what is monopolistic competition essay

• Monopolistic Competition

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 08, 2023

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Table of contents, what is monopolistic competition.

Monopolistic competition is a market structure where there are many small firms that produce differentiated products. Unlike perfect competition, each firm has some market power due to product differentiation, which allows them to charge slightly higher prices than their competitors .

However, because there are many firms producing similar but not identical products, consumers have a range of choices and can switch to another product if the price of one becomes too high.

As a result, firms in a monopolistically competitive market must engage in non-price competition, such as advertising and product differentiation, to attract customers.

Characteristics of Monopolistic Competition

Monopolistic competition is characterized by several key features:

Large Number of Small Firms . There are many firms operating in the market, none of which dominates the market.

Differentiated Products . Each firm produces a product that is distinct from its competitors' products, either through quality, design, or branding.

Some Market Power . Each firm has some control over the price of its product due to product differentiation, but this control is limited because there are many substitutes available to consumers.

Non-price Competition . Firms in a monopolistically competitive market compete using advertising, product development, and other marketing strategies to attract customers rather than relying on lower prices.

These characteristics create a market structure that combines elements of both monopoly and perfect competition, resulting in a market where firms have some market power, but not enough to eliminate competition altogether.

Examples of Monopolistic Competition

Monopolistic competition can be observed in a variety of industries, but here are some examples:

Restaurants

These are a good example of monopolistically competitive markets because they offer different types of cuisine, ambiance, and price range, which creates a range of options for consumers.

This differentiation allows each restaurant to have some control over its pricing strategy, but not enough to eliminate competition.

Clothing companies differentiate their products through design, quality, and brand image. This differentiation creates a range of options for consumers, giving each clothing company some market power over its pricing strategy.

Consumers often choose clothing based on brand image, style, and quality, rather than just the price.

Electronics

Companies producing electronics such as smartphones, laptops, and televisions are also good examples of monopolistically competitive markets. These companies differentiate their products through technology, features, and design.

For example, Apple's iPhone and Samsung's Galaxy phones have different designs, features, and operating systems, which create a range of options for consumers.

These industries have many firms competing for market share and offering slightly different products, making them good examples of monopolistically competitive markets.

Benefits of Monopolistic Competition

Monopolistic competition offers several benefits to both consumers and firms:

Consumer Choice

In a monopolistically competitive market, consumers have a range of options to choose from, leading to greater consumer satisfaction and utility.

Product Differentiation

Firms in a monopolistically competitive market differentiate their products, which encourages innovation and leads to a greater variety of products for consumers.

The need for product differentiation in a monopolistically competitive market drives firms to innovate and create new products, technologies, and marketing strategies to attract consumers.

This can lead to technological advancements and greater efficiency in the market.

Overall, monopolistic competition encourages competition, innovation, and variety, benefiting both consumers and firms in the market.

Challenges of Monopolistic Competition

While monopolistic competition offers some benefits, it also presents several challenges:

Barriers to Entry

The product differentiation in monopolistically competitive markets can make it difficult for new firms to enter the market and compete with established firms. This can lead to reduced competition and market inefficiencies.

Higher Prices for Consumers

Firms in a monopolistically competitive market have some market power, which allows them to charge slightly higher prices than in a perfectly competitive market.

This can lead to higher prices for consumers and reduced consumer surplus.

Inefficient Allocation of Resources

Monopolistic competition can lead to an inefficient allocation of resources, as firms may spend resources on advertising and product differentiation rather than on improving their production process.

This can result in less efficient use of resources and higher costs for consumers.

Applications of Monopolistic Competition

Monopolistic competition has several practical applications in business and government policies:

Business Strategy and Marketing

Firms in a monopolistically competitive market must focus on product differentiation and non-price competition to attract customers.

This can include investing in research and development, creating unique brand identities, and developing marketing campaigns to promote their products.

Government Regulation and Antitrust Policies

Because monopolistic competition can lead to market inefficiencies and reduced competition, governments may regulate these markets to promote fair competition and protect consumers.

Antitrust laws may be used to prevent monopolistic practices, such as price-fixing, collusion, or abuse of market power.

Understanding the characteristics and implications of monopolistic competition can help businesses make strategic decisions and help governments develop effective policies to promote competition and protect consumers.

Comparison of Monopolistic Competition with Other Market Structures

Monopolistic competition is just one of several market structures, each with its unique features:

• Perfect Competition

In a perfectly competitive market , many small firms sell identical products with no market power. Prices are determined by supply and demand , and there are no barriers to entry or exit.

Unlike the monopolistic competition, there is no product differentiation or non-price competition.

In a monopoly, there is only one firm in the market with complete market power. The firm can set prices and restrict output without facing competition. There are significant barriers to entry, making it difficult for new firms to enter the market.

Monopolistic competition sits between the extreme market structures of perfect competition and monopoly, with some market power due to product differentiation but still facing competition from other firms.

In an oligopoly, there are only a few firms in the market, each with a significant market share.

The firms may have some market power and engage in non-price competition, but there are significant barriers to entry and exit, making it difficult for new firms to enter the market.

Oligopoly is similar to monopolistic competition in that there are barriers to entry and a small number of firms, but with more market power and less product differentiation.

Final Thoughts

Monopolistic competition is a market structure in which many small firms produce differentiated products, leading to some market power and non-price competition.

This market structure offers benefits such as consumer choice, product differentiation, and innovation but also presents challenges such as barriers to entry, higher prices for consumers, and inefficient allocation of resources.

It is important to note that monopolistic competition is just one of several market structures, each with unique features and implications. You can speak to a wealth management professional to learn more about monopolistic competition.

Monopolistic Competition FAQs

What is monopolistic competition, and how does it differ from perfect competition.

Monopolistic competition is a market structure where many small firms produce differentiated products, creating some market power but still facing competition. Unlike perfect competition, firms have some control over the price of their product due to product differentiation.

What are some examples of industries that demonstrate monopolistic competition?

Monopolistic competition can be observed in industries such as restaurants, clothing, and electronics, where firms differentiate their products through features, design, and branding to attract customers.

What are the benefits of monopolistic competition?

Monopolistic competition offers benefits such as consumer choice, product differentiation, and innovation, as firms must constantly develop new products, technologies, and marketing strategies to remain competitive.

What are the challenges of monopolistic competition?

The need for product differentiation can create barriers to entry, making it difficult for new firms to enter the market and compete with established firms. This can lead to market inefficiencies and higher prices for consumers. Furthermore, monopolistic competition can result in an inefficient allocation of resources.

How can businesses and policymakers navigate the challenges of monopolistic competition?

Understanding the characteristics, benefits, and challenges of monopolistic competition is essential for businesses and policymakers seeking to navigate this market structure effectively. This includes investing in research and development, creating unique brand identities, and developing marketing campaigns to promote their products. Governments may also regulate these markets to promote fair competition and protect consumers through antitrust laws.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Monopolistic Competition – definition, diagram and examples

Definition: 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 can 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.

A monopolistic competitive industry has the following features:

• Many firms.
• Freedom of entry and exit.
• Firms produce differentiated products.
• Firms have price inelastic demand; they are price makers because the good is highly differentiated
• Firms make normal profits in the long run but could make supernormal profits in the short term
• Firms are allocatively and productively inefficient.

Diagram monopolistic competition short run

The firm maximises profit where MR=MC. This is at output Q1 and price P1, leading to supernormal profit

Monopolistic competition long run

In the long-run, supernormal profit encourages new firms to enter. This reduces demand for existing firms and leads to normal profit. I

Efficiency of firms in monopolistic competition

• Allocative inefficient. The above diagrams show a price set above marginal cost
• Productive inefficiency. The above diagram shows a firm not producing on the lowest point of AC curve
• Dynamic efficiency. This is possible as firms have profit to invest in research and development.
• X-efficiency. This is possible as the firm does face competitive pressures to cut cost and provide better products.

Examples of monopolistic competition

• Restaurants – restaurants compete on quality of food as much as price. Product differentiation is a key element of the business. There are relatively low barriers to entry in setting up a new restaurant.
• Hairdressers. A service which will give firms a reputation for the quality of their hair-cutting.
• Clothing. Designer label clothes are about the brand and product differentiation
• TV programmes – globalisation has increased the diversity of tv programmes from networks around the world. Consumers can choose between domestic channels but also imports from other countries and new services, such as Netflix.

Limitations of the model of monopolistic competition

• Some firms will be better at brand differentiation and therefore, in the real world, they will be able to make supernormal profit.
• New firms will not be seen as a close substitute.
• There is considerable overlap with oligopoly – except the model of monopolistic competition assumes no barriers to entry. In the real world, there are likely to be at least some barriers to entry
• If a firm has strong brand loyalty and product differentiation – this itself becomes a barrier to entry. A new firm can’t easily capture the brand loyalty.
• Many industries, we may describe as monopolistically competitive are very profitable, so the assumption of normal profits is too simplistic.

Key difference with monopoly

In monopolistic competition there are no barriers to entry. Therefore in long run, the market will be competitive, with firms making normal profit.

Key difference with perfect competition

In Monopolistic competition, firms do produce differentiated products, therefore, they are not price takers (perfectly elastic demand). They have inelastic demand.

New trade theory and monopolistic competition

New trade theory places importance on the model of monopolistic competition for explaining trends in trade patterns. New trade theory suggests that a key element of product development is the drive for product differentiation – creating strong brands and new features for products. Therefore, specialisation doesn’t need to be based on traditional theories of comparative advantage, but we can have countries both importing and exporting the same good. For example, we import Italian fashion labels and export British fashion labels. To consumers, the importance is the choice of goods.

Readers Question : if all firms in a monopolistic competitive industry were to merge would that firm produce as many different brands or just one brand?

Interesting question. I think it is an open-ended question with many different possibilities. One approach is to think how firms in different industries may behave if they did merge. Bearing in mind the model of monopolistic competition doesn’t always stand up to scrutiny too well in the real world.

If the firms merged together, there is no certainty how they would behave.

In some industries, it makes sense to have many differentiated brands creating an illusion of competition and providing a barrier to entry.

How many soap powders are there? About 35. But, most of these brands are owned by two companies, Unilever and Proctor and Gamble. Having brand proliferation means it is harder for a new firm to enter the market. This is because a new firm would have to compete against 30 established brands as opposed to 2. There is less chance of getting a good market share with so many brands. Therefore the new firm would have an incentive to keep different brands to deter competitors.

However, if you have merge different brands there may be economies of scale. You can devote more resources and investment to improving that particular product and maximising its efficiency. This might be appropriate for an industry like computer software or computers. There used to be many different brands of computers until the pc came to dominate.

Are the different brands catering to different sectors of the market. If you take the restaurant business, there is a big difference between Chinese and Indian. If 2 restaurants merge, they would be better off retaining distinct business. It would make no sense to have a restaurant which offered a mixture of Chinese/Indian – consumers would trust it less.

If you fear the arrival of a powerful company, it might be good to consolidate your brands. For example, there are many small search engines, but they would be better off combining forces to compete against the mighty Google.

43 thoughts on “Monopolistic Competition – definition, diagram and examples”

Was requesting for economic restrictions for monopolistic competition

All great actions and thoughts have a negligible beginning.

I work hard, I insist, I will succeed

Thanks a lot sir you explain easily the topic and this is very helpful for me

it was helpful kindly send some more important information to my gmail, will appreciate

why is not possible for monopoly to exist to a large extent in agriculture?

hello sir, Could you please tell me that which theme you uses ?

Explain the dertemination of the optimal price and output combination in a monopolistic competition.use the resulting equilibrium to illustrate the statement that ‘production inefficient is a necessary price to pay for product variety’ comment on this statement (25)

hi, how is a monopolistic competition different from monopoly? thanks

In monopolistic competition there are no barriers to entry. Theoretically, if firms have no barriers to entry or exit, there will be mass competition as everyone wants to get a piece of the super normal profit. If this happens, there will be decreased demand for a specific product or service, as theres more substitue goods. leading to firms in monopolistic competition acheiving normal profit in the long run. Whereas with monopolies, the low competition means they control supply, without the threat of competition offering more supply to boost market cap and sales, leading to them being able to keep demand constant and acheive supernormal profits in both the long and short run.

Monopoly cannot exist in large extent in agriculture because the Monopoly you are talking about is short run

I’m happy to have learnt something new

Comments are closed.

10.1 Monopolistic Competition

Learning objectives.

By the end of this section, you will be able to:

• Explain the significance of differentiated products
• Describe how a monopolistic competitor chooses price and quantity
• Discuss entry, exit, and efficiency as they pertain to monopolistic competition
• Analyze how advertising can impact monopolistic competition

Monopolistic competition involves many firms competing against each other, but selling products that are distinctive in some way. Examples include stores that sell different styles of clothing; restaurants or grocery stores that sell a variety of food; and even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names. There are over 600,000 restaurants in the United States. When products are distinctive, each firm has a mini-monopoly on its particular style or flavor or brand name. However, firms producing such products must also compete with other styles and flavors and brand names. The term “monopolistic competition” captures this mixture of mini-monopoly and tough competition, and the following Clear It Up feature introduces its derivation.

Clear It Up

Who invented the theory of imperfect competition.

Two economists independently but simultaneously developed the theory of imperfect competition in 1933. The first was Edward Chamberlin of Harvard University who published The Economics of Monopolistic Competition . The second was Joan Robinson of Cambridge University who published The Economics of Imperfect Competition . Robinson subsequently became interested in macroeconomics and she became a prominent Keynesian, and later a post-Keynesian economist. (See the Welcome to Economics! and The Keynesian Perspective chapters for more on Keynes.)

Differentiated Products

A firm can try to make its products different from those of its competitors in several ways: physical aspects of the product, location from which it sells the product, intangible aspects of the product, and perceptions of the product. We call products that are distinctive in one of these ways differentiated products .

Physical aspects of a product include all the phrases you hear in advertisements: unbreakable bottle, nonstick surface, freezer-to-microwave, non-shrink, extra spicy, newly redesigned for your comfort. A firm's location can also create a difference between producers. For example, a gas station located at a heavily traveled intersection can probably sell more gas, because more cars drive by that corner. A supplier to an automobile manufacturer may find that it is an advantage to locate close to the car factory.

Intangible aspects can differentiate a product, too. Some intangible aspects may be promises like a guarantee of satisfaction or money back, a reputation for high quality, services like free delivery, or offering a loan to purchase the product. Finally, product differentiation may occur in the minds of buyers. For example, many people could not tell the difference in taste between common varieties of ketchup or mayonnaise if they were blindfolded but, because of past habits and advertising, they have strong preferences for certain brands. Advertising can play a role in shaping these intangible preferences.

The concept of differentiated products is closely related to the degree of variety that is available. If everyone in the economy wore only blue jeans, ate only white bread, and drank only tap water, then the markets for clothing, food, and drink would be much closer to perfectly competitive. The variety of styles, flavors, locations, and characteristics creates product differentiation and monopolistic competition.

Perceived Demand for a Monopolistic Competitor

A monopolistically competitive firm perceives a demand for its goods that is an intermediate case between monopoly and competition. Figure 10.2 offers a reminder that the demand curve that a perfectly competitive firm faces is perfectly elastic or flat, because the perfectly competitive firm can sell any quantity it wishes at the prevailing market price . In contrast, the demand curve, as faced by a monopolist, is the market demand curve, since a monopolist is the only firm in the market, and hence is downward sloping.

The demand curve as a monopolistic competitor faces is not flat, but rather downward-sloping, which means that the monopolistic competitor can raise its price without losing all of its customers or lower the price and gain more customers. Since there are substitutes, the demand curve facing a monopolistically competitive firm is more elastic than that of a monopoly where there are no close substitutes. If a monopolist raises its price, some consumers will choose not to purchase its product—but they will then need to buy a completely different product. However, when a monopolistic competitor raises its price, some consumers will choose not to purchase the product at all, but others will choose to buy a similar product from another firm. If a monopolistic competitor raises its price, it will not lose as many customers as would a perfectly competitive firm, but it will lose more customers than would a monopoly that raised its prices.

At a glance, the demand curves that a monopoly and a monopolistic competitor face look similar—that is, they both slope down. However, the underlying economic meaning of these perceived demand curves is different, because a monopolist faces the market demand curve and a monopolistic competitor does not. Rather, a monopolistically competitive firm’s demand curve is but one of many firms that make up the “before” market demand curve. Are you following? If so, how would you categorize the market for golf balls? Take a swing, then see the following Clear It Up feature.

Are golf balls really differentiated products?

Monopolistic competition refers to an industry that has more than a few firms, each offering a product which, from the consumer’s perspective, is different from its competitors. The U.S. Golf Association runs a laboratory that tests 20,000 golf balls a year. There are strict rules for what makes a golf ball legal. A ball's weight cannot exceed 1.620 ounces and its diameter cannot be less than 1.680 inches (which is a weight of 45.93 grams and a diameter of 42.67 millimeters, in case you were wondering). The Association also tests the balls by hitting them at different speeds. For example, the distance test involves having a mechanical golfer hit the ball with a titanium driver and a swing speed of 120 miles per hour. As the testing center explains: “The USGA system then uses an array of sensors that accurately measure the flight of a golf ball during a short, indoor trajectory from a ball launcher. From this flight data, a computer calculates the lift and drag forces that are generated by the speed, spin, and dimple pattern of the ball. ... The distance limit is 317 yards.”

Over 1800 golf balls made by more than 100 companies meet the USGA standards. The balls do differ in various ways, such as the pattern of dimples on the ball, the types of plastic on the cover and in the cores, and other factors. Since all balls need to conform to the USGA tests, they are much more alike than different. In other words, golf ball manufacturers are monopolistically competitive.

However, retail sales of golf balls are about $500 million per year, which means that many large companies have a powerful incentive to persuade players that golf balls are highly differentiated and that it makes a huge difference which one you choose. Sure, Tiger Woods can tell the difference. For the average amateur golfer who plays a few times a summer—and who loses many golf balls to the woods and lake and needs to buy new ones—most golf balls are pretty much indistinguishable.

How a Monopolistic Competitor Chooses Price and Quantity

The monopolistically competitive firm decides on its profit-maximizing quantity and price in much the same way as a monopolist. A monopolistic competitor, like a monopolist, faces a downward-sloping demand curve, and so it will choose some combination of price and quantity along its perceived demand curve.

As an example of a profit-maximizing monopolistic competitor, consider the Authentic Chinese Pizza store, which serves pizza with cheese, sweet and sour sauce, and your choice of vegetables and meats. Although Authentic Chinese Pizza must compete against other pizza businesses and restaurants, it has a differentiated product. The firm’s perceived demand curve is downward sloping, as Figure 10.3 shows and the first two columns of Table 10.1 .

We can multiply the combinations of price and quantity at each point on the demand curve to calculate the total revenue that the firm would receive, which is in the third column of Table 10.1 . We calculate marginal revenue, in the fourth column, as the change in total revenue divided by the change in quantity. The final columns of Table 10.1 show total cost, marginal cost, and average cost. As always, we calculate marginal cost by dividing the change in total cost by the change in quantity, while we calculate average cost by dividing total cost by quantity. The following Work It Out feature shows how these firms calculate how much of their products to supply at what price.

Work It Out

How a monopolistic competitor determines how much to produce and at what price.

The process by which a monopolistic competitor chooses its profit-maximizing quantity and price resembles closely how a monopoly makes these decisions process. First, the firm selects the profit-maximizing quantity to produce. Then the firm decides what price to charge for that quantity.

Step 1. The monopolistic competitor determines its profit-maximizing level of output. In this case, the Authentic Chinese Pizza company will determine the profit-maximizing quantity to produce by considering its marginal revenues and marginal costs. Two scenarios are possible:

• If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then the firm should keep expanding production, because each marginal unit is adding to profit by bringing in more revenue than its cost. In this way, the firm will produce up to the quantity where MR = MC.
• If the firm is producing at a quantity where marginal costs exceed marginal revenue, then each marginal unit is costing more than the revenue it brings in, and the firm will increase its profits by reducing the quantity of output until MR = MC.

In this example, MR and MC intersect at a quantity of 40, which is the profit-maximizing level of output for the firm.

Step 2. The monopolistic competitor decides what price to charge. When the firm has determined its profit-maximizing quantity of output, it can then look to its perceived demand curve to find out what it can charge for that quantity of output. On the graph, we show this process as a vertical line reaching up through the profit-maximizing quantity until it hits the firm’s perceived demand curve. For Authentic Chinese Pizza, it should charge a price of $16 per pizza for a quantity of 40.

Once the firm has chosen price and quantity, it’s in a position to calculate total revenue, total cost, and profit. At a quantity of 40, the price of $16 lies above the average cost curve, so the firm is making economic profits. From Table 10.1 we can see that, at an output of 40, the firm’s total revenue is $640 and its total cost is $580, so profits are $60. In Figure 10.3 , the firm’s total revenues are the rectangle with the quantity of 40 on the horizontal axis and the price of $16 on the vertical axis. The firm’s total costs are the light shaded rectangle with the same quantity of 40 on the horizontal axis but the average cost of $14.50 on the vertical axis. Profits are total revenues minus total costs, which is the shaded area above the average cost curve.

Although the process by which a monopolistic competitor makes decisions about quantity and price is similar to the way in which a monopolist makes such decisions, two differences are worth remembering. First, although both a monopolist and a monopolistic competitor face downward-sloping demand curves, the monopolist’s perceived demand curve is the market demand curve, while the perceived demand curve for a monopolistic competitor is based on the extent of its product differentiation and how many competitors it faces. Second, a monopolist is surrounded by barriers to entry and need not fear entry, but a monopolistic competitor who earns profits must expect the entry of firms with similar, but differentiated, products.

Monopolistic Competitors and Entry

If one monopolistic competitor earns positive economic profits, other firms will be tempted to enter the market. A gas station with a great location must worry that other gas stations might open across the street or down the road—and perhaps the new gas stations will sell coffee or have a carwash or some other attraction to lure customers. A successful restaurant with a unique barbecue sauce must be concerned that other restaurants will try to copy the sauce or offer their own unique recipes. A laundry detergent with a great reputation for quality must take note that other competitors may seek to build their own reputations.

The entry of other firms into the same general market (like gas, restaurants, or detergent) shifts the demand curve that a monopolistically competitive firm faces. As more firms enter the market, the quantity demanded at a given price for any particular firm will decline, and the firm’s perceived demand curve will shift to the left. As a firm’s perceived demand curve shifts to the left, its marginal revenue curve will shift to the left, too. The shift in marginal revenue will change the profit-maximizing quantity that the firm chooses to produce, since marginal revenue will then equal marginal cost at a lower quantity.

Figure 10.4 (a) shows a situation in which a monopolistic competitor was earning a profit with its original perceived demand curve (D 0 ). The intersection of the marginal revenue curve (MR 0 ) and marginal cost curve (MC) occurs at point S, corresponding to quantity Q 0 , which is associated on the demand curve at point T with price P 0 . The combination of price P 0 and quantity Q 0 lies above the average cost curve, which shows that the firm is earning positive economic profits.

Unlike a monopoly, with its high barriers to entry, a monopolistically competitive firm with positive economic profits will attract competition. When another competitor enters the market, the original firm’s perceived demand curve shifts to the left, from D 0 to D 1 , and the associated marginal revenue curve shifts from MR 0 to MR 1 . The new profit-maximizing output is Q 1 , because the intersection of the MR 1 and MC now occurs at point U. Moving vertically up from that quantity on the new demand curve, the optimal price is at P 1 .

As long as the firm is earning positive economic profits, new competitors will continue to enter the market, reducing the original firm’s demand and marginal revenue curves. The long-run equilibrium is in the figure at point Y, where the firm’s perceived demand curve touches the average cost curve. When price is equal to average cost, economic profits are zero. Thus, although a monopolistically competitive firm may earn positive economic profits in the short term, the process of new entry will drive down economic profits to zero in the long run. Remember that zero economic profit is not equivalent to zero accounting profit . A zero economic profit means the firm’s accounting profit is equal to what its resources could earn in their next best use. Figure 10.4 (b) shows the reverse situation, where a monopolistically competitive firm is originally losing money. The adjustment to long-run equilibrium is analogous to the previous example. The economic losses lead to firms exiting, which will result in increased demand for this particular firm, and consequently lower losses. Firms exit up to the point where there are no more losses in this market, for example when the demand curve touches the average cost curve, as in point Z.

Monopolistic competitors can make an economic profit or loss in the short run, but in the long run, entry and exit will drive these firms toward a zero economic profit outcome. However, the zero economic profit outcome in monopolistic competition looks different from the zero economic profit outcome in perfect competition in several ways relating both to efficiency and to variety in the market.

Monopolistic Competition and Efficiency

The long-term result of entry and exit in a perfectly competitive market is that all firms end up selling at the price level determined by the lowest point on the average cost curve. This outcome is why perfect competition displays productive efficiency : goods are produced at the lowest possible average cost. However, in monopolistic competition, the end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve, not at the very bottom of the AC curve. Thus, monopolistic competition will not be productively efficient.

In a perfectly competitive market, each firm produces at a quantity where price is set equal to marginal cost, both in the short and long run. This outcome is why perfect competition displays allocative efficiency: the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production. In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC—and price is higher than marginal revenue, not equal to it because the demand curve is downward sloping. When P > MC, which is the outcome in a monopolistically competitive market, the benefits to society of providing additional quantity, as measured by the price that people are willing to pay, exceed the marginal costs to society of producing those units. A monopolistically competitive firm does not produce more, which means that society loses the net benefit of those extra units. This is the same argument we made about monopoly, but in this case the allocative inefficiency will be smaller. Thus, a monopolistically competitive industry will produce a lower quantity of a good and charge a higher price for it than would a perfectly competitive industry. See the following Clear It Up feature for more detail on the impact of demand shifts.

Why does a shift in perceived demand cause a shift in marginal revenue?

We use the combinations of price and quantity at each point on a firm’s perceived demand curve to calculate total revenue for each combination of price and quantity. We then use this information on total revenue to calculate marginal revenue, which is the change in total revenue divided by the change in quantity. A change in perceived demand will change total revenue at every quantity of output and in turn, the change in total revenue will shift marginal revenue at each quantity of output. Thus, when entry occurs in a monopolistically competitive industry, the perceived demand curve for each firm will shift to the left, because a smaller quantity will be demanded at any given price. Another way of interpreting this shift in demand is to notice that, for each quantity sold, the firm will charge a lower price. Consequently, the marginal revenue will be lower for each quantity sold—and the marginal revenue curve will shift to the left as well. Conversely, exit causes the perceived demand curve for a monopolistically competitive firm to shift to the right and the corresponding marginal revenue curve to shift right, too.

A monopolistically competitive industry does not display productive or allocative efficiency in either the short run, when firms are making economic profits and losses, nor in the long run, when firms are earning zero profits.

The Benefits of Variety and Product Differentiation

Even though monopolistic competition does not provide productive efficiency or allocative efficiency, it does have benefits of its own. Product differentiation is based on variety and innovation. Most people would prefer to live in an economy with many kinds of clothes, foods, and car styles; not in a world of perfect competition where everyone will always wear blue jeans and white shirts, eat only spaghetti with plain red sauce, and drive an identical model of car. Most people would prefer to live in an economy where firms are struggling to figure out ways of attracting customers by methods like friendlier service, free delivery, guarantees of quality, variations on existing products, and a better shopping experience.

Economists have struggled, with only partial success, to address the question of whether a market-oriented economy produces the optimal amount of variety. Critics of market-oriented economies argue that society does not really need dozens of different athletic shoes or breakfast cereals or automobiles. They argue that much of the cost of creating such a high degree of product differentiation, and then of advertising and marketing this differentiation, is socially wasteful—that is, most people would be just as happy with a smaller range of differentiated products produced and sold at a lower price. Defenders of a market-oriented economy respond that if people do not want to buy differentiated products or highly advertised brand names, no one is forcing them to do so. Moreover, they argue that consumers benefit substantially when firms seek short-term profits by providing differentiated products. This controversy may never be fully resolved, in part because deciding on the optimal amount of variety is very difficult, and in part because the two sides often place different values on what variety means for consumers. Read the following Clear It Up feature for a discussion on the role that advertising plays in monopolistic competition.

How does advertising impact monopolistic competition?

The U.S. economy spent about $180.12 billion on advertising in 2014, according to eMarketer.com. Roughly one third of this was television advertising, and another third was divided roughly equally between internet, newspapers, and radio. The remaining third was divided between direct mail, magazines, telephone directory yellow pages, and billboards. Mobile devices are increasing the opportunities for advertisers.

Advertising is all about explaining to people, or making people believe, that the products of one firm are differentiated from another firm's products. In the framework of monopolistic competition, there are two ways to conceive of how advertising works: either advertising causes a firm’s perceived demand curve to become more inelastic (that is, it causes the perceived demand curve to become steeper); or advertising causes demand for the firm’s product to increase (that is, it causes the firm’s perceived demand curve to shift to the right). In either case, a successful advertising campaign may allow a firm to sell either a greater quantity or to charge a higher price, or both, and thus increase its profits.

However, economists and business owners have also long suspected that much of the advertising may only offset other advertising. Economist A. C. Pigou wrote the following back in 1920 in his book, The Economics of Welfare :

It may happen that expenditures on advertisement made by competing monopolists [that is, what we now call monopolistic competitors] will simply neutralise one another, and leave the industrial position exactly as it would have been if neither had expended anything. For, clearly, if each of two rivals makes equal efforts to attract the favour of the public away from the other, the total result is the same as it would have been if neither had made any effort at all.

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What is Monopolistic Competition?

Industries exhibiting features of monopolistic competition, short-run decisions on output and price, long-run decisions on output and price, monopolistic competition vs. perfect competition, inefficiencies in monopolistic competition, limitations of monopolistic competition market structure, additional resources, monopolistic competition.

A type of market structure where companies in an industry produce similar but differentiated products

Monopolistic competition is a type of market structure where many companies are present in an industry, and they produce similar but differentiated products. None of the companies enjoy a monopoly, and each company operates independently without regard to the actions of other companies. The market structure is a form of imperfect competition.

The characteristics of monopolistic competition include the following:

• The presence of many companies
• Each company produces similar but differentiated products
• Companies are not price takers
• Free entry and exit in the industry
• Companies compete based on product quality, price, and how the product is marketed

Companies in a monopolistic competition make economic profits in the short run, but in the long run, they make zero economic profit. The latter is also a result of the freedom of entry and exit in the industry. Economic profits that exist in the short run attract new entries, which eventually lead to increased competition, lower prices, and high output.

Such a scenario inevitably eliminates economic profit and gradually leads to economic losses in the short run. The freedom to exit due to continued economic losses leads to an increase in prices and profits, which eliminates economic losses.

In addition, companies in a monopolistic market structure are productively and allocatively inefficient as they operate with existing excess capacity. Because of the large number of companies, each player keeps a small market share and is unable to influence the product price. Therefore, collusion between companies is impossible.

In addition, monopolistic competition thrives on innovation and variety. Companies must continuously invest in product development and advertising and increase the variety of their products to appeal to their target markets . Competition with other companies is thus based on quality, price, and marketing.

Quality entails product design and service. Companies able to increase the quality of their products are, therefore, able to charge a higher price and vice versa. Marketing refers to different types of advertising and packaging that can be used on the product to increase awareness and appeal.

Examples of industries in monopolistic competition include the following:

• Clothing and apparel
• Sportswear products
• Restaurants
• Hairdressers
• PC manufacturers
• Television services

The short-run equilibrium under monopolistic competition is illustrated in the diagram below:

Profits are maximized where marginal revenue (MR) is equal to marginal cost (MC) . The point determines the company’s equilibrium output. The price is determined at a point where the imaginary line from the equilibrium output passes through the point of intersection of the MR, and MC curves and meets the average revenue (AR) curve, which is also the demand curve .

Total profit is represented by the cyan-colored rectangle in the diagram above. It is determined by the equilibrium output multiplied by the difference between AR and the  average total cost (ATC) . Companies in monopolistic competition determine their price and output decisions in the short run, just like companies in a monopoly.

Companies in monopolistic competition can also incur economic losses in the short run, as illustrated below. They still produce equilibrium output at a point where MR equals MC in which losses are minimized. The cyan-colored rectangle shows the economic loss incurred.

In the long run, companies in monopolistic competition still produce at a level where marginal cost and marginal revenue are equal. However, the demand curve will have shifted to the left due to other companies entering the market. The shift in the demand curve is a result of reduced demand for an individual company’s products due to increased competition.

Such action reduces economic profits, depending on the magnitude of the entry of new players. Individual companies will no longer be able to sell their products at above-average cost.

Companies in monopolistic competition will earn zero economic profit in the long run. At this stage, there is no incentive for new entrants in the industry.

Companies in monopolistic competition produce differentiated products and compete mainly on non-price competition. The demand curves in individual companies for monopolistic competition are downward sloping, whereas perfect competition demonstrates a perfectly elastic demand schedule.

However, there are two other principal differences worth mentioning – excess capacity and mark-up. Companies in monopolistic competition operate with excess capacity, as they do not produce at an efficient scale, i.e., at the lowest ATC. Production at the lowest possible cost is only completed by companies in perfect competition.

Mark-up is the difference between price and marginal cost. There is no mark-up in a perfect competition structure because the price is equal to marginal cost. However, monopolistic competition comes with a product mark-up, as the price is always greater than the marginal cost.

• The equilibrium output at the profit maximization level (MR = MC) for monopolistic competition means consumers pay more since the price is greater than marginal revenue.
• As indicated above, monopolistic competitive companies operate with excess capacity. They do not operate at the minimum ATC in the long run. Production capacity is not at full capacity, resulting in idle resources.
• Monopolistic competitive companies waste resources on selling costs, i.e., advertising and marketing to promote their products. Such costs can be utilized in production to reduce production costs and possibly lower product prices.
• Since companies do not operate at excess capacity, it leads to unemployment and social despondency in society.
• Inefficient companies continue to exist under monopolistic competition, as opposed to exiting, which is associated with companies under perfect competition.
• Another scope of inefficiency for monopolistic competitive markets stems from the fact that the marginal cost is less than the price in the long run.
• Monopolistic competitive market structures are also allocatively inefficient. Their prices are higher than the marginal cost.
• Companies with superior brands and high-quality products will consistently make economic profits in the real world.
• Companies entering the market will take a long time to catch up, and their products will not match those of the established companies for their products to be considered close substitutes. New companies are likely to face barriers to entry because of strong brand differentiation and brand loyalty .

Thank you for reading CFI’s guide to Monopolistic Competition. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• Aggregate Supply and Demand
• Barriers to Entry
• Legal Monopoly
• See all economics resources
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Module 10: Monopolistic Competition and Oligopoly

Monopolistic competition, learning objectives.

• Describe and give examples of monopolistically competitive industries
• Explain the significance of differentiated products to monopolistic competition
• Compare demand curves for monopolistically competitive firms, monopolies, and perfectly competitive firms

Monopolistic competition is what economists call industries that consist of many firms competing against each other, but selling products that are distinctive in some way. Examples include stores that sell different styles of clothing; restaurants or grocery stores that sell different kinds of food; and even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names. When products are distinctive, each firm has a mini-monopoly on its particular style or flavor or brand name. However, firms producing such products must also compete with other styles and flavors and brand names. The term “monopolistic competition” captures this mixture of mini-monopoly and tough competition.

Who invented the theory of imperfect competition?

The theory of imperfect competition was developed by two economists independently but simultaneously in 1933. The first was Edward Chamberlin of Harvard University who published The Economics of Monopolistic Competition . The second was Joan Robinson of Cambridge University who published The Economics of Imperfect Competition . Robinson subsequently became interested in macroeconomics where she became a prominent Keynesian, and later a post-Keynesian economist.

Differentiated Products

A firm can try to make its products different from those of its competitors in several ways: physical characteristics of the product, location from which the product is sold, intangible aspects of the product, and perceptions of the product. Products that are distinctive in these ways are called differentiated products .

Physical characteristics of a product include all the phrases you hear in advertisements: unbreakable bottle, nonstick surface, freezer-to-microwave, non-shrink, extra spicy, newly redesigned for your comfort. The location of a firm can also create a difference between producers. For example, a gas station located at a heavily traveled intersection is more convenient than one on a less-traveled back road. A supplier to an automobile manufacturer may find that it is an advantage to locate close to the car factory.

Intangible aspects can differentiate a product, too. Some intangible aspects may be promises like a guarantee of satisfaction or money back, a reputation for high quality, services like free delivery, or offering a loan to purchase the product. Finally, product differentiation may occur in the minds of buyers. For example, many people could not tell the difference in taste between common varieties of beer or cigarettes if they were blindfolded but, because of past habits and advertising, they have strong preferences for certain brands. Advertising can play a role in shaping these intangible preferences.

The concept of differentiated products is closely related to the degree of variety that is available. If everyone in the economy wore only blue jeans, ate only white bread, and drank only tap water, then the markets for clothing, food, and drink would be much closer to perfectly competitive. The variety of styles, flavors, locations, and characteristics creates product differentiation and monopolistic competition.

Perceived Demand for a Monopolistic Competitor

A monopolistically competitive firm perceives a demand for its goods that is an intermediate case between monopoly and competition. Figure 1 offers a reminder that the demand curve as faced by a perfectly competitive firm is perfectly elastic or flat, because the perfectly competitive firm can sell any quantity it wishes at the prevailing market price. In contrast, the demand curve, as faced by a monopolist, is the market demand curve, since a monopolist is the only firm in the market, and hence is downward sloping.

Figure 1. Perceived Demand for Firms in Different Competitive Settings. The demand curve faced by a perfectly competitive firm is perfectly elastic, meaning it can sell all the output it wishes at the prevailing market price. The demand curve faced by a monopoly is the market demand. It can sell more output only by decreasing the price it charges. The demand curve faced by a monopolistically competitive firm falls in between.

The demand curve as faced by a monopolistic competitor is not flat, but rather downward-sloping, which means that the monopolistic competitor can raise its price without losing all of its customers or lower the price and gain more customers. Since there are substitutes, the demand curve facing a monopolistically competitive firm is more elastic than that of a monopoly where there are no close substitutes. If a monopolist raises its price, some consumers will choose not to purchase its product—but they will then need to buy a completely different product. However, when a monopolistic competitor raises its price, some consumers will choose not to purchase the product at all, but others will choose to buy a similar product from another firm. If a monopolistic competitor raises its price, it will not lose as many customers as would a perfectly competitive firm, but it will lose more customers than would a monopoly that raised its prices.

At a glance, the demand curves faced by a monopoly and by a monopolistic competitor look similar—that is, they both slope down. But the underlying economic meaning of these perceived demand curves is different, because a monopolist faces the market demand curve and a monopolistic competitor does not. Rather, a monopolistically competitive firm’s demand curve is but one of many firms that make up the “before” market demand curve. Are you following? If so, how would you categorize the market for golf balls?

ARE GOLF BALLS REALLY DIFFERENTIATED PRODUCTS?

Monopolistic competition refers to an industry that has more than a few firms, each offering a product which, from the consumer’s perspective, is different from its competitors. The U.S. Golf Association runs a laboratory that tests 20,000 golf balls a year. There are strict rules for what makes a golf ball legal. The weight of a golf ball cannot exceed 1.620 ounces and its diameter cannot be less than 1.680 inches (which is a weight of 45.93 grams and a diameter of 42.67 millimeters, in case you were wondering). The balls are also tested by being hit at different speeds. For example, the distance test involves having a mechanical golfer hit the ball with a titanium driver and a swing speed of 120 miles per hour. As the testing center explains: “The USGA system then uses an array of sensors that accurately measure the flight of a golf ball during a short, indoor trajectory from a ball launcher. From this flight data, a computer calculates the lift and drag forces that are generated by the speed, spin, and dimple pattern of the ball. … The distance limit is 317 yards.”

Over 1800 golf balls made by more than 100 companies meet the USGA standards. The balls do differ in various ways, like the pattern of dimples on the ball, the types of plastic used on the cover and in the cores, and so on. Since all balls need to conform to the USGA tests, they are much more alike than different. In other words, golf ball manufacturers are monopolistically competitive.

However, retail sales of golf balls are about $500 million per year, which means that a lot of large companies have a powerful incentive to persuade players that golf balls are highly differentiated and that it makes a huge difference which one you choose. Sure, Tiger Woods can tell the difference. For the average duffer (golf-speak for a “mediocre player”) who plays a few times a summer—and who loses a lot of golf balls to the woods and lake and needs to buy new ones—most golf balls are pretty much indistinguishable.

Watch this video for a brief overview of monopolistic competition and to see a comparison between perfect competition, monopolistic competition, and monopolies. The video goes on to explain the cost curves for a monopolistically competitive firm and how it compares to those in different competitive settings, which we’ll cover in more detail later in the module.

• Monopolistic Competition. Authored by : OpenStax College. Located at : https://cnx.org/contents/[email protected]:gKktXtD8@6/Monopolistic-Competition . License : CC BY: Attribution . License Terms : Download for free at http://cnx.org/contents/[email protected]
• Episode 29: Monopolistic Competition. Authored by : Dr. Mary McGlasson. Located at : https://www.youtube.com/watch?v=T3F1Vt3IyNc&t=25s . License : CC BY-NC-ND: Attribution-NonCommercial-NoDerivatives

Monopolistic Competition as a Market Structure Essay

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A Monopolistic competition is a market structure which is identified through the large quantity of comparatively small firms with the products of the firms being similar with only a slight variation to differentiate them. Therefore, the similarity in products makes the firms that exist in a monopolistic competition to be very competitive.

However, due to the fact that each of the firms has a slightly unique product compared to the rest of the firms, then each firm has a specific consumer and hence each of the firms maintains market control to a lesser extent. Examples of monopolistic competition include restaurants and clothing stores.

Features of a Monopolistic competition

There are basically four features that are used to identify a monopolistic competition. The first feature is the noticeable large amount of small firms which leads to the production of comparable products which are however not alike in detail (Ison & Wall, 2006). The mobility of a monopolistic competition is more or less excellent but it does not amount to the ideal resource which therefore makes it widespread but not perfect in comprehension of products to the consumer.

Large Number of Small Firms

In a monopolistically competition, almost every production business has a large number of small firms (Ison & Wall, 2006). The size of each of the firms is comparatively small when compared to the extent of the market as a whole.

This therefore means that all the active firms more or less compete against each other for consumer attention and since the firms are many and are all successful in producing the needed products, then each of the firms controls a small market share thus have limited control over the market price or the number of products in the market (Colander, 2008).

Relative Resource Mobility

Firms in a monopolistic competition are free to go into or go out of a production business venture especially when compared with a perfect competition or a monopoly (Pindyck & Rubinfeld, 2001). The rules governing the operation and the general business of the firms in a monopolistic competition are relatively few or none.

Such firms are for the most part free of government interference, a standardized system, operational policy and are at liberty to raise their own capital and endure start-up costs without facing any stern obstructions from the government or other firms (Ison & Wall, 2006). This therefore makes the firms less mobile in an ideal threshold especially when compared with the mobility of a perfect competition.

Extensive market Knowledge

In monopolistic competition, consumers have reasonably comprehensive knowledge about the prices of different products as well as the fairly complete information regarding the subtle differences in the products for example color, brand names among others(Pindyck & Rubinfeld, 2001).

On the other hand, sellers of the products also have reasonably inclusive information in relation to production methods which affect prices and hence sellers are also aware of the prices of their competitors’ products (Pindyck & Rubinfeld, 2001).

Similar Products

The firms in a monopolistically competitive market produce analogous products which are however not completely identical (Colander, 2008). This makes each of the firms and the products to aim at satisfying very similar basic want or need.

Therefore, the products that are put into the market by these firms are near proxies and are very comparable but are nevertheless not perfect substitutes (Ison & Wall, 2006). Even though the products might in actual sense have substitutes or slight physical differences, consumers of the products are the only ones who might perceive them to be different because the similarities between the products are usually more than the differences (Pindyck & Rubinfeld, 2001).

Therefore, firms in a monopolistically competition at any given moment have a great number of potential competitors since the products are usually almost the same and at the same time have a great number of potential consumers who are currently buying the competitors’ products.

Reason why monopolistic competitive firms can only make normal profits in the long term

A firm in a monopolistic competition increases on the profit by opting for the output that creates the maximum difference between the total income line and the total cost line. However, over the long run, a firm produces less output and charges a higher price which is even greater than its marginal cost (Pindyck & Rubinfeld, 2001).

The difference in price and marginal cost effectively goes against the vital order of efficiency because income is not being utilized to create the utmost level of consumer satisfaction. The graphs in Figure 1.1 represents the trends of such;

Fig 1.1: Marginal Revenue Curve and Operational Barrier Curve by (Chamberlin, E. 1999).

TC = Total Cost

TR = Total Revenue

This leads to inefficiency which is basically caused by the minimal market control monopolistically competitive firms have over the overall market, and hence most of the firms experience a negatively-sloped demand curves where price is greater than marginal revenue where the price is placed equivalent to marginal cost in order to maximize profit (Figure 2).

Therefore, as firms continue to receive income through sales, the income is translated into production in order to produce more goods of higher quality to satisfy the market needs (Ison & Wall, 2006).

Furthermore, monopolistic competitive firms can only make normal profits in the long term because they only control a small portion of the market which cannot be expanded due to the presence of several competitors (Colander, 2008). If the firm were to produce superior quality goods, then the cost of production would be at a similar ratio to the percentage sales hence the profits will be normal in the long run.

A Monopolistic competition is the toughest yet most common market structure due to its relatively unregulated mode of operation. It is also quite simple to establish a firm in a monopolistic competition as compared to other market structures. Firms that operate in a Monopolistic competition each have a small portion of the market in their control and hence due to the dissimilarity in product, neither of the firms has control of the price of the products hence the price becomes market driven.

Chamberlin, E. (1999). A Supplementary Bibliography on Monopolistic Competition. The Quarterly Journal of Economics , Vol. 75, No. 28, pp. 629-638.

Colander, D. (2008) Microeconomics . 7th Ed. London: McGraw-Hill.

Ison, S. and Wall, S. (2006) Economics. 4th Ed. New York: Financial Times in assoc with Prentice Hall.

Pindyck, R & Rubinfeld, D. (2001) Microeconomics . 5th Ed. New York: Prentice-Hall.

• Economic Journal: Current Microeconomic Events
• Maximizing profits in market structures
• Monopolistic Competitive Firms
• Oligopoly Market and Monopolistic Competition
• Monopolistic Competition Practical Observation
• Opportunity Cost in Microeconomics
• Principles of Macroeconomics: Supply and Demand Relationship
• Supply Cost Production and Profit
• Supply production costs and profits
• Days Inn Hotels: Opportunity Cost in Identifying Consumer Needs Drivers
• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2018, June 27). Monopolistic Competition as a Market Structure. https://ivypanda.com/essays/monopolistic-competition-as-a-market-structure/

"Monopolistic Competition as a Market Structure." IvyPanda , 27 June 2018, ivypanda.com/essays/monopolistic-competition-as-a-market-structure/.

IvyPanda . (2018) 'Monopolistic Competition as a Market Structure'. 27 June.

IvyPanda . 2018. "Monopolistic Competition as a Market Structure." June 27, 2018. https://ivypanda.com/essays/monopolistic-competition-as-a-market-structure/.

1. IvyPanda . "Monopolistic Competition as a Market Structure." June 27, 2018. https://ivypanda.com/essays/monopolistic-competition-as-a-market-structure/.

Bibliography

IvyPanda . "Monopolistic Competition as a Market Structure." June 27, 2018. https://ivypanda.com/essays/monopolistic-competition-as-a-market-structure/.

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1.5 Monopolistic Competition, Oligopoly, and Monopoly

Learning objective.

• Describe monopolistic competition, oligopoly, and monopoly.

Economists have identified four types of competition— perfect competition , monopolistic competition , oligopoly , and monopoly . Perfect competition was discussed in the last section; we’ll cover the remaining three types of competition here.

Monopolistic Competition

In monopolistic competition , we still have many sellers (as we had under perfect competition). Now, however, they don’t sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in a number of ways, including quality, style, convenience, location, and brand name. Some people prefer Coke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch (at least temporarily).

How is product differentiation accomplished? Sometimes, it’s simply geographical; you probably buy gasoline at the station closest to your home regardless of the brand. At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from another—and better than it. Regardless of customer loyalty to a product, however, if its price goes too high, the seller will lose business to a competitor. Under monopolistic competition, therefore, companies have only limited control over price.

Oligopoly means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low.

Companies in oligopolistic industries include such large-scale enterprises as automobile companies and airlines. As large firms supplying a sizable portion of a market, these companies have some control over the prices they charge. But there’s a catch: because products are fairly similar, when one company lowers prices, others are often forced to follow suit to remain competitive. You see this practice all the time in the airline industry: When American Airlines announces a fare decrease, Continental, United Airlines, and others do likewise. When one automaker offers a special deal, its competitors usually come up with similar promotions.

In terms of the number of sellers and degree of competition, monopolies lie at the opposite end of the spectrum from perfect competition. In perfect competition, there are many small companies, none of which can control prices; they simply accept the market price determined by supply and demand. In a monopoly , however, there’s only one seller in the market. The market could be a geographical area, such as a city or a regional area, and doesn’t necessarily have to be an entire country.

There are few monopolies in the United States because the government limits them. Most fall into one of two categories: natural and legal . Natural monopolies include public utilities, such as electricity and gas suppliers. Such enterprises require huge investments, and it would be inefficient to duplicate the products that they provide. They inhibit competition, but they’re legal because they’re important to society. In exchange for the right to conduct business without competition, they’re regulated. For instance, they can’t charge whatever prices they want, but they must adhere to government-controlled prices. As a rule, they’re required to serve all customers, even if doing so isn’t cost efficient.

A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years (United States Patent and Trademark Office, 2006). During this period, other companies can’t use the invented product or process without permission from the patent holder. Patents allow companies a certain period to recover the heavy costs of researching and developing products and technologies. A classic example of a company that enjoyed a patent-based legal monopoly is Polaroid, which for years held exclusive ownership of instant-film technology (Bellis, 2006). Polaroid priced the product high enough to recoup, over time, the high cost of bringing it to market. Without competition, in other words, it enjoyed a monopolistic position in regard to pricing.

Key Takeaways

• There are four types of competition in a free market system: perfect competition, monopolistic competition, oligopoly, and monopoly.
• Under monopolistic competition , many sellers offer differentiated products—products that differ slightly but serve similar purposes. By making consumers aware of product differences, sellers exert some control over price.
• In an oligopoly , a few sellers supply a sizable portion of products in the market. They exert some control over price, but because their products are similar, when one company lowers prices, the others follow.
• In a monopoly , there is only one seller in the market. The market could be a geographical area, such as a city or a regional area, and does not necessarily have to be an entire country. The single seller is able to control prices.
• Most monopolies fall into one of two categories: natural and legal .
• Natural monopolies include public utilities, such as electricity and gas suppliers. They inhibit competition, but they’re legal because they’re important to society.
• A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process for a limited time, generally twenty years.

Identify the four types of competition, explain the differences among them, and provide two examples of each. (Use examples different from those given in the text.)

Bellis, M., “Inventors-Edwin Land-Polaroid Photography-Instant Photography/Patents,” April 15, 2006, http://inventors.about.com/library/inventors/blpolaroid.htm (accessed January 21, 2012).

United States Patent and Trademark Office, General Information Concerning Patents , April 15, 2006, http://www.uspto.gov/web/offices/pac/doc/general/index.html#laws (accessed January 21, 2012).

Exploring Business Copyright © 2016 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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• Monopolistic Competition

In monopolistic competition, the market has features of both perfect competition and monopoly . A monopolistic competition is more common than pure competition or pure monopoly. In this article , we will understand monopolistic competition and look at the features, price-output determination, and conditions for equilibrium.

In order to understand monopolistic competition, let’s look at the market for soaps and detergents in India . There are many well-known brands like Lux, Rexona, Dettol, Dove, Pears, etc. in this segment.

Since all manufacturers produce soaps, it appears to be an example of perfect competition. However, on close scrutiny, we find that each seller varies the product slightly to make it different from its competitors.

Hence, Lux focuses on making beauty soaps, Liril on freshness, Dettol on antiseptic properties, Dove on smooth skin, etc. This allows each seller to attract buyers to itself based on some factor other than price .

This market has a mix of both perfect competition and monopoly and is a classic example of monopolistic competition.

Browse more Topics under Determination Of Prices

• Intro to Determination of Prices
• Changes in Demand
• Changes in Supply
• Simultaneous changes in Demand and Supply
• Features of Perfect Competition
• Price Determination under Perfect Competition
• Long Run Equilibrium of Competitive Firm and Industry
• Monopoly Market
• Monopolist’s Revenue Curve
• Price Discrimination
• Kinked Demand Curve

Features of Monopolistic Competition

•  Large number of sellers : In a market with monopolistic competition, there are a large number of sellers who have a small share of the market.
• Product differentiation : In monopolistic competition, all brands try to create product  differentiation to add an element of monopoly over the competing products. This ensures that the product offered by the brand does not have a perfect substitute. Therefore, the manufacturer can raise the price of the product without having to worry about losing all its customers to other brands. However, in such a market, while all brands are not perfect substitutes, they are close substitutes for each other. Hence, the seller might lose at least some customers to his competitors.
• Freedom of entry or exit : Like in perfect competition, firms can enter and exit the market freely.
• Non-price competition : In monopolistic competition, sellers compete on factors other than price. These factors include aggressive advertising, product development, better distribution , after sale services, etc. Sellers don’t cut the price of their products but incur high costs for the promotion of their goods. If the firms indulge in price-wars, which is the possibility under perfect competition, some firms might get thrown out of the market.

Price-output determination under Monopolistic Competition: Equilibrium of a firm

In monopolistic competition, since the product is differentiated between firms, each firm does not have a perfectly elastic demand for its products. In such a market, all firms determine the price of their own products. Therefore, it faces a downward sloping demand curve. Overall, we can say that the elasticity of demand increases as the differentiation between products decreases.

Fig. 1 above depicts a firm facing a downward sloping, but flat demand curve. It also has a U-shaped short-run cost curve.

Conditions for the Equilibrium of an individual firm

The conditions for price-output determination and equilibrium of an individual firm are as follows:

• The MC curve cuts the MR curve from below.

In Fig. 1, we can see that the MC curve cuts the MR curve at point E. At this point,

• Equilibrium price = OP and
• Equilibrium output = OQ

Now, since the per unit cost is BQ, we have

• Per unit super-normal profit (price-cost) = AB or PC.
• Total super-normal profit = APCB

The following figure depicts a firm earning losses in the short-run.

From Fig. 2, we can see that the per unit cost is higher than the price of the firm. Therefore,

• AQ > OP (or BQ)
• Loss per unit = AQ – BQ = AB
• Total losses = ACPB

Long-run equilibrium

If firms in a monopolistic competition earn super-normal profits in the short-run, then new firms will have an incentive to enter the industry . As these firms enter, the profits per firm decrease as the total demand gets shared between a larger number of firms. This continues until all firms earn only normal profits. Therefore, in the long-run, firms, in such a market, earn only normal profits.

As we can see in Fig. 3 above, the average revenue (AR) curve touches the average cost (ATC) curve at point X. This corresponds to quantity Q 1 and price P 1 . Now, at equilibrium (MC = MR), all super-normal profits are zero since the average revenue = average costs. Therefore, all firms earn zero super-normal profits or earn only normal profits.

It is important to note that in the long-run, a firm is in an equilibrium position having excess capacity. In simple words, it produces a lower quantity than its full capacity. From Fig. 3 above, we can see that the firm can increase its output from Q 1 to Q 2 and reduce average costs. However, it does not do so because it reduces the average revenue more than the average costs. Hence, we can conclude that in monopolistic competition, firms do not operate optimally. There always exists an excess capacity of production with each firm.

In case of losses in the short-run, the firms making a loss will exit from the market. This continues until the remaining firms make normal profits only.

Solved Question on Monopolistic Competition

Q1. Which of the following is not a characteristic of monopolistic competition?

• Ease of entry into the industry.
• Product differentiation.
• A relatively large number of sellers.
• A homogeneous product.

Answer: In monopolistic competition, product differentiation is the key to add an element of monopoly to the market. Such a market needs to have a large number of sellers and ease of entry/exit from the industry. Hence, options, a, b, and c are characteristics of such a market.

A homogeneous product is an essential characteristic of a perfect competition. However, in monopolistic competition, all products are not perfect substitutes for each other. Hence, a homogeneous product is not a characteristic of such a market and option c is the right answer.

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Home Essay Samples Business Mcdonald's

Analysis of Monopolistic Competition on the Example of McDonald's

Table of contents

Introduction, examples of monopolistic competition: mcdonald’s.

• perfect competition
• monopolistic competition
• McDonald's Corporation. (2021). 2020 Annual Report. Retrieved from https://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/2020%20Annual%20Report.pdf
• Beasley, M. (2016). The McDonaldization of Society: An Investigation into the Changing Character of Contemporary Social Life (8th ed.). Sage Publications.
• Bishop, M. (2019). Monopolistic Competition. Investopedia. Retrieved from https://www.investopedia.com/terms/m/monopolisticcompetition.asp
• Gabaix, X., & Laibson, D. (2019). Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets. The Quarterly Journal of Economics, 134(1), 511-551. https://doi.org/10.1093/qje/qjy025
• Gregoriou, A. (2020). Monopolistic Competition and the Welfare Effects of Trade Liberalization. Journal of International Trade & Economic Development, 29(3), 269-299. https://doi.org/10.1080/09638199.2019.1665826
• Lutz, A. (2017). Why McDonald's Is One of the Most Monopolistic Companies in America. Business Insider. Retrieved from https://www.businessinsider.com/mcdonalds-is-one-of-the-most-monopolistic-companies-in-america-2017-10
• Mises, L. von. (1990). Human Action: A Treatise on Economics (4th ed.). Fox & Wilkes.
• Perloff, J. (2014). Microeconomics (7th ed.). Pearson Education, Inc.
• Rosenbaum, D. (2019). McDonald's: A Monopoly in the Fast Food Industry? Investopedia. Retrieved from https://www.investopedia.com/articles/investing/030916/mcdonalds-monopoly-fast-food-industry.asp
• Trefis Team. (2020). What Is McDonald's Business Model? Forbes. Retrieved from https://www.forbes.com/sites/greatspeculations/2020/07/29/what-is-mcdonalds-business-model/?sh=52f3dfdb149a

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Monopolistic Market vs. Perfect Competition: An Overview

A monopolistic market and a perfectly competitive market represent two market structures that have several key distinctions in terms of market share , price control, and barriers to entry . In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services, and that firm has total market control. A perfectly competitive market is composed of many firms, where no one firm has market control.

Monopolistic and perfectly competitive markets affect supply, demand, and prices in different ways. In the real world, no market is purely monopolistic or perfectly competitive. Every real-world market combines elements of both of these market types.

Key Takeaways:

• In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services.
• A perfectly competitive market is composed of many firms, where no one firm has market control.
• In the real world, no market is purely monopolistic or perfectly competitive.
• In between a monopolistic market and perfect competition lies monopolistic competition or imperfect competition.
• In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control.

In a monopolistic market , firms are price makers because they control the prices of goods and services. In this type of market, prices are generally high for goods and services because firms have total control of the market. Firms have total market share, which creates difficult entry and exit points. Since barriers to entry in a monopolistic market are high, firms that manage to enter the market are still often dominated by one bigger firm.

A monopolistic market generally involves a single seller, and buyers do not have a choice concerning where to purchase their goods or services.

Purely monopolistic markets are extremely rare and perhaps even impossible in the absence of absolute barriers to entry, such as a ban on competition or sole possession of all natural resources. Sometimes, however, a government will establish a monopolistic market to ensure national interests or maintain critical infrastructure. For instance, many utilities such as power companies or water authorities may be granted a monopoly status for a certain area.

In the absence of such permission, governments often have laws and enforcement mechanisms to promote competition by preventing or breaking up monopolies. This is because a monopolistic market can often become inefficient, charge customers higher prices than would otherwise be available, and can prevent newcomers from entering the market. Thus, there are various antitrust regulations that keep monopolies at bay.

A monopoly is when there is only one seller in the market. A monopsony , on the other hand, is when there is only one buyer in a market.

In a market that experiences perfect competition , prices are dictated by supply and demand. Firms in a perfectly competitive market are all price takers because no one firm has enough market control. Unlike a monopolistic market, firms in a perfectly competitive market have a small market share. Barriers to entry are relatively low, and firms can enter and exit the market easily. Contrary to a monopolistic market, a perfectly competitive market has many buyers and sellers, and consumers can choose where they buy their goods and services.

Companies earn just enough profit to stay in business and no more. If they were to earn excess profits, other companies would enter the market and drive profits down. As mentioned earlier, perfect competition is a theoretical construct. As such, it is difficult to find real-life examples of perfect competition.

Pricing in perfect competition is based on supply and demand while pricing in monopolistic competition is set by the seller.

According to economic theory, when there is perfect competition, the prices of goods will approach their marginal cost of production , or the cost of producing one additional unit. This is because any firm that tries to sell at a higher price in an attempt to earn excess profits will be undercut by a competitor seeking to grab market share. This also promotes a sort of technological arms race in order to reduce the costs of production so that competitors can undercut one another and still earn a profit. Over time, however, as technology diffuses through to all producers, the effect is to lower consumer prices even further, as well as to erode profits for producers.

In between a monopolistic market and perfectly competitive market lies monopolistic competition . In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control. In contrast, whereas a monopolist in a monopolistic market has total control of the market, monopolistic competition offers very few barriers to entry. All firms are able to enter into a market if they feel the profits are attractive enough. This makes monopolistic competition similar to perfect competition.

However, in a monopolist competitive market, there is product differentiation . Products in monopolistic competition are close substitutes; the products have distinct features, such as branding or quality. This is unlike both a monopolistic market, where there are no substitutes for products, and perfect competition, where the products are identical.

In reality, all markets will display some form of imperfect competition. That is because there will always be some barriers to entry, some information asymmetries , larger and smaller competitors, and small differences in product differentiation .

What Are the Differences Between Monopolistic Markets and Perfect Competition?

In a monopolistic market, there is only one seller or producer of a good. Because there is no competition, this seller can charge any price they want subject to buyers' demand and establish barriers to entry to keep new companies out. On the other hand, perfectly competitive markets have several firms each competing with one another to sell their goods to buyers. In this case, prices are kept low through competition, and barriers to entry are low.

What Is the Difference Between a Monopoly and a Monopolistic Market?

A monopoly refers to a single producer or seller of a good or service. A monopolistic market is the scope of that monopoly. For instance, XYZ Co. may be a monopoly producer of widgets. It can control a monopolistic market over all the widgets sold in the United States whereby nobody else sells widgets.

What Are the Main Characteristics of Perfect Competition?

In a perfectly competitive market: All firms sell an identical product; all firms are  price-takers ; all firms have a relatively small market share; buyers know the nature of the product being sold and the prices charged by each firm; and the industry is characterized by freedom of entry and exit. In reality, some or all of these features are not present or are influenced in some way, leading to imperfect competition .

Monopolistic markets and perfectly competitive markets are two different types of market structures. Monopolistic markets are characterized by the domination of one firm, which can dictate price, supply, barriers to entry, and other terms. In contrast, perfectly competitive markets are composed of many firms, where no single firm has total control.

In the real world, most markets are neither monopolistic nor perfectly competitive. Rather, they exist on the spectrum between these two types.

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48 Monopolistic Competition Essay Topics

🏆 best essay topics on monopolistic competition, 🎓 most interesting monopolistic competition research titles, 💡 simple monopolistic competition essay ideas.

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• Monopolistic Competition

Monopolistic Competition – Introduction, Meaning, Features and FAQs

In the industrial market, there are many kinds of issues and monopolistic competition is one of them. This idea came from the monopoly of brand products. It is a competition among the same type of product brands with imperfect substitute products.

Marketplace issues are significant for the growth of the industry, and this competition is a vital part of that. It helps the industry to grow and be more efficient. This competition also increases the experience of a brand and the industry becomes glorious. Nowadays, changes are in every corner, so the industry condition should also be changed for betterment.

What is a Monopolistic Competition?

Monopolistic competition definition says that it stands for an industry in which many firms service similar products which are not a perfect substitute. There are very low barriers to entry or exit in monopolistic competition. In this competition, one firm decision doesn't affect the whole industry or another firm. Monopolistic competition is just related to the business strategy of brand variation.

Monopolistic Competition Meaning

Monopolistic competition means monopoly plus a perfect competition. This market is a perfect mixture of monopoly and perfect competition. This industry is one of the best classical monopolistic competition examples.

Understanding of Monopolistic Competition

Monopolistic competition is half monopoly half and perfect competition. It combines elements of both in a theoretical state. In this competition, every brand tries to make its own unique product, and they make it slightly different from other brands of the same item. While we are judging them roughly, there is no difference as such. Although when we examine them closely, we can find some little difference between different brand products.

If we take the soap brands of India as monopolistic competition examples, it can be easily revealed the idea of monopolistic competition. Though all the soap brands such as Lux, Dove, Vivel, Fiama, Pears produce the same item, They contain some different features from others in their product to make it unique.

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Features of Monopolistic Competition

A Large Number of Sellers: There are many sellers involved in the market of monopolistic competition. They also own some small shares of that market.

Entry-Exit Freedom: Any firm can enter or exit in this industry for monopolistic competition. They are free to get involved in this or they can also get out of this as per their wish. It is not necessary to explain the reasons behind it.

Product Variation: Every brand involved in this industry tries to produce item variation to add monopoly. They make some small differences so that their product can be unique. All the products are somewhere different from others. Therefore, the brand can fix the price of the product as per their choice. It also creates a problem for all the brands as they tend to lose some customers.

Non-Price Factors: Besides the price competition, there are some other factors to compete in the market. The brands attract customers through advertising, product development, extra features, great service, etc. All the brands promote and take the initiative to make their product better than other available products in the market.

Equilibrium for Monopolistic Competition

There are two types of equilibrium in this competition that define monopolistic competition as imperfect competition i.e. short-run equilibrium and long-run equilibrium.

Short-run equilibrium increases profit and makes marginal revenue (MR) and marginal cost (MC) equal. Long-run equilibrium makes changes in marginal and average revenue (MR & AR) in the entrance of other brands. The firm never sells products above average cost and doesn't claim economic profit in long-run equilibrium.

In the monopolistic market, you can see many monopolistic competition examples following all the classic rules of this industry. Some common examples are soap brands, toothpaste brands, electronics, furniture, smartphone, stationeries, etc. All these brands make their products considering all these competitive factors and ensure the uniqueness of their product.

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Did You know?

The monopolistic competition contains many things excluding pricing and other competition. Those things can make a lot of changes in this market. If you scrutinize closely, you can notice those factors in monopolistic competition examples.

Those secondary factors are demand and supply changes, simultaneous changes of the marketplace, features of perfect competition, price under or average value, equilibrium changes, monopolistic revenue curve, monopoly market, demand curve, oligopoly, demand curve, economical condition of the market and industry, etc.

Each seller develops a differentiated product that is easily distinguished from its close replacements in a Monopolistic Competition. In this essay, we'll go over what Monopolistic Competition is and how it works.

What is Monopolistic Competition and How does It work?

Professor Leftwitch's response to the question "What is Monopolistic Competition?" is as follows:

'Monopolistic competition is a market circumstance in which many vendors compete for the same product, but each seller's product differs in some way from every other seller's product in the minds of consumers.'

As a result, each seller is a monopolist of his 'differentiated product' under this market system. Buyers can only acquire a specific product from him. However, there are a number of close replacements available on the market.

As a result, shoppers compare the pricing of products as well as their perceived quality. As a result, there is competition among sellers for market share. As you can see, in this market structure, a set of companies compete against one another while maintaining monopolies over their own products.

Under Monopolistic Competition, a buyer can only buy a specific type of product from a single manufacturer. In other words, product differentiation exists.

Because there is product differentiation, businesses must incur sales expenses.

There are a lot of sellers, and their demand and supply are all intertwined. Sellers set prices, and the demand curve for a single seller's goods is downward sloping. Demand isn't completely elastic.

The company can also increase or degrade the quality of its products. Improving the product's quality helps to increase demand and pricing. On the other hand, lowering the quality helps lower the average production cost.

Inputs are also a source of competition for businesses. They must also work within a certain technological range. As a result, no company can provide a higher-quality product at a lower average price.

Firms should be aware of their demand and cost conditions. They must also apply this knowledge in order to optimize the predicted profit income.

A company can quit a product group's group of companies at any time. New enterprises can also join the group and produce close alternatives for the company's existing items. This assures that no company loses money or makes excessive profits.

Every enterprise in Monopolistic Competition must strive for profit maximisation.

All enterprises in this market structure are believed to have the same cost and demand circumstances.

FAQs on Monopolistic Competition

1. What are the primary features of Monopolistic Competition?

Amongst all the marketing features of this competition, there are some primary features that are common for all brands. The number of sellers is one of them, and the customer numbers increase the competition of brands. The ability to enter and depart the competition at any time causes a simultaneous change in the competition. Product diversification is a key aspect of a monopolistic market, as it dramatically alters the competition. Customers are aware of the varied brands' product selling prices, which is also a source of concern. Other essential elements of this rivalry include a lack of marketing understanding, more elastic demand, and less mobility.

2. What are the conditions of monopolistic competition?

In a market with monopolistic competition, there are some key conditions that brands must adhere to. Buyers and sellers, entry and exit restrictions, perfect knowledge, and goods variation are the main criteria. A fundamental requirement for participating in this competition is that buyers and sellers meet certain criteria. A minimum number of buyers must purchase your product. The tournament has no access or exit barriers.A brand can make an entry or exit anytime. To be in the competing market, perfect information about product and marketplace situations is necessary. Product variation of the brands involved in the competition is one of the most important conditions.

3. What is monopolistic competition?

One advantage of monopolistic competition is that it is a more appealing alternative to models that rely on physician collusion to explain some observed price and quantity patterns.It is said to be a type of imperfect competition in the commerce industry. You can read about the monopolistic competition with the help of a free PDF of Monopolistic Competition – Introduction, Meaning, Features and FAQs from Vedantu.

4. What is product variation?

Product variation in monopolistic competition is an important characteristic to understand its significance and concept. Every known brand involved in the industry tries to produce product variation to add monopoly. They make some small differences that can make their product unique and new. Every product differs from the others in some way. As a result, the brand can set the price of the goods as they see fit. It also poses a challenge for all brands, as they are likely to lose some customers as a result.

5. Is the free PDF of Monopolistic Competition – Introduction, Meaning, Features and FAQs helpful?

Yes, the free PDF of Monopolistic Competition – Introduction, Meaning, Features and FAQs from Vedantu is very helpful. It helps the students to understand the monopolistic competition in the commerce industry. If you are planning to start a new business or become an entrepreneur it is important to know about the brand era and its functions. This PDF enables you to get the features and frequently asked questions on the most generic topic. Get help from the experts at Vedantu if you are unable to understand the concept.

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Monopolistic Competition - KAA and Evaluation Paragraphs

Last updated 20 Feb 2019

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In this short video we look through example KAA and evaluation paragraphs on this question: "Assess the extent to which monopolistic competition leads to economic efficiency."

KAA Paragraph

In monopolistic competition, we assume that there are many firms each selling slightly differentiated products and the barriers to entry are low. An example might be many sandwich shops competing in a city centre. Intense competition between suppliers means that demand is likely to be price elastic (Ped>1) which then means that prices may move closer to marginal cost. Therefore, in contrast to a monopoly, prices for consumers will be lower and this would be an improvement in allocative efficiency of scarce resources.

Evaluation Paragraph

However, firms in monopolistic competition still have pricing power since AR and MR are downward sloping. This is especially true for firms with strong brand loyalty. Even if the entry of new firms & products means that normal profits are made in the long run, price will remain above marginal cost so allocative efficiency is not achieved. The saturation of many differentiated products in monopolistically competition may also lead to a loss of productive efficiency as firms are unable to fully exploit economies of scale in the long run.

• Monopolistic competition
• Economic Efficiency
• Productive Efficiency
• Allocative efficiency

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Monopoly: Compilation of Essays on Monopoly | Markets | Economics

Here is a compilation of essays on ‘Monopoly’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Monopoly’ especially written for school and college students.

Essay on Monopoly

Essay Contents:

• Essay on the Disadvantages of Monopolies

Essay # 1. Introduction to Monopoly :

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The market, form of monopoly is the opposite extreme from that perfect competition. It exists whenever an industry is in the hands of single of producer. In the case of perfect competition there are so many individual producers that no one of them has any power over the market and an; one firm can increase or diminish its production without affecting the market price. A monopoly, on the other hand, has power to influence the market price. By reducing its output, it can force the price up, and by increasing its output it can force the price down.

The word monopoly is made of two words; MONO +POLY. Here ‘Mono’ means one and ‘Poly’ implies the seller, thereby the literal meaning of the word Monopoly is one seller or one producer. Thus, pure monopoly refers to that form of market organisation wherein there is single firm (or producer) producing a commodity for which there are no good or close substitutes.

According to Watson, “A monopolist is the only producer of a product that has no close substitutes.” Changes in prices and outputs of other goods sold in the economy must leave the monopolist unaffected. Conversely, changes in the monopolist’s price and output must leave the other producers of the economy unaffected.

Essay # 2. Features of Monopoly :

(i) Single Producer:

There is a single firm producing the commodity in the market.

(ii) No Close Substitutes:

For the monopoly to exist single producer is the necessary condition but not a sufficient one. It is also essential that there should be no close substitute of the commodity in the market. This second condition would be even more difficult to fulfil than the first, since there are few things for which there is no substitute.

For instance, Usha are produced by a single firm alone but there are close substitutes of Usha fans that are available in the market in the form of Relifans, Khaitan Ashoka, Crompton, etc. Hence, though the firm producing Usha fans is single yet it cannot be termed a monopoly firm.

It is, therefore, essential for a monopoly to exist that there should be no close substitutes available in the market. This condition can be stated in other words as that the cross elasticity of demand for the output of the firm with respect to the price of every firm’s product is zero.

(iii) Barriers to the Entry:

The entry into the industry is completely barred or made impossible. If new firms are admitted into the industry, monopoly itself breaks down. This ban on entry may be legal, natural or institutional but it must essentially be there.

(iv) Firm and Industry:

Since in monopoly there is single firm producing the commodity, hence the difference between firm and industry vanishes automatically.

(v) Downward Sloping AR and MR Curves:

The monopoly firm is like an industry, and faces a downward sloping demand curve for its product; thus, it has to lower its price in order to sell more. For, it is this nature of demand curve that determines the nature of average and marginal revenue curves. Under perfect competition, we know, average revenue and marginal revenue curves coincide in a horizontal line. But that is not so under monopoly.

With a monopoly, however, the average revenue curve, which is the same as the market demand curve, is downward sloping. Furthermore, the marginal revenue curve does not coincide with the average revenue curve rather, it remains below it. Thus, for a monopolist firm both AR and MR curve are downward sloping and MR remains below AR as shown in the diagram.