Monopolistic Competition

Definition
Monopolistic competition refers to a market structure and which a large number of sellers sell
differentiated product which is close substitute for one another. There is completion which keen,
though not perfect, among many firms making many similar products. In monopolistic
competition there are lots of compotators with highly substitutable products that have slight
differences

Monopolistic competition. This describes a market structure in which there are many firms
selling products that are similar but not identical. In a monopolistically competitive market, each
firm has a monopoly over the product it makes, but many other firms make similar products that
compete for the same customers.

To be more precise, monopolistic competition describes a market with the following attributes:

• Many sellers: There are many firms competing for the same group of customers.

• Product differentiation: Each firm produces a product that is at least slightly different from
those of other firms. Thus, rather than being a price taker, each firm faces a downward-sloping
demand curve.

Examples of Monopolistic Competition

Coal:
We can say that coal is the example of monopolistic competition which are similar but not
identical.

• Subbituminous: Subbituminous coal is black in colour and dull (not shiny), and has a
higher heating value than lignite.
 • Lignite: Lignite coal, aka brown coal, is the lowest grade coal with the least
concentration of carbon.

• Anthracite: The highest rank of coal. It is a hard, brittle, and black lustrous coal, often
referred to as hard coal, containing a high percentage of fixed carbon and a low
percentage of volatile matter.

Monopolistic characteristics
1. In monopolistic competition there is relatively large number of sellers.
2. Differentiated products often promoted by heavy advertisement.
3. Easy entry and easy to exits.
4. Advertisement

In monopolistic competition there is relatively large number of sellers.

Monopolistic completion is characterize by fairly large number of firms sells, 25, 30 or 70 not by
the hundreds or thousands of firm in pure completion.

1. Small market shares

Each firm has comparatively small percentage of total market and consequently has
limited control over market price.
 2. No collusion
The presence of relatively large number of firms ensures that collusion by a group of
firms to restrict output and set prices is unlikely.

3. Independent action
With numerous firms in an industry, there is no feeling of enter dependence among them.
Each firm can determine its own prices.

Differentiated Product
Monopolistically competitive firms produce products with slightly different physical
characteristic offer varying degree of customer service provide varying amount of locational
convenience or proclaim special qualities real or imagine for their product.

Product may also be differentiated through the location and accessibility of the stores that sell
them.

Small convince store manage to compete with large supermarkets, even though these minimarts
have a more limited range of products and charges higher prices. They compete mainly of the
basis of location being close to customer and situated on busy streets. The use of brand names
and trademarks, packaging and celebrity connections.

Despite the relatively large number of firms, monopolistic competitors do have more control
over prices.

Easy entry and exist

Entry into monopolistically competitive industries is relatively easy compared to oligopoly on
pure monopoly. Because monopolistic compotators are topically small firms, both absolutely and
relatively, economics of scale are few and capital requirements are low.

Advertisement
It is nearly impossible to go through a typical day in a modern economy without being
bombarded with advertising. Whether you are surfing the Internet, posting on Facebook, reading
a newspaper, watching television, or driving down the highway, some firm will try to convince
you to buy its product. Such behavior is a natural feature of monopolistic competition. When
firms sell differentiated products and charge prices above marginal cost, each firm has an
incentive to advertise to attract more buyers to its particular product. The amount of advertising
varies substantially across products
Brand Names
Advertising is closely related to the existence of brand names. In many markets, there are two
types of firms. Some firms sell products with widely recognized brand names, while other firms
sell generic substitutes. For example, in a typical drugstore, you can find Bayer aspirin on the
shelf next to generic aspirin. In a typical grocery store, you can find Pepsi next to less familiar
colas. Most often, the firm with the brand name spends more on advertising and charges a higher
price for its product.
The Monopolistically Competitive Firm
In the Short Run
 As there are many sellers/firms in monopolistic competition and they selling
differentiated products.
 AR or Demand curve is slightly flutter than Monopoly
Equilibrium Condition:
 Equilibrium point exists at a point where MR=MC,
 At this point quantity will determine.
 Now if we go up from equilibrium point to Demand curve Price charge by Monopolistic
will determine.
Loss and Profit Conditions
 If ATC curve is below the AR/Demand curve there will be profit. ( MR > ATC )
 If ATC curve is above the AR/Demand curve there will be loss. ( MR < ATC )
As mentioned in fig-a and fig-b respectively.

The Long-
Run
Equilibrium
  As mentioned above in short-run when firm was making profit, this will attract other
firms to enter in the market, so now quantity of product will increase and there will be
less demand for product of that firm which was making profit. Finally this new entries in
the market will reduce profit and now they gain normal profit.

 Now in case of loss in short-run as mentioned above, some firms exit market, and there
will be higher demand for products of the remaining firm. It means the firms that facing
loss now gaining normal Profit.

NOTE: If the firms are in profit or loss is short-run they will gain normal profit in long-run.
Or in long-run ATC always equals to MR