In the real world, market is neither perfectly competitive nor a monopoly. The great majority of imperfectly competitive producers in the real world produce goods, which are neither completely different nor completely same. They produce goods, which are analogous to those produced by their rivals. This means that the goods produced in the market are close substitutes. It follows that such producers must be concerned about the way in which the action of these rivals affects their own profits. This kind of market is known as ‘Monopolistic Competition’ or group equilibrium. Here there is competition, which is keen, though not perfect, between firms manufacturing very similar products.
According to Chamberlin, “Monopolistic competition is a challenge to the traditional viewpoint of economics that competition and monopoly are alternatives…By contrast it is held that most economic situations are composites of both competition and monopoly.”
Monopolistic Competition is that market category in which there is keen competition, though not perfect, among a group of monopolists producing same, though not identical product e.g. soaps, watches etc.
Features of Monopolistic Competition
- Large number of firms: Monopolistic competition is characterized by large number of sellers. In this respect it is close to perfect competition. The number may not be as large as that under perfect competition but it is also not very small.
- Absence of interdependence: Since the number of firms is sufficiently large and the size of individual firm is small enough no appreciable interdependence exists among the different firms. No single firm can influence or is influenced by the others in the market. It means different firms cannot produce any significant impact on market by changing their price policies.
- Freedom of Entry: Like perfect competition, monopolistic competition also grants unrestricted entry, to rivals in the market. It means there are no restrictions. This leads to occurrence of only normal profits in the long run. However, the nature of this feature is not the same as that under perfect competition. Under perfect competition new firms enter the market with an identical product while under monopolistic competition the new firm may produce only similar but not identical product.
- Product-Differentiation: Under monopolistic competition, the different firms produce similar (but not homogeneous) products. It means the different firms produce what may be properly described as a differentiated product. Thus, product differentiation is the core of monopolistic competition. The firms produce a product belonging to a particular class, say tooth-paste; but individual product is differentiated from other rival products. It is because of such product differentiation that firms enjoy some monopoly power, that is, the power to control the price in a narrow circle, but in the wider circle, it faces the competition from the rival firms. Hence, the firms may be called as “competing monopolists” and the situation may be rightly described as monopolistic competition.
- Selling Costs: Another feature of Monopolistic Competition is the existence of Selling Costs; i.e. the costs incurred in order to create demand and push up the sales of the product; such as advertising costs and publicity expenses. Selling costs are not incurred under Perfect Competition nor under Monopoly. In case of Perfect Competition we assume perfect knowledge on the part of buyers about the market condition; and in case of monopoly there is no close substitute in the market. Therefore selling costs are peculiar to monopolistic competition.
- Concept of Group: Industry referred to a collection of firms producing homogeneous product; whereas group comprises of firms producing differentiated product. The group may be ‘small’ or ‘large’. A small group consists of few sellers whereas large group consists of many sellers. A small group consisting of few sellers is associated with a market category called Oligopoly whereas in Monopolistic Competition we are concerned with large group having sufficiently large number of firms producing differentiated product.
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