Monopolistic Competition and the Effects on the Market !
The concept of monopolistic competition market is developed by Robinson (Great Britain) and Chamberlin (USA). According to this concept monopolistic competition varies from the perfect competition in that production does not occurs at minimum possible cost. Due to this, concerns are leave with surplus production capacity.
“Monopolistic competition” is a type of imperfect competition. It is a market formation based on similar but a little differentiated products produced by a large number of sellers. Individual vendor can decide its quantity and price with no affect on market place.
Monopolistic competition is a market which is based on following features:
All concerns produce same products but not purely substitutable
If concerns find the market profitable they are free and capable to enter the market
All concerns are able to maximize the profit
Concerns are powerful in the market it means they are not a price take
We can describe monopolistic competition with the example of restaurants. Each restaurant offers something dissimilar to other and shows their uniqueness in every element. But, all have the same target customers and they are competing for them.
Main features of Monopolistic Competition:
Many sellers or vendors
Enter and exit freedom
Cost of sale
Undependability on each other
Double proportional competition
Decline of demand curve
Many sellers and vendors:
Many sellers are producing different products. Therefore, the competition between them is very enthusiastic. As there is a large number of sellers so each of them produce a small part of the market supply. In this way no one can control the price of the product.
Difference of the products:
In perfect competition all products are same in their nature. However, in monopolistic competition all producers of the product try to produce a dissimilar product than others to sustain their product’s identity.
Enter and exit freedom:
Free entries in the market allow new concerns to come up with new substitutes. Freedom of entry and exit maintain the profit of the market on normal level.
Cost of sale:
Cost of sale is a very unique feature of monopolistic competition. In this type of market, because of the difference of products, all concerns have to pay some extra expenses in form of cost of sale. This cost is consist of the expenses of advertisement, payroll of the staff, promotion etc.
Undependability on each other:
Every concern has its own marketing and production policy. Firms are not influenced by each other. Every firm is independent.
Double proportional competition:
There are two types of competition features of monopolistic competition
Price competition: price is a base of competition between firms or concern.
Non-price competition: competition of firms or concerns is based on brand, quality, product and advertisement.
A group is a large number of firms or concerns producing different goods which are intimately related.
Decline of demand curve:
A firm or concern is facing descending slop of demand curve. Therefore, individual can sell more on low price and vice-versa.