Both Monopoly and
Perfect Competition market structure are
rarely found in actual practice.
In the real world it is imperfect competition
which dominates the market structure.
The main form of imperfect competition is
Monopolistic Competition.
It is a form of market in which there are many sellers
of the product, but the product of each seller is somewhat different from that of
the other.
Thus, there are many sellers, selling a differentiated product.
For example: firms producing different brands of
toothpastes like Colgate, Pepsodent, close –up etc.
Monopolistic Competition combines
the features of monopoly and perfect competition.
Trademark gives monopoly
power to the firms also since many firms are producing a commodity (like
toothpaste) there is a competition in the market.
In view of the blending of monopoly and competitive elements, this
type of market has a Partial Control over
price of their product.
It is only through product differentiation that a
monopolistic competitive firm enjoys partial control over price.
Difference in
design, colour or even packing of the product attracts buyers to buy a
particular product even at a relatively higher price.
But full control over price is ruled out because
a) there are competitors in the market, and
Features
of Monopolistic Competition
1) Large
Number of buyers and Sellers :
Like perfect competition, there are large number of
buyers and sellers. Also, the size of each firm is small. Each firm has a
limited share of the market.
The firm can follow independent price policy.
For example:
the firm can lower its price without taking into account the reaction of rival
firms.
It is partly for this reason that firms under monopolistic competition
are price takers.
They set their own prices called administered
prices (rather than by impersonal market forces).
It means that a firm
is the Price Maker for its product
The numbers of buyers are so large that no
individual buyers can influence the price of the products by changing his
demand.
2) Differentiated products :
It is an important feature of Monopolistic
Competition. A product is often differentiated by way of trademarks and brand
names.
The differentiated products are close substitutes of each other, like
Colgate and Pepsodent toothpaste.
Because of product differentiation, each firm can
decide its price policy independently.
So that each firm has a partial control
over price of its product.
Products produced by different firms are substitutes
for each other, but not perfect substitutes.
Products under monopolistic Competition may be
different from each other in two ways:
Firstly, products may be differentiated on the basis
of physical nature such as physical and chemical components of the products,
difference in quality, size, design, colour or difference in packaging.
Secondly, products may be differentiated on the
basis of conditions surrounding the sale of the product, it relates to the
location of the seller, his reputation, efficiency, courtesy, trustworthiness,
credit facility, etc.
3) Free entry and Free Exit :
Firms are free to enter the industry or to leave it.
However new firms have no absolute freedom of entry into industry.
Products of
some firms may be legally patent. New firms cannot produce those products.
Example: No rival firms can produce and sell patented
items like woodland shoes.
There is a freedom of entry in the sense that new
firm are free to produce the close substitutes also there is no restrictions on
firms deciding to leave the industry.
So firm earns normal profits in the long run. Free
entry would ensure that there are no super normal profits also no losses in the
long run.
4) Selling Cost :
Each firm has to incur selling
costs (expenditure on advertisement, etc) to promote sales.
This is because
there is a large number of close substitutes.
The sales promotion measures may
take the form of persuasive or competitive advertisement like advertisement in
newspapers, TV commercials, door to door campaign, offering discounts etc.
This is so to lure away the customers from other
brands by persuading them to buy his brands rather than other brands.
In perfect competition, the product is perfectly
homogeneous and so there is no scope to engage in advertisement.
In monopoly,
there is no need to engage in advertisement and other sales promotion measures
since there is no competition.
5) Lack of Perfect Knowledge :
Sellers and buyers of products do not have a perfect
knowledge about the market price.
Because of product differentiation, it is not
possible to compare price of different products.
6) Non – Price Competition :
Firms may compete with one another without changing
price of heir product.
For example: if you buy one packet of ‘Surf’, you may
get one glass tumbler free with it and on the purchase of one packet of ‘Rin’
you may get one steel spoon free.
Thus, the firms compete by offering gifts to
the buyers rather than by cutting price of their product.
7) More can be sold only at Lower Price :
A firm under Monopolistic
Competition can sell more of the products only by lowering the price.
So, firm’s
demand curve slopes downwards (as in case of monopoly) .
The AR curve of a firm is more elastic than monopoly
because of the existence of rival firms producing close substitutes.
The
elasticity depends on the nature and numbers of close substitutes and
preferences of the consumers for different brands.
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| Monopolistic Competition |
From the above features we can conclude that Monopolistic
Competition is a realistic model of market structure, it corresponds to the
real world market situations.
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