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Monopolistic competition refers to a market condition wherein the firms have numerous competitors, and each one of them sells a different product or service. This type of markets is defined by the combination of the elements of Competitive and Monopolistic markets. Since it offers freedom of entry and exit to firms the need to differentiate one’s products and services becomes very important to stand out from the crowd.The inelastic demand curve defines this condition, and therefore the firms are free to set their prices.
A typical feature of Monopolistic Competitive markets is that the freedom of entry and high profits encourage firms to enter the market eventually causing the earnings to average out in the long run.
The inelastic demand curve defines this condition, and therefore the firms are free to set their prices. A typical feature of Monopolistic Competitive markets is that the freedom of entry and high profits encourage firms to enter the market eventually causing the earnings to average out in the long run.
A typical feature of Monopolistic Competitive markets is that the freedom of entry and high profits encourage firms to enter the market eventually causing the earnings to average out in the long run.
The inelastic demand curve defines this condition, and therefore the firms are free to set their prices. A typical feature of Monopolistic Competitive markets is that the freedom of entry and high profits encourage firms to enter the market eventually causing the earnings to average out in the long run.
Hence, we can say that all the businesses put forward their elements of uniqueness while essentially competing for the same set of target customers.
Features of Monopolistic Competitive Market
- Every firm is free to make independent decisions about output and prices based on the cost of production, market conditions, and product type.
- Although knowledge is widely available to all the customers or participants, however, it is unlikely that this knowledge will be perfect.
- Entrepreneurs tend to have a crucial role to play in comparison to firms in this type of market structure due to higher risks associated with decision making.
- Since there are no significant barriers to entry or exit, firms are free to enter or exit the market as and when they feel like.
- Firms in monopolistic competition market can be called price makers; however, they need to deal with a downward sloping demand curve.
- One of the critical features of this market structure is how the products are differentiated from one another. There are four types of differentiation, namely, physical, product, marketing, human capital, and distribution differentiation.
- Physical product differentiation is where the firm’s change the design, size, performance, shape, colour, and features of a product for a differentiated look and feel.
- Marketing differentiation is when the firms make their offerings unique using distinctive packaging and diverse promotional techniques.
- Human capital differentiation is a situation wherein firms create differences using the skill, conduct, and training of their employees.
- Operating through various distribution channels in comparison to your competitors like Amazon gives you differentiation through distribution.
- Since there are a large number of independent firms competing in this market type that’s why monopolistic competitive firms are referred to as profit maximisers.
Monopolistic Competition Market Examples
Monopolistic competitive firms are readily available in industries where differentiation is possible. These include
- Hotels and pub
- The restaurant business
- Consumer services like hairdressing
- General specialist retailing
Market Dynamics in The Short Run
When the firms reach the point of profit maximization, MC = MR, due to which output is Q and price P. If we assume that price (AR) is above Average Total Cost at Q, then the area PABC define supernatural profits.
As more and more forms mark their entry into the market the demand for the products of the existing firms becomes increasing the elastic causing the demand curve to shift to the left. This causes the price to drop doing away with supernormal profits.
Market Dynamics in The Long Run
Supernormal profits become the key attracting point in this type of market structure. For all the new entrants, it causes the demand curve for the existing forms to shift to the left. As the new entrants venture into the market, normal profits will be available. It is at this point when the firms have achieved the long-run equilibrium.
It is evident that in a monopolistic competition market the firm benefits the most in the short-term by innovating and extensive product differentiation.
Advantages of Monopolistic Competition
- Since this market structure is free from significant barriers to entry, therefore, they are relatively contestable.
- The desire to differentiate your offering helps in bringing diversity, utility, and choice in the market. For example, on any high street in the town, there will be a large number of restaurants for the consumers to choose from.
- This type of market structure is less efficient than a perfect competition; however, more efficient than monopoly. On the contrary, it is imperative to remind yourself that the firms may be dynamically efficient and innovative in terms of new product design.
Disadvantages of Monopolistic Competition
- It is not necessary that differentiation will always lead to a higher utility. There are chances that it may lead to unnecessary waste such as excess packaging.
- In this type of market structure, if we assume that profit maximization is this only objective of the firms, then there is allocative inefficiency in the short term as well as the long run. This happens because the price is generally above the marginal cost.
As an economic model, monopolistic competition is highly realistic in comparison to the perfect competition model. It is due to this reason that many familiar and complex markets are adapting to this model.
What is a Monopolistic Market?
Monopolistic markets is basically a condition in which a market is created where only one company offers their own products and services to its customers and gains all the capital. You can take it as the opposite of a competitive market in which you may find a plethora of sellers selling their products or giving services to customers. The monopolistic market is known for restricting output, price hikes and throughout the long run they enjoy the profit. Monopoly companies have full control over the market; as a result they set the supply chain according to their own will.
Monopolistic Competition Pictures
If you have knowledge regarding monopolistic markets, then you may understand the monopolistic competition pictures clearly.
For example:
- There are many fast food companies that are offering food to its customers but McDonald, KFC etc are examples of monopolistic competition. If you check it properly then you will find both the companies offer the same kind of foods to their customers but we can’t call them as the substitute of another. Their selling totally depends totally on their customers.
- There are a lot of cake shops available in the market but in a particular city only one or two shops have captured the whole market. You will find the same kinds of products in different brands too, but still their demand is higher than others. This shows the clear picture of monopolistic markets.
What are the Features of Monopolistic Competitions?
The features of monopolistic competition are mentioned below:
- In a monopolistic competition you will find a large number of buyers and sellers
- Here you will see a vast difference in products
- In monopolistic competitions there is free entry and exit of all
- Here a lack of knowledge is found among the buyers and sellers both
- You will find a wide range of differences in the cost of products
- Under monopolistic competition a particular firm can’t be considered as a price maker or a price taker.
- In some aspects you will find non-pricing competition in monopolistic competition. Non–pricing competition means sometimes a particular brand offers some gifts with its products that are exactly free of cost, i.e. tooth brushes are given as a free gift with a particular quantity of toothpaste. This is basically a way of attracting more consumers on that particular product.
How to Define Monopolistic Competition
Monopolistic competition is such a type of competition that is mainly found in businesses. It lies between the monopoly and perfect competition. Here many firms offer the same types of products or services to their customers. But we can’t call them substitutes of another. Anyone can easily enter into this competition as well as take exit too without caring about its barriers. It is such industries that are very familiar with our day-to-day lifestyles. In monopolistic competition the decision of any particular firm does not directly affect the whole system. It totally depends on business strategy and brand differentiation. Monopolistic competition basically occurs when a particular industry has many firms of its own, and these all are similar but we can’t consider them identical. Unlike monopoly, these firms have very little power to reduce the supply chain or to increase the price of a particular product to increase their profits. You can understand monopolistic competition by some strategies like spending a lot of money on advertisement, marketing or promoting their products; some economists consider it as a waste of resources. The definition of monopolistic competition can be understood with the examples more easily. For example: Restaurants, hair salons, garments stores, shops of electronic appliances etc.
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