module 9 monopolistic competition

1. Monopolistic
Competition
Module 9

2. Monopolistic Competition
● is a market structure which combines elements of
monopoly and competitive markets.
● is a type of imperfect competition such that many
producers sell goods and services that are similar but
differentiated from one another (e.g. by branding or
quality) and hence are not perfect substitutes.

3. Examples of monopolistic competition
● Clothing and apparel
● Sportswear products
● Restaurants
● Hairdressers
● PC manufacturers
● Television services

4. Characteristics Of
Monopolistic Competition

5. ● Like the perfect competition, monopolistic
competition also consists of a large number of sellers
and buyers. That means several sellers are selling
the same product in the market. However, the
product sold by each firm serves the same purpose,
but the products don’t need to be identical. The
products sold by each firm are differentiated based
on different factors like brand, shape, size, etc.
● Similarly, there are a large number of buyers in the
market. All buyers have their unique choices. These
buyers divide among seller firms based on their
preferences.
1. A large number of sellers and buyers

6. ● The price of products sold by sellers in monopolistic
competition is different. The price of a product can be low or
high based on the brand name or based on its properties.
2. Different price of products

7. ● In monopolistic competition, products sold can vary in price,
shape, size, and qualities. A product that serves the same primary
purpose can be sold at different prices because of its advertised
features and the name of the brand associated with it.
3. Product variation

8. ● A seller has control over the price of products produced by his
firm. Unlike perfect competition, he is not bound to keep the
same as that of other seller firms.
4. Control of a seller on the price of
the product, but not on the market

9. ● In monopolistic competition, each firm has the
freedom to enter and exit the market. There is
little control of the government on the
monopolistic competition, and it puts little
restrictions on the sellers. Despite that, each
firm has the freedom to stay in the market as
long as it wants and exit the market whenever it
desires. In addition to this, because of multiple
sellers available in the market, the market also
does not get much affected by the exit of a
seller.
5. Freedom of entry and exit

10. ● In monopolistic competition, it is not easy to mobile a product from one
place to another. In perfect competition, a seller can easily take his product
to a different place where he can earn more profit by selling the product.
But in monopolistic competition, it is not easy for a seller to move a
product.
● Because of government restriction and also because of the variety of
products available in the market. In modern times, the introduction
of e-commerce has also put restrictions on the mobility of products as any
product can be bought in any part of the world.
6. Imperfect mobility of products

11. ● In monopolistic competition, all sellers and buyers have incomplete
knowledge about the market. Buyers are lure with the things advertised
by the buyers. They are unaware of the actual characteristics of
products promoted to them. Similarly, the trade secrets about the
products are kept hidden by the seller firms and are not shared in the
market openly. Sellers generate huge profits because of the imperfect
knowledge of the buyers.
● The lack of knowledge of customers is used as a marketing tool by the
organizations. They make the use of advertising to convey any
information about their product. There is the only motive is to maximize
sales by attracting more customers.
7. Imperfect knowledge

12. ● The demand for products in monopolistic
competition is quite flexible. There might
be more demand for products sold by one
seller and low demand for similar products
sold by another seller. In addition to this,
the demand for products also varies
depending on the season and need. As a
result of which the revenue generation of
the seller firm is not constant and varies
frequently.
8. More elastic demand

13. ● Heavy advertising of products is done in
Monopolistic competition. In monopolistic
competition, products produced by
different sellers are not identical. They
come in different sizes, shapes, and
different prices. Therefore, sellers are
required to use advertising to attract
customers and to boost the sales of their
products. Because of advertising, each
seller firm has a different share in the
market.
9. Advertising

14. ● In monopolistic competition, sellers have the right to make
important decisions about the product, such as the size of
the product, shape of the product, the color of the product,
and the price of the product independently. Because of this
reason, similar products are sold by different firms at
different prices in the organization.
10. Independent decision making

15. Short-Run Decisions on Output and Price
The short-run equilibrium under monopolistic competition is
illustrated in the diagram below:

16. ● Profits are maximized where marginal revenue (MR) is equal to marginal
cost (MC). The point determines the company’s equilibrium output. The
price is determined at a point where the imaginary line from the
equilibrium output passes through the point of intersection of the MR, and
MC curves and meets the average revenue (AR) curve, which is also
the demand curve.
● Total profit is represented by the cyan-colored rectangle in the diagram
above. It is determined by the equilibrium output multiplied by the
difference between AR and the average total cost (ATC). Companies in
monopolistic competition determine their price and output decisions in the
short run, just like companies in a monopoly.
● Companies in monopolistic competition can also incur economic losses in
the short run, as illustrated below. They still produce equilibrium output at
a point where MR equals MC in which losses are minimized. The
cyan-colored rectangle shows the economic loss incurred.

17. Long-Run Decisions on Output and Price
In the long run, companies in monopolistic competition still produce at a
level where marginal cost and marginal revenue are equal. However, the
demand curve will have shifted to the left due to other companies entering
the market. The shift in the demand curve is a result of reduced demand for
an individual company’s products due to increased competition.
Such an action reduces economic profits, depending on the magnitude of
the entry of new players. Individual companies will no longer be able to sell
their products at above-average cost.

18. ● Companies in monopolistic
competition will earn zero
economic profit in the long
run. At this stage, there is
no incentive for new
entrants in the industry.

19. • Companies in a monopolistic competition make economic profits
in the short run, but in the long run, they make zero economic
profit. The latter is also a result of the freedom of entry and exit
in the industry. Economic profits that exist in the short run
attract new entries, which eventually lead to increased
competition, lower prices, and high output.
• Such a scenario inevitably eliminates economic profit and
gradually leads to economic losses in the short run. The freedom
to exit due to continued economic losses leads to an increase in
prices and profits, which eliminates economic losses.

20. Monopolistic Competition vs. Perfect Competition
● Companies in monopolistic competition produce differentiated products and
compete mainly on non-price competition. The demand curves in individual
companies for monopolistic competition are downward sloping, whereas
perfect competition demonstrates a perfectly elastic demand schedule.
● However, there are two other principal differences worth mentioning –
excess capacity and mark-up. Companies in monopolistic competition
operate with excess capacity, as they do not produce at an efficient scale,
i.e., at the lowest ATC. Production at the lowest possible cost is only
completed by companies in perfect competition.
● Mark-up is the difference between price and marginal cost. There is no
mark-up in a perfect competition structure because the price is equal to
marginal cost. However, monopolistic competition comes with a product
mark-up, as the price is always greater than the marginal cost.

21. Inefficiencies in Monopolistic
Competition
• The equilibrium output at the profit maximization level (MR = MC) for
monopolistic competition means consumers pay more since the price is
greater than marginal revenue.
• As indicated above, monopolistic competitive companies operate with
excess capacity. They do not operate at the minimum ATC in the long
run. Production capacity is not at full capacity, resulting in idle
resources.
• Monopolistic competitive companies waste resources on selling costs,
i.e., advertising and marketing to promote their products. Such costs
can be utilized in production to reduce production costs and possibly
lower product prices.

22. • Since companies do not operate at excess capacity, it leads to
unemployment and social despondency in society.
• Inefficient companies continue to exist under monopolistic
competition, as opposed to exiting, which is associated with
companies under perfect competition.
• Another scope of inefficiency for monopolistic competitive
markets stems from the fact that the marginal cost is less than
the price in the long run.
• Monopolistic competitive market structures are also
allocatively inefficient. Their prices are higher than the
marginal cost.

23. Limitations of Monopolistic Competition
Market Structure
● Companies with superior brands and high-quality products
will consistently make economic profits in the real world.
● Companies entering the market will take a long time to catch
up, and their products will not match those of the
established companies for their products to be considered
close substitutes. New companies are likely to face barriers
to entry because of strong brand differentiation and brand
loyalty.

24. References:
● https://corporatefinanceinstitute.com/resources/knowledge/econo
mics/monopolistic-competition-2/
● https://www.economicshelp.org/blog/311/markets/monopolistic-c
ompetition/
● https://www.marketing91.com/characteristics-of-monopolistic-com
petition/

25. THANK YOU FOR
LISTENING!