Essay # 1. Definition of Monopolistic Competition: Monopolistic Competition is a market model wherein a large number of buyers purchase heterogenous products that are close substitutes from a large number of sellers. Sellers can vary their products, or act on the demand for their product through sales blogger.comted Reading Time: 8 mins Competition within the Monopolistic Competition structure is highly competitive with each having some area of market control. Monopolistic Competition in effect is a cross between Perfect Competition and the Monopoly. Within the real world, there are perhaps half of all production are monopolistic competitive businesses/organizations/ individuals · Essay on Monopolistic Competition essay In the monopolistic form of market, there are a large number of sellers of a particular product and each seller sells slightly differentiated, but not
Monopolistic Competition Free Essay Example
Monopolistic Competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms are able to differentiate their products.
Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term.
The firm is able to collect a price based on the average revenue AR curve. The difference between the firms average revenue and average cost, monopolistic competition essay, multiplied by the quantity sold Qsgives the total profit. Task done as described and better, responded to all my questions promptly too!
Long-run equilibrium of the firm under monopolistic competition: The firm still produces where marginal cost and marginal revenue are equal; however, the demand curve and AR has shifted as other firms entered the market and increased competition. The firm no longer sells its goods above average cost and can no longer claim an economic profit. MC firms sell products that have real or perceived non-price differences. However, the differences are not so great as to eliminate other goods as substitutes.
Technically, the cross price elasticity of demand between goods in such a market is positive. In fact, the XED would be high. MC goods are best described as close but imperfect substitutes. The goods perform the same basic functions but have differences in qualities such as type, style, monopolistic competition essay, quality, reputation, appearance, and location that tend to distinguish them from each other.
For example, the basic function of motor vehicles is basically the same — to move people and objects from point A to B in reasonable comfort and safety. Yet there are many different types of motor vehicles such as motor scooters, monopolistic competition essay cycles, trucks, cars and SUVs and many variations even within these categories.
There are many firms in each MC product group and many firms on the side lines prepared to enter the market. For example, a firm could cut prices and increase sales without fear that its actions will prompt retaliatory responses from competitors.
How many firms will an MC market structure support at market equilibrium? The answer depends on factors such as fixed costs, economies of scale and the degree of product differentiation.
For example, the higher the fixed costs, the fewer firms the market will support. Also the greater the degree of product differentiation — the more the firm can separate itself from the pack — the fewer firms there will be at market equilibrium. In the long run there is free entry and exit. This assumption implies that there are low startup costs, no sunk costs and no exit costs.
The cost of entering and exit is very low, monopolistic competition essay. Each MC firm independently sets the terms of exchange for its product, monopolistic competition essay. The firm gives no consideration to what effect its decision may have on competitors. The theory is that any action will have monopolistic competition essay a negligible effect on the overall market demand that an MC firm can act without fear of prompting heightened competition.
In other words each firm feels free to set prices as if it were a monopoly rather than an oligopoly. MC firms have some degree of market power. Market power means that the firm has control over the terms and conditions of monopolistic competition essay. An MC firm can raise its prices without losing all its customers.
The firm can also lower prices without triggering a potentially ruinous price war with competitors. Market power also means that an MC firm faces a downward sloping demand curve.
There are two sources of inefficiency in the MC market structure. The monopoly power possessed by an MC firm means that at its profit maximizing level of production there will be a net loss of consumer and producer surplus.
The second source of inefficiency is the fact that MC firms operate with excess capacity. Both a PC and MC firm will operate at a point where demand or price equals average cost. For a PC firm this equilibrium condition occurs where the perfectly elastic demand curve equals minimum average cost.
Thus in the long run the demand curve will be tangential to the long run average cost curve at a point to the left of its minimum. The result is excess capacity. While monopolistically competitive firms are inefficient, it is usually the case that the costs of regulating prices for every product that is sold in monopolistic competition far exceed the benefits of such regulation.
That alone would be an improvement on the current situation. A monopolistically competitive firm might be said to be marginally inefficient because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market is productively inefficient market structure because marginal cost is less than price in the long run.
However, monopolistically competitive markets are allocatively efficient. Another concern is that monopolistic competition fosters advertising and the creation of brand names. Advertising induces customers into spending more on products because of the name associated with them rather than because of rational factors, monopolistic competition essay. Defenders of advertising monopolistic competition essay this, arguing that brand names can represent a guarantee of quality and that advertising helps reduce the cost to consumers of weighing the tradeoffs of numerous competing brands.
There are unique information and information processing costs associated with selecting a brand in a monopolistically competitive monopolistic competition essay. In a monopoly market, the consumer is faced with a single brand, making information gathering relatively inexpensive. In a perfectly competitive industry, the consumer is faced with many brands, but because the brands are virtually identical information gathering is also relatively monopolistic competition essay. In a monopolistically competitive market, the monopolistic competition essay must collect and process information on a large number of different brands to be able to select the best of them.
In many cases, the cost of gathering information necessary to selecting the best brand can exceed the benefit of consuming the best brand instead of a randomly selected brand. The result is that the consumer is confused. Some brands gain prestige value and can extract an additional price for that.
Evidence suggests that consumers use information obtained from advertising not only to assess the single brand advertised, but also to infer the possible existence of brands that the consumer has, heretofore, not observed, as well as to infer consumer satisfaction with brands similar to the advertised brand.
In many U. markets, producers practice product differentiation by altering the physical composition of products, using special packaging, or simply claiming to have superior products based on brand images or advertising. Toothpastes, toilet papers, computer software and operating systems are examples of differentiated products.
This is not a trivial amount. In other words, the long-run never arrived for these firms, monopolistic competition essay. Pricing decisions tend to be the most important decisions made by any firm in any kind of market structure. The concept of pricing has already been discussed in unit. The price is affected by the competitive structure of a market because the firm is an integral part of the market in which it operates, monopolistic competition essay.
We have examined the two extreme markets monopolistic competition essay. monopoly and perfect competition in the previous unit. In this unit the focus is on monopolistic competition and oligopoly, which lie in between the two extremes and are therefore more applicable to real world situations.
Monopolistic competition normally exists when the market has many sellers selling differentiated products, monopolistic competition essay, for example, retail trade, whereas oligopoly is said to be a stable form of a market where a few sellers operate in the market and each firm has a certain amount of share of the market and the firms recognize their dependence on each other.
The features of monopolistic and oligopoly arediscussed in detail in this unit. Edward Chamberlin, who developed the model of monopolistic competition, observed that in a market with large monopolistic competition essay of sellers, the products of individual firms are not at all homogeneous, for example, soaps used for personal wash.
Each brand has a specific characteristic, be it packaging, fragrance, look etc, monopolistic competition essay. This is the reason that each brand is sold Pricing Decisions individually in the market, monopolistic competition essay. This shows that each brand is highly differentiated in the minds of the consumers, monopolistic competition essay. The effectiveness of the particular brand may be attributed to continuous usage and heavy advertising.
As defined by Joe S, monopolistic competition essay. Take the example of Liril and Cinthol. Both are soaps for personal care but the brands are different. Under monopolistic competition, the firm has some freedom to fix the price i. because of differentiation a firm will not lose all customers when it increases its price. Monopolistic competition is said to be the combination of perfect competition as well as monopoly because it has the features of both perfect competition and monopoly.
Monopolistic competition essay is closer in spirit to a perfectly competitive market, but because of monopolistic competition essay differentiation, firms have some control over price.
The characteristic features of monopolistic competition are as follows: A large number of sellers: Monopolistic market has a large number of sellers of a product but each seller acts independently and has no influence on others. A large number of buyers: Just like the sellers, monopolistic competition essay, the market has a large number of buyers of a product and each buyer acts independently. Sufficient Knowledge: The buyers have sufficient knowledge about the product to be purchased and have a number of options available to choose from.
For example, we have a number of petrol pumps in the city. Here accessibility is likely to be an important factor, monopolistic competition essay. Differentiated Products: The monopolistic market categorically offers differentiated products, though the difference in products is marginal, for example, toothpaste. Free Entry and Exit: In monopolistic competition, entry and exit are quite easy and the buyers and sellers are free to enter and exit the market at their own will.
Nature of the Demand Curve. The demand curve of the monopolistic competition has the following characteristics: Less than perfectly elastic: In monopolistic competition, no single firm dominates the industry and due to product differentiation, the product of each firm seems to be a close substitute, though not a perfect substitute for the products of the competitors.
Due to this, monopolistic competition essay firm in question has high elasticity of demand. Demand curve slopes downward: In monopolistic competition, the demand curve facing the firm monopolistic competition essay downward due to the varied tastes and preferences of consumers attached to the products of specific sellers. This implies that the demand curve is not perfectly elastic.
In monopolistic competition, every firm has a certain degree of monopoly power i. every firm can take initiative to set a price. In this case the price of the product of the firm is determined by its cost function,demand, its objective and certain government regulations, if there are any.
As the price of a particular product of a firm reduces, monopolistic competition essay, it attracts customers from its rival groups as defined by Chamberlin.
Episode 29: Monopolistic Competition
, time: 5:56Monopolistic Competition Essay - Words | Bartleby
· In monopolistic competition, there are close substitutes in the sense that products are different in terms of size, colour, packaging, brand, price, shape and so on as in case of chocolates, soap, toothpaste et cetra but in monopoly, there is no close substitute of the good. We Will Write a Custom Essay Specifically For You For Only $/page!Estimated Reading Time: 10 mins Competition within the Monopolistic Competition structure is highly competitive with each having some area of market control. Monopolistic Competition in effect is a cross between Perfect Competition and the Monopoly. Within the real world, there are perhaps half of all production are monopolistic competitive businesses/organizations/ individuals · Monopolistic competition as a market structure was first identified in the s by American economist Edward Chamberlin, and English economist Joan Robinson. Many small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and blogger.comted Reading Time: 7 mins
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