Monopolistic competitionThe model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. Show
Many small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and restaurants. In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers. CharacteristicsMonopolistically competitive markets exhibit the following characteristics:
Equilibrium under monopolistic competitionIn the short run supernormal profits are possible, but in the long run new firms are attracted into the industry, because of low barriers to entry, good knowledge and an opportunity to differentiate. Monopolistic competition in the short runAt profit maximisation, MC = MR, and output is Q and price P. Given that price (AR) is above ATC at Q, supernormal profits are possible (area PABC). As new firms enter the market, demand for the existing firm’s products becomes more elastic and the demand curve shifts to the left, driving down price. Eventually, all super-normal profits are eroded away. Monopolistic competition in the long runSuper-normal profits attract in new entrants, which shifts the demand curve for existing firm to the left. New entrants continue until only normal profit is available. At this point, firms have reached their long run equilibrium. Clearly, the firm benefits most when it is in its short run and will try to stay in the short run by innovating, and further product differentiation. Examples of monopolistic competitionExamples of monopolistic competition can be found in every high street. Monopolistically competitive firms are most common in industries where differentiation is possible, such as:
The survival of small firmsThe existence of monopolistic competition partly explains the survival of small firms in modern economies. The majority of small firms in the real world operate in markets that could be said to be monopolistically competitive. EvaluationThe advantages of monopolistic competitionMonopolistic competition can bring the following advantages:
The disadvantages of monopolistic competitionThere are several potential disadvantages associated with monopolistic competition, including:
InefficiencyThe firm is allocatively and productively inefficient in both the long and short run. There is a tendency for excess capacity because firms can never fully exploit their fixed factors because mass production is difficult. This means they are productively inefficient in both the long and short run. However, this is may be outweighed by the advantages of diversity and choice. As an economic model of competition, monopolistic competition is more realistic than perfect competition – many familiar and commonplace markets have many of the characteristics of this model. Test your knowledge with a quizPress Next to launch the quizYou are allowed two attempts – feedback is provided aftereach question is attempted. What is product differentiation in monopolistic competition?In Monopolistic Competition, a buyer can get a specific type of product only from one producer. In other words, there is product differentiation. The firms have to incur selling expenses since there is product differentiation.
How do monopolistic firms differentiate their products?Product differentiation: In monopolistic competition, each firm produces goods or services that are close substitutes for the goods or services produced by other firms. Competitive firms differentiate their similar products with distinct marketing strategies, brand names, and slightly different quality levels.
What is the effect of product differentiation in monopolistically competitive markets?By differentiating its products, firms in a monopolistically competitive market ensure that its products are imperfect substitutes for each other. As a result, a business that works on its branding can increase its prices without risking its consumer base.
What type of products do monopolistically competitive firms produce?Companies in a monopolistic competition make economic profits in the short run, but in the long run, they make zero economic profit.. Clothing and apparel.. Sportswear products.. Restaurants.. Hairdressers.. PC manufacturers.. Television services.. |