Monopolistic competition means a situation in the market where differentiated products are sold in the market by many firms. “There is a keen competition which is not perfect though among many firms producing very alike products”. Finns cannot have any influence that can be perceptible on the other seller’s price-output policies. Also, it cannot be much influenced by their actions. Thus, monopolistic competition means the competition among a huge number of sellers that produce close substitutes for each other which are not perfect substitutes.
According to Baurnoul, “The term monopolistic competition refers to the market structure in which the sellers do have a monopoly (they are the only sellers) of their own product, but they are also subject to substantial competitive pressures from sellers of substitute product”.
Imperfect competition is referred to that market situation in which one or more of the conditions of perfect competition is absent. The main form of imperfect competition is Monopolistic competition. For example, the coffee business has low startup costs, i.e. low capital expenditure on property, plant, and equipment.
Features of Monopolistic Competition
Some of the features of monopolistic competition are as follows:
I) A large number of Sellers: There are huge sellers in a monopolistically competitive market who have a small market share individually. These huge firms, unlike perfect competition, do not produce perfect substitutes. These firms produce and sell close substitute products. This makes them tough and real competition among firms.
2) Product Differentiation: The different seller’s products are differentiated in a monopolistic competitive market on the basis of brands. There is mostly so much advertisement for such brands that brand association of customers with the manufacturer and a kind of loyalty towards the brand is developed. A monopoly element is aroused because of product differentiation to the producer over the product that is in competition.
3) Freedom of Entry or Exit: Market allows free entry of new firms and also allows the exit of existing firms.
4) Independent Behaviour: Every firm possesses an independent policy in monopolistic competition. Since there are a large number of sellers; a major portion of total output is not controlled by anyone. By updating the price-output policy, no sellers can have any perceptible impact on other’s sales and could not influence them.
5) Product Groups: Under monopolistic competition, there is not any `industry’ but `group’ of firms that exist which produce a similar product. Each firm is an industry in itself and produces a different product. Very closely related products are produced by the Chamberlain lumps together and these are called product groups. For example, cigarettes, cars, etc.
6) Selling Costs: Sales are essentially pushed up by the selling costs because product differentiation exists in monopolistic competition. It includes salesman expenses, advertisement costs, seller’s allowances for displaying windows, free sampling, premium gifts and coupons, free service, etc.
7) Non-Price Competition: A firm increases profits and sales of its product in monopolistic competition without any price cut. Products can be changed by a monopolistic competitor either by quality variation, packaging variation or by updating promotional programs, etc.
8) Control over Price: Prices are controlled by the firms to some extent. For example, professionals such as solicitors, restaurants, etc., are price makers. It is also said that their prices are administered by them. A price that is set by the firm conscious decision is termed as Administered Price. Also, firms must decide the price changing frequency.
Advantages of Monopolistic Competition
Following are some advantages of monopolistic competition:
1) Promotion of Competition (Lack of Barriers to Entry): One important feature of this market is the lack of entry barrier which makes it relatively easy for other firms to exit and enter the market. A barrier to entry creates difficulty for new firms due to advertising, intellectual property rights, large start-up costs, etc. Therefore, in the long-run, this ensures that none of the firm will find themselves with power of monopoly (to exploit consumers) because of new (inns entering in the market.
2) Differentiation Brings Greater Consumer Choice and Variety: One of the major advantages of monopolistic competition is that in order to be a firm that is competitive in the marketplace; a firm has its main goal to differentiate it from other rivalry competitors to gain greater customer advantage that is much essential appealing to the sovereignty of consumer. Consumer sovereignty means where goods to be produced are determined by the consumers within a market. Greater choice and variation of products and services is also with this for consumers to buy from rather than a single choice; they have a wider range of consumer choice. There may be either monopoly that is just one product, or perfectly competitive where all products arc homogenous and gen9ric.
3) Product and Service Quality Development: Monopolistic competition possesses the advantage of enhancing a firm’s ability to improvise the quality of a product with the help of its brand. Branding is defended by economists as a way of enhancing consumer’s trust and reliability. Brands help to raise the strength of maintaining high quality that is based on the financial stake of business in its reputation.
4) Consumers become More Knowledgeable of Products: Monopolistic competition provides a positive externality which is accompanied the intense marketing and advertising. The reason behind this is that firms try to differentiate their products that make the consumer more aware and informed about the options in products and services. This helps to gain an understanding of the uniqueness. features and aspects that a particular product possesses in comparison to other products. Hence. this leads to further competition because firms are able to recognize the consumer’s wants and degree of demand.
Disadvantages of Monopolistic Competition
Following are the disadvantages of monopolistic competition:
1) Liable of Excess Capacity: In monopolistic competition, firms do not produce enough output which leads to lowering down of average cost and benefits attained from economies of scale. Due to less marginal revenue, as compared to marginal cost, they are reducing their `economic profits’. In fact, at some levels, the expense and funding going into marketing, packaging, and advertising can be considered as extreme waste.
2) Allocatively Inefficient: As compared to perfect competition, it can be shown that firms undergoing monopolistic competition possess an allocation efficiency element as the price is above the marginal cost curve and less in the long-run as competition is more. As demand curve slope downward, this shows that for a monopolistically competitive firm the price must be greater than the marginal cost. The product produced for society to benefit is not enough which shows it is allocatively inefficient because they want more, results in the company to lose money.
Also Read:-Meaning and Definition of Cost
3) Higher Prices: Monopolistic competition imparts another drawback that is they have a tendency to extenuate a mark-upon the revenue’s marginal cost because of firms having `some market power’ in comparison to a perfectly competitive firm having prices equal to marginal cost. This arises difficult to governmental authority regarding regulation for following 2 reasons: i) Many firms are there, and ii) There would be loss made by these firms, hence this forces out such firms from business eventually.
4) Advertising: Marketing and Advertising is beneficial to customers to some extent because it provides information about the products and services. Also, this leads to an increase in the competition and thus can also impact negatively the consumer sovereignty. There has been an argument about manipulation and distortion regarding consumer’s desires along with obviously reducing competition. The reason for this being, consumers becoming captivated over the differentiation perception.