Monopolistic Competition

By: EconomyWatch   Date: 14 October 2010

About The Author

EconomyWatch

The core Content Team our economy, industry, investing and personal finance reference articles.

EconomyWatch, Content Team

 

  • Dot Div
  •      

The concept of Monopolistic Competition is concerned with the common form of a market and its competitions. Monopolistic Competition is present in various industrial sectors such as apparels, restaurants, footwear, food and in the service sectors as well.

Monopolistically competitive markets: Distinctive features

  • In a monopolistically competitive market, there is abundance of both producers and consumers.
  • The purchasing preferences of the customers are clearly expressed in a monopolisticaly competitive market.
  • To survive in a monopolistically competitive market, each seller tries to distinguish his products from that of other competitors, for increasing their saleabilities.
  • The entry and exit to a monopolistically competitive market is subject to certain restrictions.
  • Here, the producers are endowed with considerable power to regulate the market prices.
  • Monopolistic competitive market is essentially heterogeneous in nature.
  • Such market leads to the rise of non-price competitions.
  • At equilibrium, firms reach a zero economic profit situation where no firm enters or exits the industry. A positive profit will imply increase in the number of firms in the industry, and vice versa is the case for negative profit. This allow the firms to exert substantial influence over the existing market by increasing the prices and not losing any consumer.
  • The production of goods in a monopolistically competitive market never act as ideal substitutes, but as close substitutes .

    Equilibrium in the long-run monopolistic competitive market:

    Let us suppose that Firm A formulates a strategy to reap higher profits. The monopolistic competitive Firm B duplicates this strategy. As a result, there is a decline in the price level. In the long-run, the price will reduce to the level where economic profit is zero. Long-run equilibrium will be acquired at this point.

    Drawbacks of the monopolistic competitive markets:

  • Monopolistic competitive markets are inefficient in handling the cost of the regulating prices of each sold good. This is because the output of the concerned firms involves substantial production costs.
  • Such markets are known for extensive promotions of advertisements for the sake of developing brand names, making the consumers unnecessarily spendthrifts. Moreover, this also increases the expenditure on unnecessary advertising-related activities .

  • Dot Div
  •      

Most Popular in Economic Theory

Related Links
blog comments powered by Disqus