Monopolistic Competition and How to Apply in our Markets.
Monopolistic Competition: What does Monopolistic competition entail? That is what am about to expatiate in this article. 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.
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.
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
Instances of monopolistic competitions can be found in virtually every high street. Monopolistically competitive company are most common in industries where differentiation is probable, they are:
there are lots of advantage of monopolistic competitions but we are going to be showing the major three which are
There are no significant barriers to entry; therefore markets are relatively contestable.
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.
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:
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.
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 allocatively inefficient, but it is still inefficient.