Understanding Monopolistic Competition – Assignment help !

# INTRODUCTION TO MONOPOLISTIC COMPETITION :

We already know about the two extreme situations of market, namely perfect competition and monopoly.  But in real life, situation is the mid way between these two extremes. This is Monopolistic competition also referred as imperfect competition.

Monopolistic competition is a market structure, wherein there are many sellers of a commodity, but the product of each seller is some what different from other sellers. This product differentiation manifest itself in 

• trade mark
• brand name
• quality differentiation OR
• different facilities offered

For example : Firms producing different brands of tooth paste such as Colgate, cibaca, pepsodent, close-up etc are operating under monopolistic competition.

In this type of market structure, firm is characterized by some features of monopoly and some features of perfect competition. Under perfect competition, the no. of sellers is very large and under monopoly there is a single seller, while under monopolistic, the number of sellers is no doubt large but with product differentiation.

 

# FEATURES OF MONOPOLISTIC COMPETITION :

• LARGE NUMBER OF FIRMS & BUYERS : There are large number of buyers and firms and size of each firm under monopolistic competition is small. Each firm has a limited share of market.

 

• PRODUCT DIFFERENTIATION : The distinct feature of monopolistic competition is product differentiation. Though the number of firms is large, their products differs from one another in colour, shape, brand, quality or durability etc. These products are close substitutes for example: In case of soaps we have several brands as Lux, Hamam, Godrej, pears etc. Because of this product differentiation, each firm has partial control over the price of its product.

 

• FREEDOM OF ENTRY & EXIT OF FIRMS : Firms are free to enter into or exit the firm. But new firms have no absolute freedom and have to face several difficulties.

 

• SELLING COSTS : Under monopolistic competition, each firm has to spend a lot on the advertisement of its product such as advertisement in newspaper, cinema, radio, tv etc. these expenses on advertisement and publicity are called as selling costs.

 

• LESS MOBILITY : There is no perfect mobility of factors of production, goods and services under monopolistic market.

 

• IMPERFECT KNOWLEDGE : Sellers as well as buyers of product do not have perfect knowledge about the prices of product. It is so because due to product differentiation, it is not possible to compare the prices of different products.

 

• NON-PRICE COMPETITION : It means that the firms compete on other than the PRICE FRONT. Thus firm compete in attracting potential buyers by offering them gifts and other services such as if a customer buy a packet of surf, he may get a glass tumbler free with it.

 

• MORE CAN BE SOLD AT LOWER PRICE : Each firm has limited control over the price of product. Average and marginal revenue curves under monopolistic competition also slopes downwards as in case of monopoly. so, if a firm wants to sell more, it will have to lower the price per unit.