Monopolistic Competition – Introduction, Meaning, Features and FAQs
In the industrial market, there are many kinds of issues and monopolistic competition is one of them. This idea came from the monopoly of brand products. It is a competition among the same type of product brands with imperfect substitute products.
Marketplace issues are significant for the growth of the industry, and this competition is a vital part of that. It helps the industry to grow and be more efficient. This competition also increases the experience of a brand and the industry becomes glorious. Nowadays, changes are in every corner, so the industry condition should also be changed for betterment.
What is a Monopolistic Competition?
Monopolistic competition definition says that it stands for an industry in which many firms service similar products which are not a perfect substitute. There are very low barriers to entry or exit in monopolistic competition. In this competition, one firm decision doesn't affect the whole industry or another firm. Monopolistic competition is just related to the business strategy of brand variation.
Monopolistic Competition Meaning
Monopolistic competition means monopoly plus a perfect competition. This market is a perfect mixture of monopoly and perfect competition. This industry is one of the best classical monopolistic competition examples.
Understanding of Monopolistic Competition
Monopolistic competition is half monopoly half and perfect competition. It combines elements of both in a theoretical state. In this competition, every brand tries to make its own unique product, and they make it slightly different from other brands of the same item. While we are judging them roughly, there is no difference as such. Although when we examine them closely, we can find some little difference between different brand products.
If we take the soap brands of India as monopolistic competition examples, it can be easily revealed the idea of monopolistic competition. Though all the soap brands such as Lux, Dove, Vivel, Fiama, Pears produce the same item, They contain some different features from others in their product to make it unique.
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Features of Monopolistic Competition
A Large Number of Sellers: There are many sellers involved in the market of monopolistic competition. They also own some small shares of that market.
Entry-Exit Freedom: Any firm can enter or exit in this industry for monopolistic competition. They are free to get involved in this or they can also get out of this as per their wish. It is not necessary to explain the reasons behind it.
Product Variation: Every brand involved in this industry tries to produce item variation to add monopoly. They make some small differences so that their product can be unique. All the products are somewhere different from others. Therefore, the brand can fix the price of the product as per their choice. It also creates a problem for all the brands as they tend to lose some customers.
Non-Price Factors: Besides the price competition, there are some other factors to compete in the market. The brands attract customers through advertising, product development, extra features, great service, etc. All the brands promote and take the initiative to make their product better than other available products in the market.
Equilibrium for Monopolistic Competition
There are two types of equilibrium in this competition that define monopolistic competition as imperfect competition i.e. short-run equilibrium and long-run equilibrium.
Short-run equilibrium increases profit and makes marginal revenue (MR) and marginal cost (MC) equal. Long-run equilibrium makes changes in marginal and average revenue (MR & AR) in the entrance of other brands. The firm never sells products above average cost and doesn't claim economic profit in long-run equilibrium.
In the monopolistic market, you can see many monopolistic competition examples following all the classic rules of this industry. Some common examples are soap brands, toothpaste brands, electronics, furniture, smartphone, stationeries, etc. All these brands make their products considering all these competitive factors and ensure the uniqueness of their product.
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Did You know?
The monopolistic competition contains many things excluding pricing and other competition. Those things can make a lot of changes in this market. If you scrutinize closely, you can notice those factors in monopolistic competition examples.
Those secondary factors are demand and supply changes, simultaneous changes of the marketplace, features of perfect competition, price under or average value, equilibrium changes, monopolistic revenue curve, monopoly market, demand curve, oligopoly, demand curve, economical condition of the market and industry, etc.
Each seller develops a differentiated product that is easily distinguished from its close replacements in a Monopolistic Competition. In this essay, we'll go over what Monopolistic Competition is and how it works.
What is Monopolistic Competition and How does It work?
Professor Leftwitch's response to the question "What is Monopolistic Competition?" is as follows:
'Monopolistic competition is a market circumstance in which many vendors compete for the same product, but each seller's product differs in some way from every other seller's product in the minds of consumers.'
As a result, each seller is a monopolist of his 'differentiated product' under this market system. Buyers can only acquire a specific product from him. However, there are a number of close replacements available on the market.
As a result, shoppers compare the pricing of products as well as their perceived quality. As a result, there is competition among sellers for market share. As you can see, in this market structure, a set of companies compete against one another while maintaining monopolies over their own products.
Features of Monopolistic Competition
Under Monopolistic Competition, a buyer can only buy a specific type of product from a single manufacturer. In other words, product differentiation exists.
Because there is product differentiation, businesses must incur sales expenses.
There are a lot of sellers, and their demand and supply are all intertwined. Sellers set prices, and the demand curve for a single seller's goods is downward sloping. Demand isn't completely elastic.
The company can also increase or degrade the quality of its products. Improving the product's quality helps to increase demand and pricing. On the other hand, lowering the quality helps lower the average production cost.
Inputs are also a source of competition for businesses. They must also work within a certain technological range. As a result, no company can provide a higher-quality product at a lower average price.
Firms should be aware of their demand and cost conditions. They must also apply this knowledge in order to optimize the predicted profit income.
A company can quit a product group's group of companies at any time. New enterprises can also join the group and produce close alternatives for the company's existing items. This assures that no company loses money or makes excessive profits.
Every enterprise in Monopolistic Competition must strive for profit maximisation.
All enterprises in this market structure are believed to have the same cost and demand circumstances.
FAQs on Monopolistic Competition: Features and Examples
1. What is monopolistic competition?
Monopolistic competition is a market structure that combines elements of both monopoly and perfect competition. It is characterised by a large number of firms that sell similar but not identical products. Because the products are differentiated, each firm has a mini-monopoly on its specific version, allowing it some control over its price. However, the presence of many close substitutes ensures that this control is limited.
2. What are the key features of a monopolistically competitive market?
The main features of monopolistic competition, as per the CBSE syllabus, include:
- Large Number of Sellers: There are many firms competing, but each is relatively small and acts independently.
- Product Differentiation: Products are distinguished from each other by branding, quality, design, or packaging. This is the core feature that gives firms pricing power.
- Freedom of Entry and Exit: Firms can enter the market when there are profits to be made and can exit if they are incurring losses.
- Selling Costs: Firms incur significant costs on advertising and sales promotion to attract customers and build brand loyalty.
- Downward-sloping Demand Curve: Due to product differentiation, each firm faces a downward-sloping, but highly elastic, demand curve.
3. Can you give some real-world examples of monopolistic competition in India?
Yes, many common markets in India operate under monopolistic competition. Good examples include:
- The restaurant industry, where many outlets sell different types of food with unique branding and service.
- Clothing and apparel stores, where brands like Zara, H&M, and FabIndia compete with differentiated styles and quality.
- The market for soaps and toothpastes, where brands like Lux, Dove, Colgate, and Pepsodent offer distinct features and branding.
- Salons and barbershops, which compete on service quality, location, and reputation.
4. How is monopolistic competition different from perfect competition and a monopoly?
Monopolistic competition is a hybrid market form. Here’s how it compares:
- vs. Perfect Competition: In perfect competition, all firms sell identical (homogeneous) products and are price takers. In monopolistic competition, firms sell differentiated products and have some control over price.
- vs. Monopoly: A monopoly consists of a single seller with high barriers to entry. Monopolistic competition has many sellers and free entry and exit, which prevents long-run supernormal profits.
5. Why do firms in a monopolistically competitive market rely heavily on non-price competition?
Firms rely on non-price competition (like advertising, branding, and packaging) because their products are very similar to competitors'. Drastic price cuts can lead to price wars, hurting everyone's profits. Instead, firms try to build brand loyalty and create a perceived difference in quality. This makes their demand less sensitive to price changes and allows them to charge a premium without losing all their customers.
6. How are price and output determined for a firm under monopolistic competition?
The determination of price and output differs between the short run and the long run:
- In the Short Run: A firm maximises its profit by producing the quantity where its Marginal Revenue (MR) equals its Marginal Cost (MC). It can potentially earn supernormal profits if its price (Average Revenue) is greater than its Average Cost (AC).
- In the Long Run: If firms are making supernormal profits, new firms will enter the market. This increases competition and shifts the demand curve for existing firms to the left. Entry continues until all firms are only earning normal profits, which occurs when the price (AR) is equal to the Average Cost (AC).
7. Is it possible for a firm in monopolistic competition to earn supernormal profits in the long run? Why or why not?
No, a firm in monopolistic competition cannot earn supernormal profits in the long run. The primary reason is the freedom of entry and exit. If existing firms are making high profits, new firms are attracted to the industry. This influx of new competitors increases the supply of close substitutes, which reduces the market share and demand for each existing firm. This process continues until all excess profits are competed away, and firms are left earning only normal profits (where Price = Average Cost).
