Monopolistic Competition
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Monopolistic competition and How to Apply in our markets

  – Monopolistic Competition –

According to Wikipedia, it defined monopolistic competition as a type of imperfect competition such that many producers sell products that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes.

Monopolistic Competition

So far, I think this is one of the most comprehensive definitions of the term. To define it in any way, it simply entails when a firm takes up the prices charged by its competitors or rivals as given and ignores the influence of its own prices on the prices of other companies.

In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity.

Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities.

The “founding father” of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933).

Characteristic of a Monopolistic Competition

There are numerous characteristics of a monopolistic competition but we are going to be mentioning the main five. They are

1. Product Differentiation

Basically, Products are differentiated based on certain factors like service, quality or design. The product of a company is close, but not a perfect substitute for another company.

This differentiation gives some monopoly power to an individual company to affect the market price of its product.

2. Barriers to Entry

The number two characteristic is Barrier. There are no barriers to entry. It guarantees that there are neither supernormal profits or any supernormal losses to a firm in the long run.

3. Number of Sellers

There are large numbers of firms selling closely related, but not homogeneous products. Each company acts individually and has a limited share of the market. So, an individual firm has limited control over the market price.

4. Marketing

Products are differentiated, and these differences are made known to the buyers via advertisement and promotion. These costs make up a considerable part of the overall cost under monopolistic competitions.

5. Perfect Knowledge

There is imperfect knowledge in the market. People don’t know who is selling the goods the cheapest or who has the best quality. Sometimes a higher-priced product is preferred even though it is of inferior quality.

Examples of Monopolistic Competition

  • Restaurants – restaurants compete on quality of food as much as price. Product differentiation is a key element of the business. There are relatively low barriers to entry in setting up a new restaurant.
  • Hairdressers. A service which will give firms a reputation for the quality of their hair-cutting.
  • Clothing. Designer label clothes are about the brand and product differentiation
  • TV Programmes – GlobaliZation has increased the diversity of tv programmes from networks around the world. Consumers can choose between domestic channels but also imports from other countries and new services, such as Netflix.

Limitations of the Model of Monopolistic Competition

  • Some firms will be better at brand differentiation and therefore, in the real world, they will be able to make supernormal profit.
  • New firms will not be seen as a close substitute.
  • There is considerable overlap with oligopoly – except the model of monopolistic competition assumes no barriers to entry. In the real world, there are likely to be at least some barriers to entry
  • If a firm has strong brand loyalty and product differentiation – this itself becomes a barrier to entry. A new firm can’t easily capture the brand loyalty.
  • Many industries, we may describe as monopolistically competitive are very profitable, so the assumption of normal profits is too simplistic.

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Monopolistic Competition vs. Perfect Competition

Companies in monopolistic competition produce differentiated products and compete mainly on non-price competition. The demand curves in individual companies for monopolistic competition are downward sloping, whereas perfect competition demonstrates a perfectly elastic demand schedule.

However, there are two other principal differences worth mentioning – excess capacity and mark-up. Companies in monopolistic competition operate with excess capacity, as they do not produce at an efficient scale, i.e., at the lowest ATC. Production at the lowest possible cost is only completed by companies in perfect competition.

Mark-up is the difference between price and marginal cost. There is no mark-up in a perfect competition structure because the price is equal to marginal cost. However, monopolistic competition comes with a product mark-up, as the price is always greater than the marginal cost.

Difference Between Monopolistic Competition and a Monopoly

A monopoly is when a single company dominates an industry. This lack of competition means the company can set prices as it pleases, provided, of course, that there is demand for what it offers.

Monopolistic competitive companies don’t enjoy this luxury. Such entities must compete with others, restricting their ability to substantially hike prices and circumvent the natural laws of supply and demand.

Monopolistic competition is viewed as healthier for the economy and is much more common than monopolies, which are generally frowned upon in free-market nations because they can lead to price-gouging and deteriorating quality due to a lack of alternative choices.

The Advantages of Monopolistic Competition

The Advantages of Monopolistic Competition

there are lots of advantage of monopolistic competitions but we are going to be showing the major three which are

  1. There are no significant barriers to entry; therefore markets are relatively contestable.
  2. Differentiation creates diversity, choice, and utility. For example, a typical high street in any town will have a number of different restaurants from which to choose.
  3. The market is more efficient than monopoly but less efficient than the perfect competition – less allocatively and less productively efficient. However, they may be dynamically efficient, innovative in terms of new production processes or new products. For example, retailers often constantly have to develop new ways to attract and retain local custom.

The Disadvantages of Monopolistic Competition

there can’t be an advantage and not be a disadvantage. some of the disadvantages of monopolistic competitions are:

  1. Some differentiation does not make or create utility but produces irrelevant waste like excess packaging. Advertising may also be considered wasteful, although most are informative rather than persuasive.
  2.  It is allocative in both the inadequacy long and short run. This is because the price is above marginal cost in both cases. In the long run, the firm is less allocative inefficient, but it is still inefficient.

Monopolistic competition is a market structure where a large number of firms produce similar, though not interchangeable, products. A monopoly occurs when one firm holds all of the market power and sets the market price. 

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