Gujarat BoardEnglish MediumSTD 11 CommerceEconomicsMarket5 Marks
Question
State the Characteristic of Monopolistic Competition.
✓
Answer
Introduction :
Perfect competition and monopoly are two extremes of the market which are theoretical.
The condition prevailing between these two extremes is imperfect competition.
The concept of imperfect competition has been presented by Mrs. John Robinson.
The scope of imperfect competition is very wide.
Monopolistic competition is one of the concept of imperfect competition.
This concept is similar to imperfect competition.
This concept has been presented by Prof. Chamberlin.
Meaning of Monopolistic Competition: According to Chamberlin :
"Perfect Competition and Perfect Monopoly co-exist in market known as monopolistic market."
According to Smt. Robinson : "If each firm establishes monopoly and also competes at the same time, the market is called imperfect competition.
" In general meaning, monopolistic competition means the competition prevailing among a large group of producers producing close substitutes, not perfect substitutes.
" Such markets have two characteristics :
There are many producers.
They produce close substitutes.
Example :
The company producing LUX is the example of monopolistic competition, there are many companies in the market producing bathing soaps like Hamam, Dove, Pears, Life boy etc.
They are close substitutes of one another.
There is competition among them but all soaps are not the same.
They are not 100% homogeneous.
There is product differentiation among them but each company has a special customer group that uses certain brand of soaps and to that extent, there is an element of monopoly in it.
Thus, there is mixture of competition and monopoly in it.
Characteristics of Monopolistic Competition :
A Large number of Sellers and Numerable Buyers :
In perfect competition , sellers are innumerable. In monopoly, there is only one seller firm, while in monopolistic competition, there is a large number of producers.
In this market, decision taken by other firms regarding production and price affect the firm because all firms produce near substitute, slightly different from each other.
Yet, the decision of producer about production is distributed among many firms and therefore its effect quite limited.
In this market there are unlimited buyers so they can't affect the market decision individually.
Product Differentiation :
Product of monopolistic competition is a special characteristics of monopolistic competitive market.
Product differentiation is also known as Product Difference.
In the perfect competition, goods sold by firms are homogeneous, while in monopolistic competition there is product differentiation in goods sold by each firm.
This means that each firm in the group produces near substitutes to other firm.
Such product differentiation is brought by making some physical changes or by ancillary services.
A firm makes product differentiation possible by changing the form. colour, size, volume or packing of a product or by changing the decisions of sale or circumstances of sale.
Free entry- exit of the firms:
In monopoly, there are restrictions over the entry of the firms.
While in monopolistic competition like perfect competition, there is free entry and exit for other firms.
If from production or selling of any goods or product, abnormal profit is obtained in short- run $($term$)$ then in production of this product or goods entry of new firms are seen.
And if the abnormal loss situation creates then firms are exit from this industry.
It means that they change the profession.
Thus, as per perfect competition, free entry- exit is possible in this market.
At long run firm gets equilibrium at normal.
Profit in long run, after obtaining normal profit entry-exit of firm is stopped and firm of industry gets equilibrium.
Selling Cost :
In perfect competition, firms produce homogeneous products and therefore, selling cost is not necessary while in monopoly.
As there is only one firm and no near substitute available, there is no need for selling cost.
In monopolistic competition as there is a large number of producers, producing near substitutes to each other, selling cost become inevitable.
Each producer tries to convince the customers of the superiority of his product over that of the other with the help of the selling cost.
In monopolistic competition firm get benefit of market by changing place and size of demand curve through selling cost.
Selling cost means cost for increasing the sale.
Selling cost includes. advertisement cost, useful packing, attractive product, transportation cost, sales tax, commission paid to wholesaler and retailer, allowances and expenditure behind salesman.
Because of product differentiation is possible in this market, firm get better place for its product.
And to obtained this benefit selling cost is necessary.
In present time, selling cost also affect the price of product.
Competition other than Price :
In monopolistic competition, we see competition other than price also with price competition.
In this market producer try to increase the demand of product $($goods$)$ by keeping fixed price, changing quality of goods or through medium of advertisement.
According to the Chamberlin, "Actually customer not purchasing the product but purchasing quantity of utility or satisfaction.
In this quality of satisfaction, contribution of goods along with different services provided by sellers are included. e.g. Credit facility, free home delivery, behaviour of seller, facility of goods return, prestige of trader, distance of selling place etc. factors are performing important role to attract the buyers $($customers / consumers$)$.
Imperfect knowledge regarding market :
In this market, buyers and sellers do not have the complete knowledge regarding market.
If consumer or buyers don't know the features or quality or near substitute products $($goods$)$ then producer or seller can keep difference in price of goods or services provided by them.
It means that the price V/S differentiation is seen in close substitute products or goods in the market.
Control over price :
In perfect competition, the control over price is zero while in monopoly, there is only one seller and there is no near substitute available, a firm has a control over price.
In monopolistic competition , there is a large number of firms and near substitute are available, the control of the firm over price is limited.
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