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Table of Contents

1 Introduction ......................................................................................................................... 2

2 Monopolistic Competition: ................................................................................................... 2

2.1 Characteristics: ............................................................................................................ 2

2.1.1 Ability to set price: ................................................................................................. 2

2.1.2 Market Power ........................................................................................................ 2

2.1.3 Short Run Equilibrium and Profit: .......................................................................... 3

2.1.4 Long Run Equilibrium and Profit:........................................................................... 3

3 Flat-screen TV Monopolistic Competition ........................................................................... 3

4 References ......................................................................................................................... 5

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1 Introduction

China is rich in rare earth resources and, according to some estimates, has half of the worlds

total rare earth reserves. "The skyrocketing cost of rare-earth metals from China is pushing up

the cost of finished goods which use rare earths as inputs, such as flat-screen TV. The latest

sign is the wide-reaching impact of Beijing's decision to restrict exports of the minerals.

Prices for some of the manufacturers who use rare earths as inputs for their finished goods

finished goods have been raised exponentially after China, which controls about 95% of the

world's rare-earth supply, said it would reduce exports of the metals by 35% in 2011.

2 Monopolistic Competition:

It is a market structure where there are many firms selling different products that are

differentiated from one another. Monopolistic competition has characteristics that are similar to

perfect competition in regards that there are many firms producing similar products and the

ease to enter and exit the market. But on the other hand, each firm believes that it has a

monopolistic market power that comes from producing a differentiated product.

2.1 Characteristics:

2.1.1 Ability to set price:

Producers have a degree of control over the price; therefore they are price setter, in this case,

China.

2.1.2 Market Power

The key characteristic of a monopoly market is that there are barriers that prevent firms other

than the monopolist from entering the market. The barriers allow the monopolist to set prices

and quantities without fear of being undercut by competitors. Barriers to entry contradict the free

entry and exit feature that characterizes perfectly competitive markets. Barriers to entry take

four main forms: scarce resources, economies of scale, government intervention, and

aggressive business tactics on the part of market-leading firms. The most straightforward cause

of barriers to entry is scarcity in some key resource or input into the production process. Though

not an especially common source of monopoly power, it was the case, at first, in the rare earth

element market. Rare earth elements come out of the ground in only a limited number of places,

after all.

Therefore n this case, rare-earth elements markets in China gains monopoly power by the

barrier of entry of scarce sources.

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2.1.3 Short Run Equilibrium and Profit:

Short term profit occurs when marginal cost equals marginal revenue (MC= MR). If the price is

larger than the average total cost of the firm, the firm will gain profit. If the firm average total cost

is higher than the price, the firm will experience loss.

2.1.4 Long Run Equilibrium and Profit:

long term profits will occur when the average total cost is tangent to the demand curve at the

same output level where MC=MR. Even though it is easy to enter the market, on the long run,

new entrants will not be able to take excess profits from well-established industries with a good

reputation and customer preference.

3 Flat-screen TV Monopolistic Competition

Let us take flat-screen TV for example. The cost of producing a flat-screen TV may increase for

TV manufactures, unless they can off-set the decrease in price of rare-earth minerals with a

decrease in some other cost of production. Let's assume they cannot cut another cost. This is

the graph of the Market for flat-screen TV in equilibrium. This is called perfect competition.

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However, the Chinese have realized a complete monopoly in this field by manipulating the

economics of business: they have made products available at very cheap rates in the

international market, which has indirectly led to other countries losing interest in the business.

Now, with the major market share in the hand, the Chinese can afford to control the market.

Therefore, the market structure for flat-screen TV is called monopolistic competition, the

analysis is shown as the following graph.

Where D represents private demand, S is the supply function of the firm (or marginal cost). The

line above it includes the external cost caused by producing rare-earths. The MR line shows

marginal revenue for the monopoly which has twice the slope of the demand curve.

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Point A represents the monopoly outcome of China rare-earth element market; note that the

price paid by the consumer is not at point A, but at the point where point As quantity intersects

the demand curve. So point A has the highest consumer price, which in this case the

exponentially rising prices for flat-screen TV manufacturers. Point B shows the perfectly

competitive outcome, where quantity is the highest of the three, and price is the lowest of the

three. Finally, point C shows the optimal society outcome, where surplus is maximized and the

externality is taken into account.

4 References

1. As quoted by Paul Krugman in Rare and Foolish, New York Times, October 17, 2010,

available at http://www.nytimes.com/2010/10/18/opinion/18krugman.html,

2. See http://news.xinhuanet.com/english/business/2012-06/20/c_131665123.htm,

3. Cindy Hurst, Chinas Rare Earth Elements Industry: What Can the West Learn?, March

2010, Institute for the Analysis of Global Security (IAGS), available

athttp://fmso.leavenworth.army.mil/documents/rareearth.pdf,

4. Dorothy Kosich, Chinese Govt. White Paper Pledges International REE Cooperation,

June 20, 2012, available

at http://www.mineweb.com/mineweb/view/mineweb/en/page72068?oid=153603&sn=D.

5. Gus Lubin, Noah Plaue and Shlomo Sprung, A Shocking Number Of Minerals Are

Controlled By China, July 11, 2012, available at http://www.businessinsider.com/china-

leads-production-in-dozens-of-miner...

6. Greer Meisels, The Rare Earth Race, June 26, 2012, A. Greer

Meisels http://nationalinterest.org/commentary/the-race-rare-earth-elements-7120

7. 7Marc Humphries, Rare Earth Elements: The Global Supply Chain, June 8, 2012,

available at http://www.fas.org/sgp/crs/natsec/R41347.pdf