Monopolistic Competition
Monopolistic competition describes an industry in which several companies provide similar but not identical goods or services. In a monopolistic competitive industry, entrance and exit barriers are minimal, and one firm’s choices have little impact on its rivals. Monopolistic competition is intimately linked to the brand differentiation business strategy.
Monopolistic competition is a hybrid of monopoly and perfect competition (a purely theoretical state) that incorporates aspects of both. In monopolistic competition, all companies have the same, relatively low level of market power; they all set prices. Demand is very elastic in the long term, meaning it is sensitive to price fluctuations. Economic profit is positive in the short term, but it approaches negative in the long run. Firms that compete in a monopolistic market are more likely to promote excessively.
Monopolistic competition is a kind of rivalry that may be seen in a variety of sectors that consumers are acquainted with. Restaurants, hair salons, apparel, and consumer gadgets are just a few examples.
Monopolistic competition’s characteristics
The following are the major characteristics of monopolistic competition:
- There are a lot of buyers and sellers.
There are a lot of businesses, but not as many as there would be if there was ideal competition.
As a result, each business has some influence over its price-output strategy. It is anticipated that a business’s price-output strategy would not elicit a response from other companies, implying that each firm has its own pricing policy.
If a company lowers its pricing, the sales gains will be evenly distributed across several of its competitors, resulting in relatively little losses for each of them. As a result, these competitors will have no motive to respond.
- Firms have unrestricted entry and exit.
Firms may enter and depart freely under monopolistic competition, just as they can in perfect competition. When the current businesses are producing super-normal profits, the firms will enter. With the addition of new businesses, the supply will grow, lowering the price, leaving current businesses with merely typical earnings. Similarly, if current businesses are losing money, some marginal businesses may close. It will limit supply, causing prices to increase and leaving current businesses with just typical profit margins.
- Differentiation of Products
Product diversification is another hallmark of monopolistic competition. When customers of a product compare it to other products, this is referred to as product differentiation. In general, the goods of various companies are not completely distinct; they vary somewhat from one another. Despite the fact that any business manufacturing distinct products has a monopoly on its own product, it must compete. It’s possible that this product distinction is genuine or imagined. Design, material utilised, talent, and so forth are real distinctions, while advertising, trade marks, and so on are fictional differences.
- Selling Price
Another characteristic of monopolistic competition is that each corporation attempts to advertise its product via a variety of expenditures. The most essential component of the selling cost is advertising, which influences both demand and product cost. The monopolist’s primary goal is to maximise profits, thus he modifies this sort of spending appropriately.
- Inadequate Information
Buyers and sellers do not have complete market information. There are several goods that are near substitutes for one another. The purchasers are unaware of all of these items, their characteristics, or their costs.
As a result, a large number of consumers choose a product from a limited number of options available for purchase close to home. A buyer may be aware of a certain commodity that is offered at a reduced price. However, he is unable to travel there owing to a lack of time, or because he is too lazy to go, or because he is unable to obtain suitable transportation. Similarly, since the vendor does not know the specific preferences of the purchasers, he or she is unable to take advantage of the circumstance.
- Mobility is restricted.
Both the factors of production, as well as the commodities and services, are not fully mobile under monopolistic competition.
- Demand Is More Elastic
The demand curve is more elastic under monopolistic competition. Firms must lower their prices in order to sell more.
Monopolistic Competition Characteristics
Markets that are monopolistically competitive have the following characteristics:
Based on its product, market, and manufacturing costs, each business makes its own judgments regarding pricing and output.
Although there is a lot of knowledge among the participants, it is unlikely to be flawless. Diners, for example, may check all of the menus offered from restaurants in a town before making a decision. They may review the menu once inside the restaurant before placing an order. They will not be able to properly enjoy the restaurant or the cuisine until they have eaten.
Because of the heightened risks connected with decision-making, the entrepreneur plays a larger role than in perfectly competitive enterprises.
There are no substantial obstacles to entrance or departure, hence there is no restriction on entering or exiting the market.
Differentiated goods are a key aspect of monopolistic competition. Differentiation may be divided into four categories: Physical product differentiation refers to how companies differentiate their goods based on size, design, colour, shape, performance, and features. Consumer gadgets, for example, may be clearly distinguished physically.
Firms aim to distinguish their products via unique packaging and other promotional strategies in marketing differentiation. Breakfast cereals, for example, may simply be distinguished by their packaging. Human capital differentiation is when a company differentiates itself based on the talent of its personnel, the degree of training they’ve received, unique uniforms, and so on.
Differentiation via distribution, such as mail order or internet purchasing, such as Amazon.com, which sells online and separates itself from conventional bookshops.
Firms are price makers, and their demand curve is slanted downward. Because each company produces a unique product, it has the ability to charge a greater or lower price than its competitors. The business is free to determine its own price and is not obligated to ‘accept’ it from the industry as a whole, however the industry price may serve as a guideline or a restraint. As a result, the demand curve will be slanted downwards.
Firms that compete in a monopolistic market are almost always forced to advertise. Firms are often in severe rivalry with other (local) businesses that provide a similar product or service, and may need to promote locally to inform clients of their distinctions. Local newspaper and radio, local cinema, posters, pamphlets, and special promotions are all common ways for these businesses to advertise.
Because businesses are tiny and entrepreneurs are actively engaged in operating the company, monopolistically competitive enterprises are presumed to be profit maximizers.
In most markets, there are a huge number of independent businesses competing.
Monopolistic rivalry is shown by the following examples.
Restaurants: Restaurants compete on both pricing and meal quality. Differentiation of products is an important aspect of the company. When it comes to opening a new restaurant, the obstacles to entry are rather low.
A service that will help businesses establish a reputation for high-quality hair-cutting.
It’s all about the brand and product uniqueness when it comes to designer label clothing.
TV shows: As a result of globalisation, the variety of television shows available from across the globe has risen. Domestic channels, as well as imports from other nations and innovative services like as Netflix, are available to consumers.
The monopolistic competition model’s limitations
Some businesses will excel at brand uniqueness and, as a result, will be able to earn above-average profits in the real world.
New businesses will not be recognised as a viable alternative.
There is a lot of overlap with oligopoly, except that monopolistic competition implies no entry barriers. In the actual world, there are very certainly some entrance restrictions.
When a company has significant brand loyalty and product distinctiveness, it becomes a barrier to entry in and of itself. A new company will find it difficult to gain brand loyalty.
Many businesses that we may characterise as monopolistically competitive are very successful, thus assuming normal earnings is too simple.