Download Monopolistic competition

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Monopolistic competition.
In this type of market structure most business are there to compete with one another. They tend
to sell the product slightly different from the others so as to eliminate or reduce the competition
that is intense in the market. The sellers usually use differentiation as the major tool to counter
competition due to large number of sellers and buyers.
Most small businesses operate monopolistic competition where they sell the same product as
others but they try to modify so that it becomes different from others. For example a restaurant
which is independently owned offers unique product and services so as to attract customers but
in reality they offer the same product as other restaurants.
Characteristics of monopolistic competition.
There are usually many sellers in this market structure. The seller are usually independent in
their decision regarding the price of the product. The many sellers are there to compete one
another for the same customer who wants to satisfy his/her wants. So the monopolistic
competition has a lot of sellers who are there to maximize profit.
The product are differentiated so as to look different in the eye of the customer while it is just the
same product. There are different types of differentiation which include;

Physical differentiation- this is where firms uses color, design, features and performance
to make the product look different. For example electronic items such as radios,
television can be easily differentiated.

Marketing differentiation- this is where firm utilizes different packaging and promotional
techniques to make the product attractive and also look different. For example soaps and
detergents.

Human capital differentiation- This is where firms create difference skills of employees.
This is done through training, use of different uniforms.

Distribution differentiation- This is where firms adopt different distribution strategy. This
include; online distribution where customers order online and it is delivered to him/her. A
good example is the Amazon.com.
There is free entry and exit in and out of the market. There are no barriers to entrance and exit
this will mean that there will be a lot of sellers and information is easily spread but not all
customers will have the same information of the market’s product. This implies that since there
are a lot of sellers and buyers, some buyers will know where the product is sold at a lower price
while others will purchase the same product at a price higher. In monopolistic competition the
information is not usually perfect.
Other characteristics of monopolistic competitive market include; the firms are price makers
hence they can charge a high or low price, they usually use advertising as a major tool for
attracting customers and also the entrepreneur plays a big role in the market.
Advertising.
By definition advertising is the process of using audio or video to promote or sell a product.
Adverting is majorly done to counter competition and obtain a large market share by business. In
monopolistic competition, advertising is frequently used since there are large number of sellers
and the same product. Advertising has a major influence on the prices of product as the product
which is advertised is more expensive than the one not advertised and yet they are the same
product.
Most business advertise their products by different brand names. The brand names of the
products are as a result of differentiation so that the product will look different in the names but
all of them are similar. Prices of this brands are usually higher and consumer are forced to pay
more for a product that he/she could have bought it cheaply. Normally, the brand names are
registered as intellectual property so that it cannot be imitated by any other business. Eliminating
such protection of intellectual property right will help reduce the market prices of such product
because sellers will make the same product and charge a lower price which consumers can pay
for and interaction between demand and supply will make the product cheaper to acquire.
Equilibrium under monopolistic competition.
In the short run, different firm are likely to gain a supernormal profit as a form of reward for
their enterpreneurship but in the long run many firms will enter the market because there is no
barrier to entry and exit thus normal profits will be obtained.
Monopolistic competition in the short run.
The firm is likely to maximize its profit where MC=MR with the respective price, P which they
should charge and the quantity Q which they should offer.The price P is usally given by AR
which is above ATC at Q therefore supernormal profit is possible and is represented by the area
PCAB.
As new firm enters the market, demand of the existing firm moves to the left and becomes elastic
thereby lowering the price and thus the supernormal profits are eroded.
Monopolistic competition in the long run.
Super-normal profits attracts new firms to enter the market which cause the demand curve to
shift to the left. The new firms will continue to enjoy the existing normal profits and at this point
the firms have reached equilibrium.
So different firms will like to be in short run rather than long run because of the super-normal
profit. Different firm starts innovating new products, differentiating so that they can look
different thus attracting super-normal profit.
Comparison between perfect and monopolistic competition.
There are a number of differences and similarities between perfect and monopolistic
competition. The similarities include; in both market structures there are many sellers and
buyers, there are no barriers to entry and exit into and out of the market and in the long run both
market structure expect to gain a normal profit. The differences include; the product sold in
perfect competitive market structure are identical while in monopolistic the products are
differentiated, In perfect competition the sellers are price takers while in monopolistic
competition the sellers are price makers and in perfect competition the demand curve is
horizontal because while monopolistic competition the demand curve is downward sloping.
Comparison between monopoly and monopolistic competition.
The similarity between the two market structures in that both of them are price makers and have
total control of the market. Also both market structures have downward sloping demand curve.
The differences include; In monopoly, they only deal with one product with no close substitute
while monopolistic there are several close substitute of the products, in the long run the profit is
positive in monopoly and zero in monopolistic, there is no free entry and exit in monopoly while
in monopolistic there is free entry and exit and there is only one seller in monopoly while there
are many sellers in monopolistic competition.