Competitive advantage is only worth pursuing if it is sustainable. Dropping prices can and will be imitated very quickly and causes a long-term loss of profit for all involved.
As in monopolistic competition, your firm has to create as much uncertainty as possible, not only for consumers but also for rivals. The more unpredictable your firm is and the greater the uncertainty about the source of your success, the greater your chances of beating your rivals.
Monopoly
A monopolist’s product is unique with no close substitutes and it is virtually impossible for new firms to enter the industry. This means that consumers are can not do anything about price changes. The monopolist therefore has considerable control over its price and product and it will make the greatest possible profit that it can possibly make. The only threats to a monopolist are the government and the possibility that its products may become outdated.
For example, there is no substitute for petrol so petrol prices will continue to rise and the consumers do not have a say in the significant price which varies. A monopoly is an industry in which there is one seller. Because it is the only seller, the monopolist faces a downward-sloping demand curve.
So all in all imperfect competition has significant control over their prices but most cases of perfect competition don’t. This is because perfect competition has no barriers and no brands and they can all gain the same information as each others. Unlike imperfect competition who have control over their price and have brands and do not possess the same information as their competition. So they relatively compete more than perfect competition.
Monopolies have no competition because they are the only firm that produce their product. They have no other substitute. Like petrol as I mentioned before. So it has no true need to engage in competitive behaviour. But in rare cases monopolies do compete in perfectly contestable markets. This is because it is pressured to be efficient because of the threats of upcoming and potential rivals. So in a sense it does compete even though it has no actual rivals. This is very rare because of the size of these firms and the fact that they are in a market with little products that compete with it. Like petrol there is no substitute so other companies cannot find an alternative to that.
Internal Economies of Scale
These are economies made within a firm as a result of mass production. As the firm produces more and more goods, so average cost begin to fall because of:
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Technical economies made in the actual production of the good. For example, large firms can use expensive machinery, intensively.
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Managerial economies made in the administration of a large firm by splitting up management jobs and employing specialist accountants, salesmen, etc.
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Financial economies made by borrowing money at lower rates of interest than smaller firms.
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Marketing economies made by spreading the high cost of advertising on television and in national newspapers, across a large level of output.
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Commercial economies made when buying supplies in bulk and therefore gaining a larger discount.
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Research and development economies made when developing new and better products.
External Economies of Scale
These are economies made outside the firm as a result of its location and occur when:
- A local skilled labour force is available.
- Specialist local back-up forms can supply parts or services.
- An area has a good transport network.
- An area has an excellent reputation for producing a particular good. For example, Sheffield is associated with steel.
