A number of national newspapers are offered at a considerable discount at most British university Student Unions. Discuss how the frameworks of monopolistic competition and price discrimination would respectively explain this. Which framework best captures the rationale for this practice?

Introduction

In this essay, I intend to examine and critically analyse the extent to which the frameworks of monopolistic competition and price discrimination could be applied to the situation of selected national newspapers being offered to university students at significantly discounted prices.

Monopolistic competition is one of the four main market structures in an economy along with perfect competition, oligopoly and monopoly. Originating from Edward Chamberlain (1933), the theory of monopolistic competition as a type of market structure, refers to the imperfect competition that takes place among a large amount of firms.

Price discrimination is defined as, ‘charging different prices to different customers for the same good or service’, which ‘is possible only if the supplier has some monopoly power, and can identify the customer, and the customer cannot resell the good, or it is expensive to do so’ (Black 1997: 363).

I will also aim to compare and evaluate which of these two frameworks can best explain the reason for the given setting. I will make these evaluations based on a comprehensive method of analysis, identifying the common features as well as the disparities.

Monopolistic Competition

This market structure is based on four assumptions. The first assumption is that there is ‘a large number relatively small firms so that each firm can neglect the possibility that its own decisions provoke any adjustments in other firms’ behaviour’ (Begg 2000: 152). Secondly, that there is freedom to entry and exit into the industry in the short and long run, which will allow new firms to enter the market if there are incentives of abnormal profits. Such profits are only available in the short run as prices will tend to fall towards normal profits as new firms continue to enter the industry, as shown below.

In the short-run (Fig 1.1), a monopolistically competitive firm can exploit the heterogeneity of its brand in order to gain positive economic profit. The firm acts like a monopolist in such a way that it is able to influence the market price of its product by altering the rate of production of that particular good or service. In the long-run (Fig 1.2) however, the distinguishing characteristic that enables the firm to exploit monopoly profits will be duplicated by competing firms. This competition will drive the price of the product down and in the long-run, the monopolistically competitive firm will make zero economic profit. This is shown in Fig 1.2 where average revenue is equal to the long run average cost where output takes place.

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The third assumption is that each firm in the industry has (or is perceived to have) a differentiated good or service when compared to those of its competitors. Therefore firms can alter prices without large shifts in demand, which implies that a monopolistically competitive firm faces a downward sloping demand curve, although the curve will have a relatively gradual slope due to the availability of substitutes. The final assumption of monopolistic competition is that as a result of firms having small amounts of monopoly power, ‘each one ignores the possible reactions of its competitors when it makes it own price ...

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