Ceatures of Monopolistic Competition:

The main features of monopolistic competition are summarized

below:
1 Existence of large number of buyers and sellers: The
number of firms in monopolistic competition is fairly large.
Each firm decides its own price output policy without
considering the reactions of rival firms. Similarly, the
number of buyers is fairly large in monopolistic competition.
2/Product differentiation: Product differentiation is the
hallmark of monopolistic competition. Product
differentiation may be real or imaginary. Real
differentiation is done through differences in the materials
used, design, colour, etc. Imaginary differences may be
created through advertisement, brand name, trade mark,
packaging etc. Therefore, products sold in such a market
are heterogeneous.
3. Selling costs : Another very important feature of the
monopolistic competition is that each firm tries to create
difference in its product from the other. This is done
through advertisement, propaganda, attractive packing
etc., for which cost is included. Such cost is known as
selling cost. Selling costs are those expenses of the
producer incurred on marketing of goods produced. The
effect of selling costs may be to attach particular consumer
to particular brand.
4. Free entry and free exit offirms: Another characteristic
of the monopolistic competition is the freedom of entry

151
 increa.
firms creases
are ableent
differentiation
Product
and exist of firms.
the industry.
New tirms areR
new firms into
of
commence production of very stitutes for the
close Substitutes

existing brands of the product.

curve: Under monan
5. Downward Sloping demand
a single firm can
control only a small n
competition,
of the total output. The
demand curve of a firm
m
downwards to the.undes
the righ
monopolistic competition slopes
A reduction in price leads to increase in sales and
vice
versa.
6. Price maker: Under monopolistic competition a
fixes its own price of its product. The firms
firm
are-
distinguished on the basis of their brand names; therefon
each monopolistic firm enjoys a monopolist position
This is because no other firm can produce and sell
is
products under the same brand name.

Equilibrium under Monopolistic Competition

Underperfect competition, the individual seller can sell as
much as he pleases at the
ongoing price. Under monopolistic
competition, his/her market is separate from that of his/her rivals
to some extent. The firm's
sales are linited by three factors:
(i) Price; (ii) The nature of
product (ii) Advertising outlays.
Under monopolistic
the
competition, there is a
slight difference in
conditions of price and output
and long run. In this determination in the short-run
market, the producer is
price taker. price maker and not

Short-run Equilibrium of
The short-run
Monopolistic Firm
equilibrium conditions for
re same that ior a
as
market. The conditions perfectly
monopolistic
competitive market
are: and monopoy
1. MR = MC

152
 2. Marginal cost curve is upward sloping at the point or
intersection (MC curve intersects MR curve from below
and moves upward.
3. Price should be greater than or equal to minimum of Av
curve i.e P > minimum of AVC curve.
There are different short-run equilibrium situations in
monopolistic competition

(a) Abnormal profit (when P > minimum of AC curve)

(b) Normal profit (when P = minimum of AC curve)

(a) Abnormal profit: In diagram 6.10 (a, b & c) equilibrium

similar
quantity is Oq
and equilibrium price is OP. The diagrams are
firm. The only
to those for the short-run equilibrium of monopoly
is
between these diagrams and those of monopoly firm
difference
MR curves are more flat (elastic) due to the presence
that, the AR and less
close substitutes. Under monopoly, AR and MR curves are
of
flatter (less elastic) due to the absence of substitutes.
=
TR -

TC Cost/Price/
(Profit) T
Revenue Profit
=
Pxq - AC x q
MC
- OP x Oq - OP, x Oq AC

= OPRq- OP,Sq AVC

= PPRS

ABNORMAL PROFIT
AR

mMR Output
Profit in Short-run Equilibrium of
Diagram 6.10 (a) Abnormal
Monopolistic Firm

is OP
In the diagram 6.10(a) at point E the equilibrium price
The equilibrium is
determined by the
and equilibrium output is Oq. E. The
and the MC c u r v e at point
intersection of the MR curve
OP. This equilibrium
equilibrium price is
ascertained by the AR curve at
This shows the
mninimum of the AC curve.
is greater than the PRs.
by shaded area P,
price
nrm is earning abnormal profit and is denoted
153
 Cost/Price/
Reven ue
(Profit) n = TR - TC

=
P x
q AC
-

MC AC xx
AVC
=
OP x
Oq Op
Px O
-

=
OPRq -

OPSqg
= O

AR
NORMAL PROFIT OR
Output
AMR ECONOMIC PROFIT
Diagram 6.1o (b) Normal Profit in Short-run Equilibriumof
Monopolistic Firm
In Diagram 6.10(b),
equilibrium is determined in th the
same way a s
diagram (a) at point E. The equilibrium price is Op
equilibrium output is Oq. Here we observe that the equilibrium Dorie
OP is equal to the minimum point of the AC curve. Hence the fi
IS earning nornmal profit, this is also known a s economic profit
Loss of monopolistic firm:
(Profit) T =TR TC
= -

Cost/Price/ Loss
Revenue
Px q -

- AC x q MC
4C
=

OP x Oq -

OP x Oq AVC
=
OP Sq -

OPRq P
= P,PRS

AR
LOSS.
Output
MR