This document provides an overview of monopolistic competition. It defines monopolistic competition as a market structure with many small businesses that sell differentiated but substitutable products, allowing them some control over prices. While firms can set prices, entry of new competitors in the long run will eliminate supernormal profits and result in normal profits. The document outlines key features of monopolistic competition, including a large number of sellers, product differentiation, freedom of entry and exit, independent behavior among firms, and non-price competition. It also discusses how firms determine price and output in the short and long run under monopolistic competition.

1. DEPARTMENT OF M.B.A
A presentation on
Monopolistic competition
submitted by
19L31E0007 M JAYA CHANDRA

2. Monopolistic competition
 DefMinition: Monopolistic competition is a market structure which combines
elements of monopoly and competitive markets. Essentially a monopolistic
competitive market is one with freedom of entry and exit, but firms can
differentiate their products. Therefore, they have an inelastic demand curve and
so they can set prices. However, because there is freedom of entry, supernormal
profits will encourage more firms to enter the market leading to normal profits in
the long term.
 Monopolistic competition refers to a market situation where there are many firms
selling a differentiated product. “There is competition which is keen, though not
perfect, among many firms making very similar products.” No firm can have any
perceptible influence on the price-output policies of the other sellers nor can it be
influenced much by their actions. Thus monopolistic competition refers to
competition among a large number of sellers producing close but not perfect
substitutes for each other.
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3. Features of monopolistic competition
 (1) Large Number of Sellers:
 In monopolistic competition the number of sellers is large. They are “many and small
enough” but none controls a major portion of the total output. No seller by changing its
price-output policy can have any perceptible effect on the sales of others and in turn be
influenced by them. Thus there is no recognized interdependence of the price-output
policies of the sellers and each seller pursues an independent course of action.
 (2) Product Differentiation:
 One of the most important features of the monopolistic competition is differentiation.
Product differentiation implies that products are different in some ways from each
other. They are heterogeneous rather than homogeneous so that each firm has an
absolute monopoly in the production and sale of a differentiated product. There is,
however, slight difference between one product and other in the same category.
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4.  (3) Freedom of Entry and Exit of Firms:
 Another feature of monopolistic competition is the freedom of entry and exit of
firms. As firms are of small size and are capable of producing close substitutes,
can leave or enter the industry or group in the long run.
 (4) Nature of Demand Curve:
 Under monopolistic competition no single firm controls more than a small
of the total output of a product. No doubt there is an element of differentiation
nevertheless the products are close substitutes. As a result, a reduction in its price
will increase the sales of the firm but it will have little effect on the price-output
conditions of other firms, each will lose only a few of its customers
 5) Independent Behavior:
 In monopolistic competition, every firm has independent policy. Since the
of sellers is large, none controls a major portion of the total output. No seller by
changing its price-output policy can have any perceptible effect on the sales of
others and in turn be influenced by them.
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5.  (6) Product Groups:
 There is no any ‘industry’ under monopolistic competition but a ‘group’ of firms producing
similar products. Each firm produces a distinct product and is itself an industry.
Chamberlin lumps together firms producing very closely related products and calls them
product groups, such as cars, cigarettes, etc.
 (7) Selling Costs:
 Under monopolistic competition where the product is differentiated, selling costs are
essential to push up the sales. Besides, advertisement, it includes expenses on salesman,
allowances to sellers for window displays, free service, free sampling, premium coupons
and gifts, etc.
 (8) Non-price Competition:
 Under monopolistic competition, a firm increases sales and profits of his product without a
cut in the price. The monopolistic competitor can change his product either by varying its
quality, packing, etc. or by changing promotional programs.
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6. PRICE & OUTPUT DETERMINATION IN MONOPOLISTIC COMPETITION/
EQUILIBIRIUM UNDER
 Short run equilibrium
 Short run is the time period in which there are fixed as well as variable factors of
production. Monopolistic firm can increase its output by increasing variable factor
only up to existing production capacity. short-run time period is too short that no
new firm can enter and no existing firm can leave the market so a firm can face
three situations in short-run:
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7.  Long run equilibrium
 Long run is the time period when all the factors of production are variable. The
can change the size of the plant and machinery. New firms can enter into the
market or existing can leave the market. A firm will produce that level of output
where long rum marginal cost is equal to marginal revenue curve. A firm will earn
normal profit in long run under monopolistic competition because
 If there is super normal profit, new firms will enter into the group so it will
the supply into the market and price will fall. Again there will be normal profit.
 In the long run to increase the demand a firm will reduce the price of the
following it other firms will also reduce the price, resulting normal profit to all the
firms in the group.
 If there are losses to the firm in the short run it will try to recover it in long run
but still it incur losses in the long run it will exit the group.
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8. MALLA JAYA CHANDRA 19L31E0007
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9. Thanking for giving
this wonderful
opportunity
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