04-05-2013, 02:52 PM
Monopolistic Competition
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Introduction
Market structure refers to the physical characteristics of the market within which firms interact.
Monopolistic competition is a market structure in which there are many firms selling differentiated products.
Oligopoly is a market structure in which there are a few interdependent firms
Market structure involves the number of firms in the market and the barriers to entry.
Perfect competition, with an infinite number of firms, and monopoly, with a single firm, are polar opposites.
Monopolistic competition and oligopoly lie between these two extremes.
Meaning of monopolistic competition
Monopolistic competition is that market structure in which there is keen competition ,but neither perfect nor pure, among a large number of producers and suppliers . They have some degree of monopoly because of their differential product .Thus monopolistic competition is a mixture of perfect competition and a certain degree of monopoly power
Many Sellers
There are many sellers, however the number is not large enough to make the market perfectly competitive.
A single seller is not so big enough to influence the market
Close Substitute Products
Products sold by the sellers in monopolistic competition are close substitutes.
Soaps and Garments are examples where there are many close substitutes for any given brand of product.
Being close substitutes the cross elasticity of demand is high.
Product Differentiation
Products in monopolistic competition are differentiated.
Being close substitutes it becomes essential to have an independent identity of its own.
In products like pant lengths, shirt pieces, dress pieces there are many varieties.
They are close substitutes and each brand of product differentiates itself.
Free Entry & Exit
A firm is free to enter the market i.e. to produce a product which is usually a close substitute for the existing products.
Entry of a new firm not restricted through govt. policies or through any other methods.
Similarly, there are no restrictions if a firm wants to exit from the market for any reason.
Monopolistic Competition Examples
Another prominent and classic example, is stationery manufacturers. They produce the same thing, but there is no congruence.
A very nice example for monopolistic competition is farmers. Farmers produce crops for the entire world population, but again they have different characteristics by virtue of things like size and quality.