monopolistic competition

Monopolistic Competition

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, for example market for toothpaste, cosmetics, watches, etc. FEATURES OF MONOPOLISTIC COMPETITION

Following are the features of a monopolistic competitive market:

Large number of firm: Monopolistic competition is characterized by large number of firms producing close substitutes but not identical product. Each firm must control a small yet significant portion of the market share such that by substantially extending or restricting its own sales, it is not able to affect the sales of any other individual seller. This condition is the same as in perfect market.

There is product differentiation: No seller has full control over the market supply. Each seller produces very close substitute products. The product is neither identical nor markedly different. Since every seller produces slightly differentiated product, each seller has minor control over the price. Unlike perfect market conditions, the firm is a price – maker to some extent. That is, a firm can change the price slightly, though not much. The control over price will depend on the degree of product differentiation.

Absence of Inter-dependence: Existence of a large number of firms insures the condition too large and too small. Thus, the individual firm’s supply is small constituent of total supply. Therefore, individual firm has limited control over price level. Similarly, each firm can decide, its price or output policies independently through price discrimination, any action by one firm may not invite reaction from rival firms.

Selling cost: Competitive advertisement is an essential feature of monopolistic competition. Selling cost becomes an integral part of the marketing of firms when product is differentiated. It is necessary to tell the buyers about the superiority of the product and induce the customer to buy the products

Free entry and exit: Under monopolistic competition, new firm firms can exit. There are no restrictions on entry or exit of the small size of firms. Existence of supernormal profit attracts entryloss, business firms to quit the market.

Lack of perfect knowledge: the buyers and sellers do not have perfect knowledge of the market there are innumerable product each being a close substitute of the other. The buyers do not know about these entire product their qualities and prices.

Less mobility; under monopolistic competition both the facts of production as well as goods and services are not perfectly mobile.

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More elastic demand: under monopolistic competition demand curve is more elastic.in order to sell more, the firm must reduce its price.Absence of collective action: under monopolistic competition, there is absence of collective action by so many firms.

Price policy of a firm: there is price policy of different firms under monopolistic competition .while, it lacks under perfect competition .under it, firm is only a features are absent under monopolistic competition.

ASSUMPTIONS OF MONOPOLISTIC COMPETITION

There are a significant number of sellers as well as buyers in the group. Products of the sellers are separated, however they are close substitutes of one another There is free entry as well as of the organization in the group. The objective of the firm is to maximize profits, both in the short run as well as in the long

run.

PRICE DETERMINATION UNDER MONOPOLISTIC COMPETITIONA) SHORT-TERM EQUILIBRIUM OF A FIRMShort-term implies to the period where a firm is not able to regulate the supply of its product as per the demand. Owing to this reason, a firm is not able to accomplish much taking into account its profit situation in the short-run. Thus, in the short-run, there could be three contingencies concerning profit (i) Abnormal profit, (ii) Normal or Zero profit, (iii) Loss.

Abnormal Profit. In short-run an organization could be capable of acquiring abnormal profit only as soon as the demand of the organization’s product is extremely high and there is no close substitute to its product. Under these circumstances, the organization can establish a high price for its product and can acquire abnormal profit. This can be achievable only in the short-run as no new organization can become involved in the market in the short-run.

Normal Profit or Zero Profit: If the demand of the organization’s product is not extremely high, the organization could acquire only normal profit once average revenue is a little more than the average cost or zero profit as soon as average revenue and average cost are equal.

Loss: In short-run, a firm may have to suffer loss when demand of the product of firm is so weak that the firm has to sell its product at a price less than its cost, in this case, average revenue of the firm is less than its average cost.

B) LONG-TERM EQUILIBRIUM OF AFRIM

Long-term is the period where an organization could regulate the supply of its product as per its demand. It is the period where new organizations can furthermore become involved in the market. In this situation, an organization at all times acquires normal profit, as in case an organization is acquiring abnormal profit in short-run new organizations will become involved in the market. It will add to the supply of the product & consequently the price of the product will be declined. In contrast if an organization is suffering a loss in the short-run, several organizations will leave the industry. In this situation, supply of the product will decline and price of the product will rise to the level of average cost or a little more than the average cost. Consequently, the organization will


acquire normal profit. Nevertheless, following two conditions should be fulfilled for the equilibrium of an organization in the long-run.

Marginal cost as well as marginal revenue of all the organizations should be equal Average cost as well as average revenue of all the organizations should be equal.DEFECTS OR WASTES OF MONOPOLISTIC COMPETITION

EXCESS CAPACITY

It implies the amount of output by which the long run output of the firm under monopolistic competition falls short of the Ideal output. This is considered as wastage in monopolistic competition.The excess capacity under imperfect competition emerges because of downward sloping demand curve. It can be tangent only at the falling part of LAC. This means the greater the elasticity of this downward sloping demand curve, lesser will be excess capacity.A firm under monopolistic competition in long run equilibrium produces an output, which is less than what is deemed socially optimum or ideal output. Society’s productive resources are fully utilized when they produce the output at minimum long run average cost. However, firm under monopolistic competition operates at the output on the falling portion of LAC; which implies it is not operating at minimum LAC point. However, under perfect competition the firm in long period operates at minimum LAC i.e. Ideal output or socially optimum output.

Unemployment: Under imperfect competition, the production capacity of the firm is notused fully. This implies that there is underutilization of capacity. This leads to unemployment.

Exploitation: Under imperfect competition the output is restricted, so that price is kept higher than the marginal cost (AR>MC). The excess of the price on MC represents realextra burden on the community i.e. exploitation. Under perfect competition this exploitation is not possible as price is equal to AC and MC (AR=MC=AC)

Advertisement: Expenditure on competition advertisement is regarded as a waste of competition. It is the result of imperfect competition because under perfect competition there is no need for such advertisement due to homogenous products. However, under imperfect competition product is differentiated and therefore advertisement becomes necessary in order to earn larger share in the market.Cross Transport: The existence of cross transport is another factor contributing to waste of imperfect competition. A firm in India may be a selling a commodity in India while the same product produced in India may be sold abroad. This is also the result of absence of perfect competition and presence of product differentiates.

Specialization: Another waste of imperfect competition is the failure of each firm in India to specialize in the production of those commodities for which it is best suited.Standardization: Under imperfect competition, standardization which helps in reducing Cost is not possible. No produce can take the rich producing particular design on larger.

Monopolistic Versus Perfect Competition Excess Capacity1. The quantity of output produced by a monopolistically competitive firm is smaller than the quantity that minimizes average total cost (the efficient scale).


2. This implies that firms in monopolistic competition have excess capacity, because the firm could increase its output and lower its average total cost of production.3. Because firms in perfect competition produce where price is equal to the minimum average total cost, firms in perfect competition produce at their efficient scale.

Markup over Marginal Cost1. In monopolistic competition, price is greater than marginal cost because the firm has some market power.2. In perfect competition, price is equal to marginal cost.

Microeconomics Macroeconomics

Individual Consumers and Firms. The demand and supply of individual

goods and services.

The Overall Economy. The aggregate demand and aggregate

supply for all goods and services.

Demand depends on:

Supply depends on: Aggregate demand depends on:

Aggregate supply depends on:

Consumer’s expectations of the future.

Expectations of profits by firms.

Households’ expectations of the future.

Producers’ expectations of future profits.

The price of the product in question.

The price of the good or service in question

Interest rates.

Productions costs.

Household income available.

Technology. Household income.

Economic growth.

Household accumulated wealth.

Costs of production.

o Laboro Raw

materials.o Other

inputs.

Household wealth.

Public policy:o Business tax

rates.o Regulation or

deregulation.o Environmental

policies.

Consumer tastes and preferences.

Business taxes and subsidies.

Taxes and tariffs.

Business taxes.

The price of other products.

Price of related goods.

Consumer indebtedness.

Weather.

The number of household

The number of suppliers.

The number of consumers.

The number of firms.


s demanding a good or service.

Demand for foreign goods.

World demand for domestic goods.

Exchange rates.

Microeconomics Macroeconomics

Equilibrium occurs when the quantity demanded equals the quantity supplied.

Equilibrium in an economy occurs when the aggregate demand equals the aggregate supply.

There is a price for each good or service that will clear the market.

There is a price level in an economy at which the aggregate demand will equal aggregate supply.

In macroeconomics:

There are no:o Substitute goods or services.o Complimentary goods and services.o Normal goods and services.o Inferior goods and services

=>There are just “aggregate goods and services”. Ceteris paribus is not an issue in macroeconomics. We do not care why consumers make individual choices. We are not concerned with:

o Price elasticity of demand.o Budget constraints of consumers.o Marginal utility of consumers.

Firms (producers) are simply firms (producers). We do not worry about whether a firm is:o A perfect competitor.o A monopolist.o In monopolistic competition.o An oligopolist.

We do not concern ourselves with the size or behavior of the firm in macroeconomics. We still emphasize the concept of “opportunity costs”, but we now apply that concept to

whole economies or societies. You will not hear the phrases “marginal cost” or “marginal revenue”. These two concepts

are not an issue in macroeconomics.

REFERENCES


1. Reddy P.N. and Appanniah, H.R. “Principles of Business Economics”.2. Su8ndharam, K.P.M. “Business Economics.3. McGuigan, Moyer and Harris: Managerial Economics, West Publishing Company4. Peterson, Craig, H. and Lewis Cris, W. “Mangaerial Economic, Pearson,Education Asia.5. Mehta, P.L., “Managerial Economics, Sultan Chand & Sons.6. Maurise, Charles, S. Thomas and Others “Mangerial Economics applied Micro Economics for Decision Making, Irwin.7. Mote, V.L., Samule Paula nd G.S. Gupta, Managerial Economics , Concepts and Cases, Tata McGraw Hill, New Delhi.
