Monopolistic market.

1. MONOPOLISTIC
MARKET

2. MONOPOLISTIC COMPETITON
Monopolistic competition refers to a market structure in which
a large number of sellers sells differentiated product which are
close substitute for one another.
Monopolistic competition: many firms sell similar but not
identical products.

3. History:
THE "FOUNDING FATHER" OF THE
THEORY OF MONOPOLISTIC
COMPETITION IS EDWARD HASTINGS
CHAMBERLIN, WHO WROTE A
PIONEERING BOOK ON THE
SUBJECT, THEORY OF MONOPOLISTIC
COMPETITION (1933).

4. CHAR CTRISTICS OF MONOPOLISTIC
COMPETITION
• Product differentiation
Firm try to differentiate their products from one another . Product are
differentiated with respect to their size, colour , design etc.
• Large number of sellers
large number of seller depending on the market size
• Free entry and free exit
This feature lead to stiff competition . Everyone can enter with close
substitutes
• Selling costs
Promotion expenses, advertisement expenses, salaries or
marketing staff.
• Absence of interdependence
Each firm has its own production and marketing policy

5. 5
Characteristics & Examples
of Monopolistic Competition
Examples:
apartments
books
bottled water
clothing
fast food
night clubs

6. Monopolistic Competition
 Monopolistic competition is a form of imperfect competition
 It can be found in many real world markets ranging from clusters
of sandwich bars, other fast food shops and coffee stores in a busy
town centre to pizza delivery businesses in a city or hairdressers in
a local area
 Monopolistic competition is similar to perfect competition, some
economist regard it as more realistic, because the products are
differentiated

7. Assumptions of the Market
1. There are many producers and many consumers - the
concentration ratio is low
2. Producers have some control over price - they are “price
makers” not “price takers” but the price elasticity of demand is
higher than it would be under a situation of monopoly
3. The barriers to entry and exit into and out of the market are
low

8. How does Monopolistic Competition differ from Perfect
Competition?
Perfect
Competition
Monopolistic
Competition
Number of producers (sellers in the
market)
Many Many
Types of goods and services available for
consumers
Homogeneo
us
Differentiated
Does the firm have control over their
own prices?
No – price
takers
Yes – some
pricing power
Is branding / marketing important? No
Yes – key non-
price
competition
Are entry barriers zero, low or high? Zero barriers Low barriers
Does this market structure lead to
productive efficiency in the long run?
Yes – min
LRAC
No – higher
LRAC

9. SHORT-RUN EQUILIBRIUM OF THE FIRM UNDER MONOPOLISTIC
COMPETITION. THE FIRM MAXIMIZES ITS PROFITS AND PRODUCES A
QUANTITY WHERE THE FIRM'S MARGINAL REVENUE (MR) IS EQUAL TO
ITS MARGINAL COST (MC). THE FIRM IS ABLE TO COLLECT A PRICE BASED
ON THE AVERAGE REVENUE (AR) CURVE. THE DIFFERENCE BETWEEN THE
FIRM'S AVERAGE REVENUE AND AVERAGE COST, MULTIPLIED BY THE
QUANTITY SOLD (QS), GIVES THE TOTAL PROFIT.

10. LONG-RUN EQUILIBRIUM OF THE FIRM UNDER MONOPOLISTIC
COMPETITION. THE FIRM STILL PRODUCES WHERE MARGINAL COST AND
MARGINAL REVENUE ARE EQUAL; HOWEVER, THE DEMAND CURVE (AND
AR) HAS SHIFTED AS OTHER FIRMS ENTERED THE MARKET AND
INCREASED COMPETITION. THE FIRM NO LONGER SELLS ITS GOODS
ABOVE AVERAGE COST AND CAN NO LONGER CLAIM AN ECONOMIC
PROFIT

11. A SUPPLY AND DEMAND DIAGRAM, ILLUSTRATING THE
EFFECTS OF AN INCREASE IN DEMAND.