Monopolistic Competition:
Question : Define monopolistic competition ? Can a seller in such a market influence price ? Explain.
The two extreme market forms – perfect competition and monopoly are rarely found in actual practice. In real world, it is imperfect competition which dominates the market structure, main form of imperfect competition is monopolistic competition.
The theory of monopolistic competition, an important landmark in the study of imperfect competition is given by an American economist Edward Hastings Chamberlin.
Meaning:
Monopolistic competition is the form of market in which there are a large number of sellers of a particular product, with each seller selling somewhat differentiated but close substitutes to the product sold by other sellers.
With monopolistic competition, no singular company maintains a total monopoly over any other within its market, and companies have slight control over the prices they charge for their services. As a result, companies can enter market quickly when they determine that there’s potential to earn revenue and leave when there’s a lower likelihood of generating profit.
Monopolistic competition has some elements of monopoly and some elements of competition, this type of market form is known as monopolistic competition.
Monopolistic competition involves many buyers, many sellers, and easy exit and entry with slightly differentiated products. The sellers in these markets sell products that are closely related, but not identical.
A monopolist is a price setter and a business competing in a perfectly competitive market is a price taker. Most businesses strive to be price setters within a certain range of prices by offering a product that is closely related, but not exactly identical to other products in the market. The key strategy for monopolistic competition is to offer products that are differentiated. The products are quasi – substitutes, but they still resemble the original product or service. For example, Apple developed the ipod to compete with existing MP3 players.
The products and services that are sold in monopolistic competition markets are – jewellery, food, movie production,many electronic gadgets and components, books, cars, houses restaurants, software, entertainment, consulting business, bars etc
Features of Monopolistic Competition:
1. Large number of Buyers and Sellers
2. Differentiated Product
3. Free Entry and Free Exit
4. Selling Cost
5. Independent Price Policy
6. Non – Price Competition
1. Large number of Buyers and Sellers :
- In monopolistic competition, the number of seller is fairly large so that each individual firm contributes a small share to total output.
- Therefore, any firm is not bother about the actions of its rival firms and the firm can follow an independent price policy.
- Hence, the firm makes its own price and output decisions, under monopolistic competition the firms are price makers. They set their own prices.
- Thus, in monopolistic competition the firms have some market power to influence price.
2. Differentiated Product :
- The key element of monopolistic competition is Product Differentiation.
- Under monopolistic competition, the firms produce differentiated product means, the products are some what different but not entirely distinct, it is substitute for each other but not perfect substitute. The product are not homogeneous but not altogether different as well.
- Under monopolistic competition the products of different firms may be different from each other in two way – Physical characteristics of the product, and Conditions surrounding the sale of the product.
- Firstly, products may be differentiated on the basis of physical characteristics of the product like colour, size, design, quality or difference in packaging, and chemical components of the products.
- Example, the calorie content of different cold drinks may differ or different brands of shirt may differ from each other in terms of cotton and polyester mix.
- Secondly, products may be differentiated on the basis of conditions surrounding the sale of the product. The conditions surrounding the sale of the product relate to the location of the seller, his reputation, efficiency, courtesy, trustworthiness, credit facility, etc.
- In monopolistic competition, each firm has monopoly of its own differentiated product, different producers produce their products under different brand names. This is monopoly component of the monopolistic competition.
- But each firm has also to compete with other firms producing similar product with different brand names. Example, the firm producing Colgate toothpaste has monopoly of this particular brand, but it has also to compete with other firms producing toothpaste with different brand names like – Pepsodent, Close – up, Vicco, Meswak etc. This is competition part of monopolistic competition.
- Thus, under monopolistic competition, there is monopoly of the brand, but competition from the rival sellers selling close substitute of the product produced by one particular firm.
3. Free entry and Free exit:
- Like perfect competition, monopolistic competition is also characterised by freedom of entry and exit from the industry.
- There are no restriction on the entry of new firms. The new firms are free to produce the close substitutes to the product produced by others but with different brand name.
- Similarly, there is no restrictions on the exiting firms deciding to leave the industry. The existing firms are free to leave the Industry if they wish.
- The implication of this characteristic is that firms under monopolistic competition earn only normal profit in the long – run.
- It there is abnormal profit earned by the firms, new firms are free to enter the industry and increase the total supply and hence abnormal profit is wiped out.
- Similarly, if the firms are incurring losses some of them would leave the industry leading to decrease in supply and rise in price till the losses are wiped out.
- This feature ensures that the firms under monopolistic competition earn normal profit and no firm incurs losses in the long run.
4. Selling Cost:
- An important characteristic of monopolistic competition is that firms under monopolistic competition compete with each other by incurring selling cost or expenditure on sales promotion of their products.
- Selling cost is the expenditure incurred by the firm to promote the sale of its product through various sales promotion measures.
- The sales promotion measure used by the firms are – TV and newspaper advertisement, door – to – door campaign, discount offers etc.
- The main purpose of these sales promotion measures is to lure the consumers away from other brands and to persuading them to buy his brand.
- There is no place for sales promotion measures both in perfect competition and monopoly. In perfect competition the product is perfectly homogeneous hence there is no scope to engage in advertisement. While there is also no need to engage in advertisement and other sales promotion measures since there are no competitors.
5. Independent Price Policy:
- It is the essential part of monopolistic competition. A firm under monopolistic competition can follow an independent price policy.
- Each firm under monopolistic competition produce differentiated product so that the firm can influence the price of the commodity and output decisions to some extent.
- Therefore the firm is price – maker to some extent.
- Thus, the firms under monopolistic competition set their own price but the amount of sales at these price are determined by the market demand.
- Monopolistic competition is a realistic model of market structure.
- Example, there are different brands of soap like – Lux, Pears, Dove etc. Different brands of toothpaste like – Colgate, Pepsodent, Close – up etc. Different brands of shoes are – Bata, Woodland, Nike, Adidas etc.
6. Non – Price Competition:
- Non – price competition is also an essential part of monopolistic competition .
- Firms under monopolistic competition compete with each other not only by price – cutting but also on the basis of non – price competition , i.e. producing differentiated product, incurring advertisement expenditure etc.
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