Mentor- Prof.

Deepika M G

Team members:
Mahesh Guleria
Pallab Misra
Manohar Shetty
Milind p m
Saquib Kalam
Mayur Somani
 Monopolistic competition is a market structure in
which:
 A large number of independent firms compete.
 Each firm produces a differentiated product.
 Firms compete on product quality, price, and marketing.
 Firms are free to enter and exit.
 Large Number of Firms
 Like perfect competition, the market has a large
number of firms. Three implications are:
 Small market share
 No market dominance
 Collusion impossible
 Product Differentation
 Making a product that is slightly different from the
products of competing firms.
 A differentiated product has close substitutes but it
does not have perfect substitutes.
 When the price of one firm’s product rises, the
quantity demanded of that firm’s product decreases.
 Competing on Quality, Price, and Marketing
 Quality
 Design, reliability, service, ease of access to the
product.
 Price
 A downward sloping demand curve.
 Marketing
 Advertising and packaging
 Entry and Exit
 No barriers to entry.
 A firm cannot make economic profit in the long run.
 Identifying Monopolistic Competition
 Two indexes:
 The four-firm concentration ratio
 The Herfindahl-Hirschman Index
  How, given its costs and the demand for its jeans,
does Tommy Hilfiger decide the quantity of jeans to
produce and the price at which to sell them?
 The Firm’s Profit-Maximizing Decision
 The firm in monopolistic competition makes its
output and price decision just like a monopoly firm
does.
 Figure on the next slide illustrates this decision.
1. Profit is maximized
when MR = MC
2. The profit-maximizing
output is 125 pairs of
Tommy jeans per day.
3. The profit-maximizing
price is $75 per pair.
ATC is $25 per pair, so
4. The firm makes an
economic profit of
$6,250 a day.
 Profit Maximizing Might Be Loss Minimizing
 Some firms in monopolistic competition have a tough
time making a profit.
 A burst of entry into an industry can limit the demand
for each firm’s own product.
 Figure on the next slide illustrates a firm incurring a
loss in the short run.
1. Loss minimized when
MC = MR
2. The loss-minimizing
output is 40,000
customers.
3. The price is $40 per
month, which is less
than ATC.

4. The firm incurs an

economic loss.
 Is Monopolistic Competition Efficient
 Efficiency requires marginal benefit to equal marginal
cost.
 In monopolistic competition, price exceeds marginal cost,
which is an indicator of inefficiency.
 Making the Relevant Comparison
 Price exceeds marginal cost because of product
differentiation. But product variety is valued.
 The Bottom Line
 The bottom line is ambiguous. But compared to the
alternative, monopolistic competition looks efficient.
 Innovation and Product Development
 Wherever economic profits are earned, imitators
emerge.
 To maintain economic profit, a firm must seek out
new products.
 Cost Versus Benefit of Product Innovation
 The firm must balance the cost and benefit at the
margin.
 Advertising
 Firms in monopolistic competition spend a large
amount on advertising and packaging their products.
 Marketing Expenditures
 A large proportion of the prices that we pay cover the
cost of selling a good.
 Selling Costs and Total Costs
 Advertising expenditures increase the costs of a
monopolistically competitive firm above those of a
perfectly competitive firm or a monopoly.
 Advertising costs are fixed costs.
 Advertising costs per unit decrease as production
increases.
 Figure on the next slide illustrates the effects of
selling costs on total cost.
1. When advertising
costs are added to . . .

2. … the average total

cost of production,
…

3. … average total
cost increases by a
greater amount at
small outputs than
at large outputs.
 Surf was launched in 1959 by HUL.
 A family brand with tough stain removal and
caring image.
 International to Ultra to Excel
 Surf Excel is available in 4 variants:
 Surf Excel Blue
 Surf Excel Quick Wash
 Surf Excel Automatic
 Surf Excel Detergent Bar
 Ariel was introduced in India in 1991 by P&G.
 Ariel contains unique Fragrance in detergents
with new technology based detergent
 Ariel is available in 3 variants:
 Ariel Fresh Clean
 Ariel Spring Clean
 Ariel Front-O-Mat
 SURF EXCEL ARIEL

 To continue market  To increase market share

leadership  7.7% P&G in Indian
 37.8% in Indian Market   Market
 Approaching New  Switch Consumers from
Markets Existing Brands in the
 Launching Product present Market
Extensions  Product Innovation
 Maintain Brand Loyalty  Increase Brand Loyalty
SIZE SURF EXCEL SURF EXCEL SURF EXCEL
QUICK WASH BLUE AUTOMATIC

SACHET Rs.2/- Rs.2/- -

200gm Rs.23/- Rs.20/- -

500gm Rs.56 Rs.41 Rs.80/-

1kg Rs.109/- - Rs.155/-

SIZE ARIEL FRESH ARIEL SPRING ARIEL
CLEAN CLEAN FRONTO-MAT

Sachet Rs.2/- Rs.2/- -

200gm Rs.26/- Rs.26/- -

500gm Rs.55/- Rs.55/- Rs.80/-

1kg Rs.107/- Rs.107/- Rs.155/-

 Major Players
 HUL ( blue, Quick wash, Automatic)
 Nirma
 P&G ( Tide, Ariel)
 Henkel India (Mir, persil, porwall, vernel,
purex,henko)
 Reckitt Benckiser ( Varnish)
 Cross Elasticity of the demand is defined as the
ratio of the percentage change in the demand for
one good to the percentage change in the price of
some other good.

 Substitute goods: Tide, Rin, ghadi etc. Cross

Elasticity will be positive in this case

 Complement goods: detergent cake, liquid soap

Elasticity is always negative.
 The Herfindhahl-Hirschman Index (HHI)
 It is the sum of squares of market share of each company in the
industry.
 H = s12+s22+…………….+sn2
 H= Herfindhahls index
 S1,S2……………Sn are market share of each company
 For detergent industry(in our case)
 H = (37.8) 2 + (7.7)2 + (3.7)2 + (1.5)2 + (.26)2 = 1504.15
 {as market share of other companies is almost negligible in the
industry}
 The four-firm concentration ratio
 It is a sum of market share of top 4 firms in the industry

 For detergent industry(in our case) ;

 Surf Excel : 37.8%

 Ariel : 7.7%

 Henko : 2.9.%

 Nirma : 1.14%

 Total : 48.74

 Conclusion : As 4 firm’s concentration ratio is less than

50%,So this let us to conclude that Detergent industry has

a Monopolistic market.
 Surf
 Experienced Player
 Competitive Advantage with well laid distribution and
retail network
 Innovative advertising approaches
 Willingness to venture out with new variants
 Ariel
 Strong first mover advantage in the Pricing War
 Entrenched firmly in minds on basis of superior cleaning
quality
 Need to bring out new variants
 focus on aggressive advertising important
 So in the monopolistic form of competition the firm doesn’t have
price war like in perfect competition, in this form of competition
there exist product differentiation firms compete among
themselves by differentiation their products and to promote their
product they incur huge selling cost in the form of:
 Advertising
 Promotion
 Packaging
 Design
 price