Selling Cost in Monopolistic Competition

Selling costs refer to those expenses which are incurred for popularizing the differentiated product and increasing the demand for it.  Selling cost is a special feature of monopolistic competition.  Under perfect competition due to homogeneous product and under monopoly because of absence of substitute, the selling costs become unnecessary.

The most important instrument by which a firm can convince its buyers about the differentiating nature of its product is advertising.  Such expenditure which is incurred by a firm under monopolistic competition to persuade customers to prefer its product to that of its rivals is known as ‘selling costs’.  According to famous American economist, Edward Chamberlin, Selling Costs are Costs incurred in order to alter the position or shape of demand curve for a product.  Such selling costs may be incurred in any form such as advertising, sales promotion, samples to potential customers etc.  Whatever be the form, selling costs aim at raising the demand for the product and changing the position and the shape of demand curve.

Production Costs v/s Selling Costs

Production cost is the cost of direct labor, direct materials, and manufacturing overhead that are consumed to create a product, whereas, Selling Cost is the expenses incurred in the marketing and distribution of a product.

Production CostSelling Cost
1.Incurred under all types of market category1.Peculiar to Monopolistic Competition
2.Influence supply side2.Influence demand side
3.To meet demand3.To create demand
4.Some element of proportionality between production cost and output4.No definite proportionality between selling cost and sales promotion.
5.Need not be considered as items of waste.5.May be considered as items of waste.

Are selling costs to be considered as items of waste ?

We can prepare a case on both sides;

  1. Selling Costs as wasteful
  2. Not necessarily as wasteful.

Selling costs may be considered as items of waste for following reasons :

  • Retaliation : i.e. when one firm incurs selling cost to push up the sales of its product, the other firms will also resort to advertisement to push up their sales.  This almost leads to advertisement warfare which would be considered as an item of waste.
  • Rise in price : Selling costs are items of cost.  When cost is incurred it will have to be covered.  This could be through rise in price.
  • Misleading : Selling costs may mislead the consumers about the nature of quality of product.  This would be considered socially undesirable.
  • Cross-transport : It may lead the consumers from one region to go to other region to purchase the product of his choice being guided by its advertisement.
  • Not effective : A firm may keep incurring selling cost without promoting sales.  This is wasteful.

However, selling costs need not necessarily be considered as items of waste for following reasons :

  • Selling costs are of two types viz. Informative and Persuasive.  Informative selling costs make the consumers aware about the entry of new firm, new product or any change in the product.  This is educative role of selling cost and should not be considered as an item of waste.
  • Selling costs involve advertisement, publicity, salesmanship etc., all these have become industry on their own.  They create large scale employment and hence cannot be treated as an item of waste.
  • Selling costs create demand.  To meet the demand the firm has to produce more.  When production expands, the average cost of production falls and hence prices need not be raised because of selling cost.  Thus selling costs need not be considered as items of waste.

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  • Rahul

    Thank you for the information ! 🙂