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    Chapter Monopolistic Competition

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    Rashed Sifat
    1) Monopolistic competition is a market structure with many small firms that sell differentiated products. Each firm has some control over price but not complete control like a monopoly. 2) In the short run, firms can earn supernormal profits but in the long run, free entry and exit will cause prices to fall to a level where firms earn only normal profits. 3) Both consumers and firms benefit from product variety under monopolistic competition, but costs are higher for firms due to advertising and consumers may face higher prices compared to perfect competition.

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    Chapter Monopolistic Competition

    Uploaded by

    Rashed Sifat
    43 views3 pages
    1) Monopolistic competition is a market structure with many small firms that sell differentiated products. Each firm has some control over price but not complete control like a monopoly. 2) In the short run, firms can earn supernormal profits but in the long run, free entry and exit will cause prices to fall to a level where firms earn only normal profits. 3) Both consumers and firms benefit from product variety under monopolistic competition, but costs are higher for firms due to advertising and consumers may face higher prices compared to perfect competition.

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    CHAPTER-MONOPOLISTIC-COMPETITION

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    1) Monopolistic competition is a market structure with many small firms that sell differentiated products. Each firm has some control over price but not complete control like a monopoly. 2) In the short run, firms can earn supernormal profits but in the long run, free entry and exit will cause prices to fall to a level where firms earn only normal profits. 3) Both consumers and firms benefit from product variety under monopolistic competition, but costs are higher for firms due to advertising and consumers may face higher prices compared to perfect competition.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    43 views3 pages

    Chapter Monopolistic Competition

    Uploaded by

    Rashed Sifat
    1) Monopolistic competition is a market structure with many small firms that sell differentiated products. Each firm has some control over price but not complete control like a monopoly. 2) In the short run, firms can earn supernormal profits but in the long run, free entry and exit will cause prices to fall to a level where firms earn only normal profits. 3) Both consumers and firms benefit from product variety under monopolistic competition, but costs are higher for firms due to advertising and consumers may face higher prices compared to perfect competition.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    CHAPTER: MONOPOLISTIC COMPETITION

    *Monopolistic Competition: This is a market structure with where there a large numbers of firms
    each selling a differentiate product.

    CHARACTERISTICS OF MONOPOLISTIC COMPETITION:

    1) The first important feature of monopolistic competition is that under it there are relatively
    large number of firms and each satisfying a small share of the market demand for the product.
    As a result they have less control over the price.

    2) The second important feature of monopolistic competition is that producer produced


    various types of product which are not identical but are slightly different from each other. As
    a result their prices cannot be very much different from each other.

    3) The buyers and sellers do not have perfect knowledge of the market. There are
    innumerable (a large number) products each being a close substitute of the other. The
    buyers do not know all these products their qualities and prices. Therefore, many buyers
    purchase a product out of a few varieties which are offered for sale near the home.
    Sometimes buyers know about a particular commodity where it is available at lower price.
    But he is unable to find proper conveyance. Likewise sellers do not know the exact
    preference of buyers and it is unable to get advantage out of the situation.

    4) This is another important feature of monopolistic competition. In a monopolistically


    competitive industry it is easy for the new firms to enter and exit the market. Free entry
    means that when in the industry existing firms are making super-normal profits, it act as an
    incentive for new firms to enter the industry which create a higher competition. Therefore a
    price war will be created in the long run they will be able to make only supernal normal
    profit.

    Short run supernormal profit will encourage new firm to enter the market. Firm can easily
    enter the market due to lack of significant entry barrier. The new entrances will partly error
    the demand for an existing firm’s product. This means that the AR curve will shift to the left
    until it is tangential to the average cost curve. (AR=AC) where only normal profits will be
    made in the long run.

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    *EXPLANATION FOR THE LONG RUN POSITION OF A FIRM MAKING SHORT
    RUN LOSSES:

    If losses are being made in the short run some firms will leave the market as there are low
    exit barriers. This will shift the AR curves right wards up to the point where AC=AR and
    only normal profit is made in the long run.

    EFFICIENCY: The firm is productively inefficient in the short run.

    Benefits of monopolistically competitive market:

    Benefits to firm:

    1) Firms face a downward slopping AR curve that is demand curve is not perfectly elastic
    like perfect competition. Thus they are price makers and not price takers. Hence firms are
    able to raise price above that which would apply under perfectly competitive condition.

    2) Firms have a certain degree of market power due to product differentiation. This can make
    the firm’s product more prices inelastic in demand and create consumer loyalty thus allowing
    them to raise price while retraining some of their customers.

    3) Short run supernormal profits may allow firms to fund more for research and development
    which may lead to greater product innovation. Thus firms are likely to gain dynamic
    efficiency.

    *BENEFITS TO CONSUMER:

    1) Consumers benefit from greater choice and variety since there are firms and products are
    differentiated.

    2) Some product differentiation can be of great value for consumers. Such as those based on
    locations as they offer more convenient.

    3) Low barriers to entry make monopolistic market relatively contestable. Firms are small
    and will have little market power as there are lots of rival firms. Hence prices are likely to
    lower in the long run compared with monopoly with only normal profit being made in the
    long run.

    4) Consumer may also benefit from product innovation which will increase their utility.

    EVALUATION:

     Firms earn normal profit in the long run which can act as a barrier to innovation.
    Earning normal profit leaves firms
     Costs are likely to be higher for firms as they need to spend a huge amount behind
    advertising and promotion. An unsuccessful advertising campaign can waste the
    money and this can lead to increased cost which adds to the final price of the product.
    This reduces consumer surplus.
     Proliferation (uncountable) brands may fled to confusion for consumers. If consumer
    gets various types of branded product in the market then they will not be able to
    choose the exact product that they want. Even they will not be able to understand
    which branded product will be more comfortable for them. Innumerable branded

    2|Page
    product also confused consumer about the price and the quality of product. Thus their
    living standard will fall.

    COMPARISON WITH PERFECT COMPETITION:

    a) Monopolistic competition results in neither allocative efficiency nor productive efficiency


    in both short run and long run, whereas perfectly competitive achieves both efficiency in the
    long run and in short run they achieve only allocative efficiency which maximize consumer
    welfare.

    However perfectly competition has unrealistic consumption and such markets may not
    exist in real world.

    b) Prices are likely to be higher and output would be lower in monopolistic competition
    whereas in perfect competition firms cannot increase the price above condition due to higher
    competition.

    COMPARISON WITH MONOPOLY:

    o The market is more efficient than monopoly but less efficient than perfect
    competition.
    o Price is above MC so allocative inefficiency exists price is also above lowest points of
    AC so productively inefficient. However the gap is likely to be less than under
    monopoly condition.
    o Due proliferation of firms industry output may be higher than under pure monopoly.

    Advantages of monopoly (economies of scale invest on R and D price discrimination)

    3|Page

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