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Monopolistic Comeptition: M. Shivarama Krishna 10HM28

This document defines and describes monopolistic competition. It notes that monopolistic competition is characterized by many sellers offering differentiated but substitutable products, free entry and exit into the market, and imperfect information. Firms operate in the short run with some profits due to product differentiation, but in the long run entry by competitors eliminates profits as firms reach equilibrium with price equal to average cost. The document provides examples of industries like retail services and hotels that exhibit monopolistic competition.

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76 views19 pages

Monopolistic Comeptition: M. Shivarama Krishna 10HM28

This document defines and describes monopolistic competition. It notes that monopolistic competition is characterized by many sellers offering differentiated but substitutable products, free entry and exit into the market, and imperfect information. Firms operate in the short run with some profits due to product differentiation, but in the long run entry by competitors eliminates profits as firms reach equilibrium with price equal to average cost. The document provides examples of industries like retail services and hotels that exhibit monopolistic competition.

Uploaded by

Powli Harshavardhan
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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MONOPOLISTIC

COMEPTITION

M. SHIVARAMA KRISHNA
10HM28
Structure based on Competition
 Perfect competition – All buyers and sellers are
aware of the price and offers made by others, same
price throughout the market at the same time.
 Imperfect competition – Buyers and sellers are not
aware of the offers made by others, different prices
for the same commodity at same time.
 Types – Monopoly, Oligopoly, Monopolistic
competition
Definition of Monopolistic competition

 Monopolistic Competition may be defined as a


market situation in which there are large number of
Buyers and Sellers dealing in differentiated products
with different prices
Monopolistic Competition
 Attributes of Monopolistic Competition
 Many sellers
 Product differentiation
 Free entry and exit
 Complete dissemination of market
information.
CHARACTERISTICS
1) Existence of many firms
 Industry consists of a large number of sellers, each one of
whom does not feel dependent others.

 Every firm acts independently without bothering about the


reactions of the rivals.

 The size is so large that an individual firm has only a


relatively small part in the total market, so that each firm
has very limited control over the price of the product.
2)Product differentiation
 Product differentiation means that products are different in
some ways, but not altogether so.

 The products are not identical but at the same time they
will not be entirely different from each other.

 The product of each firm is different from that of its rivals


in one or more respects. Different tooth pastes like
Colgate, Close up, Forhans, Pepsodent, etc. provide an
example of monopolistic competition.
 These products are relatively close substitutes
for each other but not perfect substitutes.

 Consumers have definite preferences for the


particular varieties or brands of products offered
for sale by various sellers.

 Advertisement, packing, trademarks, brand


names etc, help differentiation of products even
if they are physically identical.
3) Large number of buyers

 There are large numbers of buyers in the market who have their
own brand preferences. So the sellers are able to exercise a
certain degree of monopoly over them.

 Each seller has to plan various incentive schemes to retain the


customers who patronize his products.

4) Free entry and exit of firms

 As in the perfect competition, in the monopolistic Competition


too, there is freedom of entry and exit. That is, there is no barrier
as found under monopoly.
5) Selling costs
 Since the products are close substitutes much effort is needed to retain

the existing consumers and to create new demand.

 So each firm has to spend a lot on selling cost, which includes cost on

advertising and other sales promotion activities.

6) The group
 Under perfect competition the term industry refers to the collection of
firms producing a homogeneous product. But under monopolistic
competition the products of various firms are not identical though they
are close substitutes. Prof. Chamberline calls the collection of firms
producing close substitute products as a group.
Competition with Differentiated Products
 The Monopolistically Competitive Firm in the Short
Run
 Short-run economic profits encourage new firms to enter
the market. This:
 Increases the number of products offered.
 Reduces demand faced by firms already in the market.
Short run
Monopolistic
Competition
Here
 AR is the average revenue curve,
 MR marginal revenue curve,
 SMC short-run marginal cost curve,
 SAC short-run average cost
MR and SMC intersect at point Q where output is OM
and price MP (i.e. OP’).
Thus the equilibrium output or the maximum profit
output is OM and the price MP or OP'.
Here, AR is above AC in the equilibrium point. As AR
is above AC, this firm is making abnormal profits in
the Short-run.
The super-profit is PT, i.e. the difference between AR
and AC at equilibrium point and the total
supernormal profit is PT x OM. This total super-
profit is represented by the rectangle P'PTT'
• If the demand and cost conditions are
less favorable the monopolistic
competitive firm may incur loss in
the short-run
• A firm incurs loss when the price is
less than average cost of production.
• MT is the average cost and OP' (i.e.
MP) is the price per unit at
equilibrium output OM. TP is the
loss per unit
• The total loss at an output OM is TP
x OM
• The rectangle PP'T'T represents the
total loss area in the short-run.
Long-run position
 If a firm is making profits other firms will enter the market
with similar products
 These substitutes will shift the original firm’s demand curve
to the left
 If firms are losing money, they exit the market, shifting the
remaining demand curves to the right
 In the long run remaining firms make zero profit
 Long run
 A firm under monopolistic competition will be in the long-
run equilibriums where
MC=MR
and
AC=AR
Here the average cost is not the minimum when the firm is at equilibrium. The
monopolistically competitive firm is not an optimum firm. It does not enjoy the full
advantage of the economies of large scale production. If an attempt is made to increase
production in order to attain the minimum cost of production per unit it will only result
in loss.
This is because MC now exceeds MR.
 Example: Retail Services, Hotel Industry
 Comparison of digital camera prices between
futurebazaar.com and shopping.indiatimes.com
 Comparison of Taj and Oberoi Hotels.
CONCLUSION
 So in monopolistic competitive industry we can see the
existence of too many firms, each producing at a level below
the optimum point or lowest average cost point.

 Thus each firm will face under-utilization of its production


capacity. So excess capacity is a feature of the firms under
monopolistic competition.

 As the lowest average cost point is not attained, the price


fixed by the monopolistic competitive firm will be high.
Thank ‘U’

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