Understanding the Basics
When discussing the relationship between total revenue (TR) and marginal revenue (MR) in the context of imperfect competition, it’s crucial to first grasp the fundamental concepts of both. Total revenue is the total income a firm earns from selling its goods or services, while marginal revenue is the additional revenue a firm receives from selling one more unit of output.
Monopolistic Competition
In monopolistic competition, firms sell differentiated products, which means they have some control over the price they can charge. As a result, the relationship between TR and MR is not as straightforward as in perfect competition. In monopolistic competition, MR is typically less than the price of the product, and it decreases as output increases. This is because, to sell more units, firms often have to lower the price, leading to a lower MR.
Here’s a simple example to illustrate this. Imagine a small bakery that sells custom cakes. If the bakery charges $50 for a cake and sells 10 cakes, its TR is $500. If the bakery decides to lower the price to $45 to sell one more cake, its MR for that additional cake is $45. However, the bakery’s TR for all 11 cakes is now $495, which means its MR is less than the price of the cake.
Monopoly
In a monopoly, there is only one seller in the market, giving the firm complete control over the price. In this case, MR is less than the price, and it decreases at a faster rate than in monopolistic competition. This is because a monopolist has to lower the price significantly to sell more units, which leads to a more rapid decline in MR.
Consider a company that owns the rights to a popular movie. If the company sells 100,000 copies of the movie for $20 each, its TR is $2 million. If the company decides to sell 10,000 more copies at a discounted price of $15 each, its MR for those additional copies is $150,000. However, its TR for all 110,000 copies is now $1.65 million, which means its MR is significantly less than the price of the movie.
Oligopoly
In an oligopoly, a few large firms dominate the market. The relationship between TR and MR can vary greatly depending on the specific market structure and the actions of the firms. In some cases, MR may be less than the price, while in others, it may be equal to or greater than the price.
For instance, in the smartphone market, a few major companies compete for market share. If one of these companies decides to lower the price of its latest model to gain market share, its MR may be less than the price. However, if the company increases its advertising budget to promote the new model, its MR may be equal to or greater than the price.
Table: Summary of TR and MR Relationships in Different Market Structures
| Market Structure | MR Relationship to Price | Example |
|---|---|---|
| Monopolistic Competition | Less than Price | Custom cake bakery lowering price to sell more cakes |
| Monopoly | Less than Price, Decreases Faster | Movie company selling more copies at a discounted price |
| Oligopoly | Varies, Can be Less, Equal, or Greater than Price | Smartphone companies competing for market share |
Conclusion
Understanding the relationship between TR and MR in imperfect competition is essential for firms to make informed decisions about pricing, production, and marketing strategies. By analyzing how MR changes as output increases, firms can determine the optimal level of production and pricing to maximize their profits.
