CAIRO UNIVERSITY

FACULTY OF COMMERCE ENGLISH SECTION

CASE STUDY:

Monopolistic Competition: Definition, How it Works, Pros and

Cons

AUTHORS : Group A (Business)

Abdulfathi Mansur Abdulfathi 31003

Abdulrahman Baffa Muhammad 31114

Muhammad lawan 31165

Ahmed hishamuddin Ahmed Al Dardash 31010

Course supervisor: Dr Rasha el-Akkad

Date: 4/12/2023
What Is Monopolistic Competition?

Monopolistic competition exists when many companies offer competing products or services
that are similar, but not perfect, substitutes.

The barriers to entry in a monopolistic competitive industry are low, and the decisions of any
one firm do not directly affect its competitors. The competing companies differentiate
themselves based on pricing and marketing decisions.

 Monopolistic competition occurs when many companies offer products that are similar
but not identical.
 Firms in monopolistic competition differentiate their products through pricing and
marketing strategies.
 Barriers to entry, or the costs or other obstacles that prevent new competitors from
entering an industry, are low in monopolistic competition.

Understanding Monopolistic Competition

Monopolistic competition exists between a monopoly and perfect competition, combines

elements of each, and includes companies with similar, but not identical, product offerings.

Restaurants, hair salons, household items, and clothing are examples of industries with
monopolistic competition. Items like dish soap or hamburgers are sold, marketed, and
priced by many competing companies.

Demand is highly elastic for goods and services of the competing companies and pricing is
often a key strategy for these competitors. One company may opt to lower prices and
sacrifice a higher profit margin, hoping for higher sales. Another may raise its price and use
packaging or marketing that suggests better quality or sophistication.

Companies often use distinct marketing strategies and branding to distinguish their
products. Because the products all serve the same purpose, the average consumer often does
not know the precise differences between the various products, or how to determine what a
fair price may be.

Characteristics of Monopolistic Competition Low Barriers to Entry

In monopolistic competition, one firm does not monopolize the market and multiple
companies can enter the market and all can compete for a market share. Companies do not

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 need to consider how their decisions influence competitors so each firm can operate without
fear of raising competition.

Product Differentiation

Competing companies differentiate their similar products with distinct marketing strategies,
brand names, and different quality levels.

Pricing

Companies in monopolistic competition act as price makers and set prices for goods and
services. Firms in monopolistic competition can raise or lower prices without inciting a
price war, often found in oligopolies.

Demand Elasticity

Demand is highly elastic in monopolistic competition and very responsive to price changes.
Consumers will change from one brand name to another for items like laundry detergent
based solely on price increases.

Advantages and Disadvantages of Monopolistic Competition Monopolistic competition

provides both benefits and pitfalls for companies and consumers.

Pros

Few barriers to entry for new companies

Variety of choices for consumers

Company decision-making power for prices and marketing

Consistent quality of product for consumers

Cons

Many competitors limits access to economies of scale

Inefficient company spending on marketing, packaging and advertising

Too many choices for consumers means extra research for consumers

Misleading advertising or imperfect information for consumers

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How Does Monopolistic Competition Function in the Short Term and Long Term?

Companies aim to produce a quantity where marginal revenue equals marginal cost to
maximize profit or minimize losses. When existing firms are making a profit, new firms will
enter the market. The demand curve and the marginal revenue curve shift and new firms stop
entering when all firms are making zero profit in the long run. If existing firms are incurring a
loss, some firms will exit the market. The firms stop exiting the market until all firms start
making zero profit. The market is at equilibrium in the long run only when there is no further
exit or entry in the market or when all firms make zero profit in the long run.

In Conclusion

Monopolistic competition exists when many companies offer competitive products or services
that are similar, but not exact, substitutes. Hair salons and clothing are examples of industries
with monopolistic competition. Pricing and marketing are key strategies for competing
companies and often rely on branding or discount pricing strategies to increase market share.

Reference: https://www.investopedia.com/terms/m/monopolisticmarket.asp