it face a downward sloping demand curve which is because of a strong preference of section of consumer for the product and quasi monopoly of the seller over the supply. So, pricing and output decision is similar to monopoly. It face a downward sloping demand function because it has a strong preference of the section for consumer for the product or typically the brand loyalty and there is also a quasi monopoly of the seller over the supply. Brand loyalty or strong preference of the consumer gives the seller the opportunity to raise the price and yet retain some consumer. So, brand loyalty or the strong preference of the consumer generally allow the seller to increase the price but still the consumer they buy it because there is a brand loyalty or the strong preference for it. Since each product is substitute for the other the firm can attract the consumer of other product by lowering the price also and that is why we get a downward sloping demand curve. So, in case of short run again the monopolistic firm may get a super normal profit or they may get a normal profit or they incur a loss. So, we will analyze where they get a super normal profit where they get a loss and where they just get a normal profit and if you look at this is always on the basis of the average cost and average revenue. So, this is average revenue, this is marginal revenue, here we will take Q, here we will take P average revenue and marginal revenue. We have a average cost, we have the marginal cost, we will take the point marginal cost marginal revenue, we will identify the price and we will identify the cost at that same level. So, this is the cost and if you look at in this case since average revenue is greater than average cost for corresponding level of profit maximizing level of output, here the firm is getting super normal profit. Then we will take the case of normal profit when they generally the firm just get the normal profit. So, here again we will take average revenue, we will take the marginal revenue, we will take the average cost, we will take the marginal cost corresponding to marginal cost and marginal revenue, we get the equilibrium price, we get the equilibrium quantity and in this case is average revenue is equal to average revenue the firm is just getting the normal profit. Similarly, in case of loss the possibility is that the in the short term the monopolistic firm also can get the loss. So, in this case this is the average revenue curve, this is the marginal revenue curve, this is the average cost curve, this is the marginal cost curve following the marginal cost and marginal revenue will get the equilibrium quantity and equilibrium price, this is the cost. So, this is the amount of the loss what the firm is getting because average cost is more than average revenue in this case. So, in the short term the firm may incur loss, the firm may just get the normal profit or the firm get also the super normal profit. Next we will see what before going into the short term we will see what happens when the firms get super normal profit or when the firm gets loss. So, short term economic profit encourage the new firms to enter the market, increases the number of product offer, reduces the demand faced by the firms already in the market and increment firms demand curve shift to the left, demand for the increment firm product fall and their profit decreases. So, whenever there is a super normal profit that incentive for the new firms to enter the market that increases the number of products being offer because the new firms will again produce a differentiated product, reduces the demand for the existing firm that reduces the profit of the existing firm and finally, they again land into a situation where they just get the normal profit and the entry into the market continues till the time all the existing firm they are not getting the normal profit. If they are getting super normal profit again it is an incentive for the firms to get into the market and produce a differentiated product. Then we will take a case when all the some of the firms they are getting the economic loss or the firms they are getting economic loss in the short run. So, short run economic loss encourage the firm to exit the market at least for few of them which decrease the number of product offer, increase the demand faced by the remaining firm with the exist of few of the firms, shift the remaining firms demand curve to the right and increasing the remaining firms profit. So, again it is a transition from the loss to the normal profit and this exit from the market of those firm who are making loss will continue till the time the firms they are not getting the normal profit in the market. Next we will see the price and output determination in the long run. So, the long again in the long run again we follow the same principle we take the marginal cost marginal revenue as the to find out the profit maximizing level of output and price and after finding that we find out the price on the basis of the demand curve. We find out the cost and the difference between the cost and revenue that gives us the profit loss or whatever may be the outcome. So, in the long run if you look at the super normal profit in the long run attracts the new firm to the industry that leads to loss of market share and the normal profit. So, increasing the number of firm that intensify the price competition between them price competition increases existing firm cut down price to retain or regain the market share new firms lower to penetrate the market and demand curve becomes more elastic. So, let us understand this long run equilibrium that how the demand curve is more elastic when there is a super normal profit in the market. This is marginal cost marginal revenue this is the price and if you look at this price the firm is getting the super normal profit because at corresponding to this this is the average cost and this is the average revenue and since average revenue is more than average cost the firm is getting super normal profit. Now, what will happen this super normal profit will attract the new firm into the industry which will reduce the loss of market share and that because of the normal profit and to normal profit what we need to find out we need to find out a new set of average revenue curve and the marginal revenue curve. So, this is average revenue 1 and this is marginal revenue 1. So, increase in the number of firm intensify the price competition between them price competition increases the existing firm cut down the price to retain their markets of market power and new firm lower the price to get the profit. So, at this case if you look at corresponding to this marginal cost and marginal revenue all of them they are just getting the normal profit because the average cost is equal to average revenue at this point. So, in the super normal profit so how the generally the sequence of event. So, the average revenue marginal revenue is there on that basis they get a super normal profit. Super normal profit attracts the new firm into the market existing firm demand decreases market share decreases and then the new we get a new average revenue curve this is average revenue 1 and correspondingly we get the marginal revenue curve 1. At this with the help of this average revenue and marginal revenue cost function remain same we get a demand curve we get a profit price level which is again lower than the previous price level and also at this point the average cost is equal to average revenue. So, this leads to the fact that this average cost average revenue brings down the equilibrium level brings down the profit level and the all the firm they just get the just get the normal profit and there is also one more point to note here is that if you look at between the previous average revenue curve and this average revenue curve this average revenue curve is more elastic because all the firms they are following the all the firms they are lowering the price in order to increase the profit existing firm lowering the price to return their market share and the new firm lowering the price to lowering the price to at least penetrate in the market and that overall leads to a lower price in the market. Then there is a again a significant feature of this monopolistic competition is there is some excess capacity is always there in the monopolistic competition as compared to the perfect competition. So, if you look at in case of perfect competitive market structure the firm is equilibrium at the minimum point of the average cost curve whereas, in case of monopolistic competition the firm is equilibrium at the falling portion of the average cost curve and there that brings the excess capacity. So, this if you look at each firm will be equilibrium at the falling portion of the average cost not at the minimum point and this is because of the excess capacity theorem and what is this excess capacity theorem says there is a excess capacity with each firm more output can be produced at a lower cost per generally firm they are producing the output which is less than the full capacity or less than the minimum point. So, we will check this graphically how the monopolistic firm becomes the have some amount of the excess capacity. This is our average revenue curve, this is the marginal revenue curve, this is the long run average cost curve, this is the long run marginal cost curve. Corresponding to this we get the level of output. So, whether you call it monopolistic output or whether you call it perfect competitive, whether you call it monopoly output this is the same profit maximizing level of output whether it is monopoly or monopolistic. If you look at they operate at the decreasing portion of the average cost curve, but ideally if you look at always the perfect competitive output is produced at the point where minimum point of the long run average cost curve. So, the difference between these two is generally known as the excess capacity, because this much amount of output more could have been produced, but the monopoly market and monopolistic market since they are operating at the decreasing portion of the average cost curve they are not coming to the full or they are not coming to the minimum point of the average cost or they are not coming to the full utilization of the economies of scale or advantage of economies of scale and they are just stopping their production here that leads to some excess capacity, because there is no full utilization and that is why this difference between this QM and QC generally known as the excess capacity in case of the, excess capacity in case of the monopolistic and monopoly market structure, which is not there at least specifically in case of when it comes to the perfect competitive market structure and this feature if you will find out it is more in the monopoly and monopolistic rather than any form of the market structure. Then we will talk about since product differences in their advertising is mandatory, the firm has to tell the consumer, the firm has to give the awareness to the consumer that how the product is different from the other products in the market, because their product is different from the other product. So, the product differentiation is inherent in monopolistic competition and leads to use of advertising and the brand names. Critics argue that firms use advertising and brand names to take advantage of consumer irrationality and to reduce competition. However, the defender argue that the firms use advertising and brand names to inform consumer and to compete more vigorously on price and product quality. So, there is always a two school of thought that whether advertising is positive or advertising is negative, but if you look at the real sense the advertising onto a limiting extent is good till the time it is not maybe not getting used unnecessarily the advertising in order to attract a market share or in order to use a power. So, when it comes to advertising we know that advertising is necessary if the product is differentiated, but what is the impact of advertising and other cost of production and selling. So, this type of cost incurred to sell thus advertising cost and other cost of production selling like selling cost, giving free samples, R&D, doing a market research all these expenses incurred to sell more of a product without reducing the price must be added to the production cost to compute the average cost and contribute to higher price. Till the time all these costs are not getting added in the production cost this cannot be accounted for the calculation of price. So, if this is not getting added the cost of production will increase a price is maintained at the same level the firm is not going to make some. The firm is not going to rather they are going to lose some profit. So, this leads to increase in the average cost consumer buys more of the advertised goods however resources are diverted from the production of other goods to provide the advertising. So, ideally when this added into the production cost this also leads to increase in the average cost and consumer buys more of the advertised goods because that is fresh in their memory or they know that if it is coming as a part of awareness they see this product through the different media. They generally buy more of this advertised goods, but the resources are diverted generally from production of word goods to provide the advertising and that is the again the precondition that why generally the cost to be added in the production cost because they are incurring a good amount or large amount of in money on this. So, if you look at till the time the what is the form of competition in the monopolistic market because they are not the price taker they are the they have they can influence the price to a bit because their product is different from the other product on what basis they should compete with each other. Maybe someone can charge a higher price and always add a quality to it and that can be also sold in the market and someone will charge a lower price, but it is not qualitatively good and that is the reason he survives with a lower price. But apart from this price competition what may be the other factor on what basis such a price is getting? This price typical price typical non-price competition takes place in the monopolistic competition. So, two common form of non-price competition, one product innovation, second one is advertisement. Both go simultaneously the product innovation and the advertisement and cost incur on this selling cost whatever the cost whether it is innovation or it is it is the product advertisement both add some selling cost. So, there is an increase in the selling cost. So, average selling cost initially decreases, but ultimately increases and that is why the average selling cost is U shaped like the average cost. Non-price competition through selling cost list all the firms to an almost similar equilibrium and there through adding the selling cost we can again check what is the firm's group equilibrium when the production cost also consists of the selling cost. So, we will understand the group equilibrium and what is the criticism to channel is this theory form of monopolistic competition and we will talk about the oligopoly market structure what are the different models in our next session.