MONOPOLISTIC COMPETITION

WHAT IS MONOPOLISTIC?
• MONOPOLISTIC REFERS TO AN ECONOMIC TERM DEFINING A PRACTICE WHERE A
SPECIFIC PRODUCT OR SERVICE IS PROVIDED BY ONLY ONE ENTITY. HENCE THE
ENTITY SUPPLYING THE PRODUCT OR SERVICE HAS THE DOMINANCE IN ITS PRICE-
FIXING AND DECIDING ON THE MARKET OUTPUT.
WHAT IS MONOPOLISTIC COMPETITION?
- MONOPOLISTIC COMPETITION IS DEFINED AS AN ENVIRONMENT WHEREIN THE MARKET PARTICIPANTS
SELL DIFFERENTIATED PRODUCTS, YET SERVE THE SAME END MARKET.
- IN ECONOMICS, MONOPOLISTIC COMPETITION OCCURS WHEN SEVERAL FIRMS OFFER PRODUCTS OR
SERVICES WITH SIMILAR BASIC FUNCTIONALITY, BUT THEY ARE UNIQUE IN THEIR OWN WAY. WHEREAS A
MONOPOLISTIC MARKET EXHIBITS A SINGLE ENTITY’S DOMINATION IN SUPPLYING A PRODUCT AND
SERVICE TO THE MARKET, IT IMPLIES A PURE MONOPOLY.
- IN THE FIELD OF ECONOMICS, MONOPOLISTIC COMPETITION REFERS TO A MARKET STRUCTURE THAT
ENTAILS MANY COMPANIES (I.E. SELLERS) OFFERING A DIFFERENTIATED PRODUCT BUT WITH A
VIRTUALLY IDENTICAL UTILITY TO THE END-USER.
- WHILE THE PRODUCTS MIGHT BE LARGELY THE SAME IN THEIR INTENDED PURPOSE, I.E. THE BENEFIT
RECEIVED BY THE CUSTOMER, THERE ARE STILL ATTRIBUTES THAT CAUSE THE PRODUCTS TO BE
SOMEWHAT DIFFERENTIATED.
- THEREFORE, IN AN ENVIRONMENT OF MONOPOLISTIC COMPETITION, MARKET PARTICIPANTS COMPETE
ON QUALITY, PRICE, AND MARKETING.
 WHAT ARE THE CHARACTERISTICS OF
MONOPOLISTIC COMPETITION?
THE MOST COMMON CHARACTERISTICS OF MONOPOLISTIC COMPETITION ARE AS FOLLOWS:

•HIGH NUMBER OF MARKET PARTICIPANTS: IN MONOPOLISTIC COMPETITION, THERE ARE

MANY INDEPENDENT COMPANIES INVOLVED THAT ACTIVELY COMPETE WITHIN THE MARKET.

•DIFFERENTIATED PRODUCTS TO SERVE AN IDENTICAL END-MARKET: EACH COMPANY

PRODUCES AND SELLS A DIFFERENTIATED PRODUCT, BUT THE FUNCTION OF THE PRODUCT IS
COMPARABLE, I.E. THE PRODUCT HAS MANY CLOSE SUBSTITUTES, ALTHOUGH THERE IS NO
PERFECT SUBSTITUTE.
•LOW BARRIERS TO ENTRY: ANOTHER UNIQUE FEATURE OF MONOPOLISTIC COMPETITION IS
THE FREEDOM OF ENTRY AND EXIT PRESENT IN THE MARKET. ENTRANCE AND COMPETING IN
THE MARKET ARE RELATIVELY EASY FOR NEW COMPANIES (AND IT IS ALSO EASY TO EXIT),
BUT OF COURSE, THERE IS THE OPPORTUNITY COST OF TIME TO CONSIDER.
1. MANY BUYERS AND SELLERS
- SIMILAR TO PERFECT COMPETITION, THERE ARE MANY BUYERS AND SELLERS IN
THE MARKET. HOWEVER, THERE ARE FEWER IN MONOPOLISTIC COMPETITION.
CONSUMERS HAVE A WIDE VARIETY OF CHOICES WHICH IS NOT OFFERED BY OTHER
MARKET STRUCTURES SUCH AS A MONOPOLY OR OLIGOPOLY.
2. SLIGHTLY DIFFERENTIATED PRODUCTS
- FIRMS THAT OPERATE IN A MONOPOLISTIC MARKET HAVE VERY SIMILAR PRODUCTS
BUT ARE SLIGHTLY DIFFERENTIATED TO ADD VALUE OVER THE COMPETITION.
CLOTHING MARKETS ARE A PRIME EXAMPLE. THERE ARE MANY TYPES OF CLOTHES,
EACH WITH A SLIGHTLY DIFFERENT STYLE. THIS DIFFERENTIATION CAN BE SEEN IN
FOUR WAYS: PHYSICAL, MARKETING, HUMAN CAPITAL, AND DIFFERENTIATION
THROUGH DISTRIBUTION.
3. MAXIMIZE PROFITS
- FIRMS IN A MONOPOLISTIC MARKET SEEK TO MAXIMIZE PROFIT. IN ECONOMICS,
THIS IS WHERE MARGINAL COSTS EQUAL MARGINAL REVENUE. BY DOING SO, THE
FIRM PRODUCES RIGHT UP TO THE POINT WHEREBY IT BECOMES UNPROFITABLE TO
PRODUCE ANY MORE GOODS. TO PRODUCE ANY FURTHER WOULD CREATE A LOSS
FOR THE FIRM. SO UP TO THIS POINT, THE FIRM IS MAKING A PROFIT ON PRODUCING
AN ADDITIONAL UNIT TO SELL.
4. LOW BARRIERS TO ENTRY AND EXIT
- NEW ENTRANTS ARE EASILY ABLE TO ENTER AS THERE ARE NONE OR VERY
INSIGNIFICANT BARRIERS TO ENTRY. THE COST TO START A NEW BUSINESS IS LOW
AND THE RISK INVOLVED IN FAILING IS ALSO COMPARATIVELY LOW. SO THE
INCENTIVE TO ENTER THE MARKET IS HIGH, WHILST FEW TOOLS ARE NEEDED. IN
OTHER WORDS, THERE ARE MANY MORE PEOPLE WHO ARE ABLE AND WILLING TO
5. POTENTIAL SUPERNORMAL PROFITS IN THE SHORT TERM
- MONOPOLISTIC FIRMS CAN MAKE SUPERNORMAL PROFITS IF THEY CAN BENEFIT
FROM A GAP IN THE MARKET. LOOKING AT CLOTHING, FOR EXAMPLE, ONE COMPANY
MAY CREATE A NEW DESIGN THAT HAS NEVER BEEN DONE BEFORE
6.NORMAL PROFITS IN THE LONG-RUN
- OVER THE LONG-TERM, PROFITS SHRINK AS NEW ENTRANTS ENTER THE MARKET TO
COMPETE. DUE TO LOW BARRIERS TO ENTRY, NEW FIRMS CAN SEE ANY
SUPERNORMAL PROFITS THAT ARE MADE AND COME IN TO TAKE THEIR SHARE. SO
WHILST SOME FIRMS MAY BENEFIT FROM NEW PRODUCTS IN THE SHORT-TERM,
THESE SUPERNORMAL PROFITS ARE BROUGHT BACK DOWN AGAIN WITH THE
INTRODUCTION OF COMPETITION.
7. IMPERFECT INFORMATION
-IN PERFECT COMPETITION, THE CUSTOMER IS ABLE TO GATHER INFORMATION
RELATIVELY EASILY AS ALL PRODUCTS ARE THE SAME. AT THE SAME TIME, THE
COST TO GATHER INFORMATION IN A MONOPOLY STRUCTURE IS RELATIVELY LOW
AS THERE IS ONLY ONE FIRM.
8. NON-PRICE COMPETITION
-THE MARKET OFFERS SLIGHTLY DIFFERENT PRODUCTS, SO BUSINESSES COMPETE
ON PRODUCT/SERVICE QUALITY. THIS CAN COME THROUGH SHORTER WAIT TIMES
OR MORE ATTENTIVE EMPLOYEES. AT THE SAME TIME, FIRMS WILL ALSO COMPETE
ON OTHER NON-PRICE FACTORS SUCH AS LOCATION, BRANDING/ADVERTISING,
AND QUALITY.
EXAMPLES OF MONOPOLISTIC COMPETITION:
THANK YOU!