Imperfect competition

Imperfect competition is a competitive market situation where there are many sellers, but they are
selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario. As the
name suggests, competitive markets that are imperfect in nature.

If a seller is selling a non identical good in the market, then he can raise the prices and earn profits. High
profits attract other sellers to enter the market and sellers, who are incurring losses, can very easily exit
the market.

There are four types of imperfect competition:

1-Monopoly (only one seller)

1- Oligopoly (few sellers of goods)

2- Monopsony (only one buyer of a product)
3- Monopolistic competition (many sellers with highly differentiated product)

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 Monopolistic competition

is a type of imperfect competition such that many producers sell products that are differentiated
from one another (e.g. by branding or quality) and hence are not perfect substitutes

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 There are four conditions for monopolistic competition:
1- Large Number of Buyers as well as Sellers:
2- Product Differentiation: This feature implies presence of imperfect substitutes instead of
perfect substitutes.
3- Selling Costs: Product differentiation has its own implications for the market. It needs to
be supported by heavy advertisements and selling costs. Thus, there is presence of selling
costs. These selling costs help build brand loyalty for customers. This brand loyalty
empowers the producers to have a partial control over price and differentiate the form of
market from perfect competition.
4- Lack of Perfect Mobility: Mobility refers to movement of factors of production freely and
easily. Under monopolistic competition perfect mobility is not available. Different prices
of same factors of production exist in the market because of differentiated products.
5- Non-Price Competition : Monopolistic firms avoid getting into price wars and instead
undertake price war competition. It is not always possible to reduce the prices in order to
increase the market share so firms adopt a different strategy. Non price competition
involves incurring costs so as to promote the product. It basically involves large
promotional expenditures so as to make product visible and popular in the market. This
can be basically done by making celebrities as brand ambassadors or the offering of after
sales services etc.
6- Freedom of Entry and Exit : There are no such restrictions on entry and exit i.e. firms are
free to enter the market or exit the market. However, the entry is not always absolutely
free to enter. There are legal restrictions created through trademarks and copyrights
preventing the new firms to create and sell identical products

Limitations of the model of monopolistic competition;

 Some firms will be better at brand differentiation and therefore, in the real world, they
will be able to make supernormal profit.
 New firms will not be seen as a close substitute
 There is considerable overlap with oligopoly – except the model of monopolistic
competition assumes no barriers to entry. In the real world, there are likely to be at least
some barriers to entry
 If a firm has strong brand loyalty and product differentiation – this itself becomes a
barrier to entry. A new firm can’t easily capture the brand loyalty.
 Many industries, we may describe as monopolistically competitive are very profitable, so
the assumption of normal profits is too simplistic.

Example :

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 Examples of monopolistic competition would be the smart phone market or the toothpaste
market or the soap market. All these markets have a large number of producers and sellers but
the products are not homogeneous. The competition arises due to great number of firms

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Demand curve :

The demand curve of a monopolistic firm is a normal downward sloping curve. This means that as the
firm raises the price of its product, its quantity demanded falls and vice-versa. The demand curve looks

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 When in the revenue is more than cost, and new firms will enter the market. So supply
will increase and prices will decrease .

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  When many firms enter the market supply will increase , price will decrease and the cost
become equal to revenue .company will lose so some firms will exist the market .

 Then when cost is more than revenue companies will lose and many firms will exist the
market . then the supply will decrease and prices will increase and firms will start
entering the market again

Advantages of Monopolistic Competition

Free entry and exit
Helps in survival of small firms
Encourages innovation
Gives consumers more choices and creates diversity.

Disadvantages of Monopolistic Competition

Consumer and labor exploitation due to imperfect knowledge of market.

There is a tendency of excess capacity being created which creates inefficiency in the
economy.

Resources :

 https://en.wikipedia.org/wiki/Monopolistic_competition
 https://www.economicshelp.org/blog/311/markets/monopolistic-competition/
 http://www.bhs-business.com/d1-examining-business-markets.html


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