MONOPOLISTIC COMPETITION: CHARACTERISTICS, EXAMPLES, ADVANTAGES - CULTURE VOCABULARY - 2025

The monopolistic competition is a market structure characterized by many companies that sell products similar but not identical, so that companies compete by other factors besides the price. Monopolistic competition is sometimes called imperfect competition, because the market structure is between pure monopoly and pure competition.

Economic efficiency is also moderate. Competitive markets deliver efficient results, monopoly markets show deadweight losses - monopolistic competition is somewhere in the middle, not as efficient as pure competition but less loss of efficiency than monopoly. The main benefit of monopolistic competition is the supply of a wide variety of goods and services.

Millionaires dividing the Country. Described in the painting are William Henry Vanderbilt, Jay Gould, Cyrus West Field, Russell Sage. Frederick Burr Opper (1857–1937).

The monopolistic competition model describes a common market structure in which firms have many competitors, but each one sells a slightly different product. Monopolistic competition as a market structure was first identified in the 1930s by the American economist Edward Chamberlin and the English economist Joan Robinson.

Many small businesses operate under conditions of monopolistic competition, including independent shops and restaurants. In the case of restaurants, each offers something different and possesses an element of uniqueness, but all are competing for essentially the same customers.

characteristics

Monopolistically competitive markets have the following characteristics:

• Each company makes independent decisions about price and production, based on its product, its market and its production costs.
• Knowledge is widely spread among participants, but it is unlikely to be perfect. For example, diners can go through all the menus available from restaurants in a city, before they make their choice. Once inside the restaurant, they can see the menu again, before ordering. However, they may not fully appreciate the restaurant or the food until after they have eaten.
• The entrepreneur has a more important role than in companies that are perfectly competitive due to the greater risks associated with decision-making.
• There is freedom to enter or exit the market, as there are no great barriers to entry or exit.
• A central characteristic of monopolistic competition is that the products are differentiated. There are four main types of differentiation:

1. Physical product differentiation, where companies use size, design, color, shape, performance, and features to make their products different. For example, consumer electronics can easily be physically differentiated.
2. Marketing differentiation, where companies try to differentiate their product by distinctive packaging and other promotional techniques. For example, breakfast cereals can be easily differentiated through packaging.
3. Differentiation of human capital, where the company creates differences through the skill of its employees, the level of training received, distinctive uniforms, etc.
4. Differentiation through distribution, including distribution through the mail or through Internet purchases, such as Amazon.com, which differs from traditional bookstores or department stores by selling online.

Companies that operate under monopolistic competition generally have to resort to advertising. Businesses are often in fierce competition with other (local) businesses offering a similar product or service and may need to advertise locally to let customers know their differences.

The most common advertising methods for these companies are through social media, local press, radio, local cinema, posters, brochures, and special promotions.

Monopolistically competitive firms are assumed to be profit maximizers because firms tend to be small and entrepreneurs are actively involved in running the business.

In the short term, windfall profits are possible, but in the long run, new companies are attracted to the industry, due to low barriers to entry, good knowledge and the opportunity to differentiate.

Where is there a monopolistic competition?

There is monopolistic competition:

• Where there are a large number of sellers, each with a small market share;
• Where there is little interdependence between companies so that they can price their product without taking into account the reaction of the competition;
• Where there is little possibility of collusion to fix prices.

The companies have some control over the price, but they are limited by the narrow substitution of similar products.

Product differentiation

Monopolistic competition cannot exist unless there is at least a perceived difference between the products provided by the companies in the industry. The main tool of competition is product differentiation, which results from differences in product quality, location, service, and advertising.

Product quality may differ in function, design, materials, and workmanship. Location is usually a good differentiator for products. In general, companies that are more conveniently located may charge higher prices. Similarly, stores that have extended hours also provide convenience.

For example, if cold medicine is needed in the middle of the night, you can go to a 24-hour pharmacy to buy the medicine, even at a higher price, as immediate relief is desired. Services include uptime, the company's reputation for service or product exchange, and speed of service.

There are many examples of product differentiation in modern economies. Restaurants serve different menu items at different prices in different locations, thus providing different degrees of time and local utility. Furniture stores sell different types of furniture made of different materials such as oak, walnut, maple, etc.

Clothing retailers sell different types of clothing at different prices, where people pay not only for their good workmanship, but also for items that suit their taste. Books are an excellent example of monopolistic competition because they vary in their prices, quality of workmanship, readability, quality of illustrations, or their absence, and they differ depending on the target audience and topics, such as textbooks and college novels.

Each major category will have many minor categories and minor categories will also be distinguished by the writing styles of the authors.

A new front of monopolistic competition occurs among online retailers. In this case, your location doesn't really matter. What matters is the convenience of shopping online, how well the products are described, and the product recommendations by consumers who actually bought the product. Other important qualities include the reliability of the company and the return policies.

Easy entry and exit

Since most companies that participate in monopolistic competition have low capital requirements, companies can easily enter or exit the market.

However, the amount of investment is generally higher than that used for pure competition, as there is an expense to develop differentiated products and advertising expenses. One of the main characteristics of monopolistic competition is the constantly changing range of products that compete in the market.

Companies must continually experiment with products, prices, and advertising to see which one produces the most profit. Although this leads to productive and allocation inefficiency, the variety of goods offered more than compensates for this inefficiency.

With ease of entry and exit, companies will enter a market in which current companies are profiting and exit the market when companies are losing money, thus allowing the remaining companies to make a normal profit.

Product differentiation

Because all products serve the same purpose, there are relatively few options for sellers to differentiate their offerings from other companies. There may be "discount" varieties that are of lower quality, but it is difficult to say whether the higher priced options are in fact better.

This uncertainty results from imperfect information: the average consumer does not know the exact differences between the different products, nor what is the right price for any of them. Monopolistic competition tends to lead to heavy marketing, because different firms need to distinguish broadly similar products.

A business might choose to lower the price of its cleaning product, sacrificing a higher profit margin for higher sales. Another might take the opposite route, raising the price and using packaging that suggests quality and sophistication. A third party could sell themselves as more environmentally friendly, displaying a stamp of approval from an environmental watchdog.

Decision making

Monopolistic competition implies that there are enough firms in the industry and that a firm's decision does not set off a chain reaction. In an oligopoly, a price reduction by a company can trigger a price war, but this is not the case in monopolistic competition.

Advertising and brands

When there are only small differences between products, product differentiation would not be useful unless it can be communicated to the consumer. This communication is achieved through advertising, brand names and packaging, which are forms of competition without prices, since they force consumers to pay a higher price if they perceive, with or without reason, that quality is higher.

Advertising serves to inform customers of differentiated products and why they are superior over close substitutes. Even if there are no differences, as is often the case between store brands and national brands, or between a brand-name drug and its generics, a consumer may prefer one brand over another due to advertising.

The brand

The brand serves to distinguish identical or nearly identical products and to increase the value of advertising in which the brand name serves as an object to which desirable characteristics can be associated. Advertising is used to create brand awareness or loyalty to a particular company.

Advertising can also be used to build a brand image, which can be associated with a lifestyle, or with words or images that people will associate with the brand, rather than describing the specific characteristics of the product itself. This type of advertising is often used for products that are mostly differentiated by the personal taste of consumers, such as advertising for soft drinks.

The crowd drag effect is also often used, and occurs when advertising tries to convey that more people prefer a particular brand. The image of celebrities is widely used in this type of advertising.

The main benefit of brand names for consumers is that they allow them to easily identify the product and brands are well protected by law, so that competing companies cannot mislead customers by closely mimicking an established brand.

On the other hand, brand names provide an incentive for the firm to maintain product quality so that the brand continues to be perceived of great value by consumers. Advertising also helps companies increase market share and build brand awareness.

Advertising can help a business increase the quantity of production, which generally leads to lower prices, as fixed costs are spread over a larger quantity of product. Advertising allows startups to attract customers who buy competitive products, thus allowing easier entry of new firms. Advertising also informs customers of price differences so that they can buy at lower prices.

In the past, professional firms, such as doctors and lawyers, were prohibited from advertising prices because it was argued that it was unprofessional. However, the courts decided that the real reason was to limit competition, so they repealed the many state laws that prohibited these forms of advertising. However, advertising has its critics.

Advertising often does not convey true information, or it transmits misleading information, causing consumers to buy products that do not meet their interests. Even comparisons with competing products are often misleading. Some people argue that if a company is willing to spend a lot of money on advertising, they will have an incentive to maintain good quality so that people continue to buy the product.

However, many products and services are marketed even when they are not in the best interest of the consumer, such as debt consolidation services. Also, it is difficult to directly compare many products or services, since the benefits and costs are not directly observable before buying, such as services provided by professionals, such as doctors, dentists or lawyers.

Many people also pay more money for identical products due to advertising. Similarly, people often buy brand name drugs over generics, even though generics are just as effective. Advertising has its advantages and disadvantages, but it will remain one of the primary tools of monopolistically competitive companies.

Elasticity of demand

Due to the range of similar offers, demand is highly elastic in monopolistic competition. In other words, demand is very sensitive to price changes.

Economic gain

In the short term, companies can make excess profits. However, because entry barriers are low, other companies have an incentive to enter the market, increasing competition, until the total economic benefit is zero.

Note that economic benefits are not the same as accounting benefits; A company that records a positive net profit can have zero economic benefit, since it incorporates opportunity costs.

Examples of monopolistic competition

Companies with monopolistic competition are more common in industries where differentiation is possible, such as:

-Restaurants

- Hotels and bars

- General retail

-Consumer services, such as hairdressers

Advantage

Monopolistic competition can bring the following advantages:

• There are no significant barriers to entry.
• Differentiation creates diversity, choice, and utility. For example, a typical high street in any city will have a number of different restaurant options to choose from.
• The market is more efficient than monopoly but less efficient than perfect competition - less efficient and productively less efficient. However, they can be dynamically efficient, innovative in terms of new production processes or new products. For example, retailers often constantly have to develop new ways to attract and retain local consumers.

Disadvantages

There are several potential downsides associated with monopolistic competition, including:

• Some differentiation does not create utility but creates unnecessary waste, such as overpacking. Advertising can also be seen as wasteful, although most of it is informative and not persuasive.
• Assuming profit maximization, there is allocative inefficiency in both the long and short term. This is because the price is above the marginal cost in both cases. In the long run, the company is less ineffective, but it is still inefficient.

References

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