MONOPOLISTIC

COMPETITION
-SUBMITTED BY:
NAME: POOJA ADHIKARI
ROLL NO.: 223336
BCOM HONS. SECTION B
 INTRODUCTION
Monopolistic Competition: A Blend of Monopoly and Perfect Competition
• Definition: A market structure where many firms sell differentiated products that are
close substitutes but not perfect substitutes.
• Key Characteristics:
• Many Sellers: Numerous firms compete in the market.
• Product Differentiation: Firms differentiate their products through branding,
quality, features, or perceived value.
• Low Barriers to Entry and Exit: New firms can enter the market relatively easily,
and existing firms can exit if they are not profitable.
• Imperfect Information: Consumers may not have perfect information about all
available products and prices.
•Price-Making Power: Firms have some control over
their prices due to product differentiation, but they are
not price takers like in a perfectly competitive market.
•Non-Price Competition: Firms compete through
advertising, branding, and other non-price strategies to
attract customers.
•Excess Capacity: Firms may not operate at their most
efficient level of output, leading to excess capacity in the
industry.
•Inefficiency: Monopolistic competition can lead to
some inefficiency due to product differentiation and
advertising costs.
 Monopolistic Competition: A Blend of
Monopoly and Perfect Competition(graph)
 ASSUMPTIONS OF
MARKET :
•Many Sellers and Buyers: There are numerous sellers and buyers
in the market, none of whom have significant market power.
•Product Differentiation: Products are differentiated in some way,
whether it be through branding, quality, features, or perceived value.
This allows sellers to have some control over price.
•Low Barriers to Entry and Exit: New firms can enter the market
relatively easily, and existing firms can exit if they are not profitable.
•Imperfect Information: Consumers may not have perfect
information about all available products and prices, leading to some
brand loyalty and imperfect competition.
 LONG RUN EQUILIBRIUM FOR
MONOPOLISTIC COMPETITION
(explanation)
Key Points:
•Falling AR and MR: As the firm produces more output, it must lower its
price to sell additional units. This leads to a falling AR and MR curve.
•Price and Profit: The firm will charge a price that is higher than its
marginal cost, but lower than the price a monopolist would charge. This
results in a lower level of profit compared to a monopoly.
•Long-Run Equilibrium: In the long run, economic profits will be zero
for a monopolistically competitive firm.
This is because new firms will enter the market, attracted by the positive
profits, shifting the demand curve for each existing firm to the left.
LONG RUN EQUILIBRIUM FOR
MONOPOLISTIC COMPETITION
(graph)
 DIFFERENCE BETWEEN
MONOPOLY AND PERFECT
COMPETITION
Feature Monopoly Perfect Competition
Number of Firms One Many
Unique product, no close Homogeneous products,
Product Differentiation
substitutes identical
Price Control Price maker Price taker
Barriers to Entry High barriers No barriers
Market Power Significant market power No market power
Demand Curve Downward sloping Perfectly elastic
Potential for long-run Zero economic profit in long
Profit in Long Run
economic profits run
Allocatively and productively Allocatively and productively
Efficiency
inefficient efficient
Public utilities (water,
Agriculture, foreign exchange
Examples electricity), government-
markets
granted monopolies
 Monopolistically Competitive Firm in the Short Run

Key Characteristics:
• Downward-sloping Demand Curve: Firms have some market power due to product
differentiation, allowing them to influence price.
• Profit Maximization: Firms produce where Marginal Revenue (MR) equals Marginal Cost
(MC).
• Potential for Profit or Loss:
• Profit: If the price at the profit-maximizing quantity exceeds Average Total Cost (ATC),
the firm earns economic profit.
• Loss: If the price is below ATC, the firm incurs an economic loss.
In essence, a monopolistically competitive firm in the short run behaves similarly to a
monopoly, with the ability to set price and quantity to maximize profit. However, the degree of
market power is limited by the presence of close substitutes
 Monopolistically Competitive
Firm in the Short Run (GRAPH)
 Monopolistic Competition and Welfare:
• In monopolistically competitive markets, firms produce differentiated products
and have some market power, leading to a markup of price over marginal cost.
• This markup causes deadweight loss, making the market outcome inefficient
compared to perfect competition.
• Policymakers face challenges in addressing this inefficiency due to the difficulty
of regulating differentiated products and the potential for unintended
consequences like losses for firms.
• The number of firms in a monopolistically competitive market may not be
optimal due to product-variety and business-stealing externalities.
• These externalities make it difficult to determine whether there are too few or
too many firms in the market, further complicating the welfare analysis.
Overall, monopolistically competitive markets do not achieve the same level of
efficiency as perfectly competitive markets, but the inefficiencies are complex and
difficult to remedy through government intervention.
 Advertising in Monopolistic
Competition
• Purpose: Firms use advertising to differentiate their products and create
brand loyalty, even when products are physically similar.
• Spending: Firms in monopolistically competitive markets, especially those
selling differentiated consumer goods, spend a significant portion of their
revenue on advertising.
• Debate: There is a debate about the social value of advertising.
• Critics: Argue that advertising manipulates consumer tastes and reduces
competition by making consumers less price-sensitive.
• Defenders: Argue that advertising provides valuable information to
consumers and increases competition by making it easier for new firms to
enter the market.
Overall, advertising in monopolistic competition is a complex issue with both
benefits and drawbacks for consumers and firms.
 CONCLUSION
Here are 3 key points to conclude a discussion on monopolistic competition:
[Link]: Monopolistic competition results in a less efficient outcome than
perfect competition due to the presence of market power. This leads to a
deadweight loss as firms produce less than the socially optimal level of output.
[Link] Variety: While monopolistic competition may not be as efficient as
perfect competition, it offers consumers a wider variety of products to choose
from. This product differentiation can enhance consumer satisfaction.
[Link] Implications: Government intervention in monopolistically competitive
markets is complex. Policies aimed at increasing competition, such as antitrust
regulations, may have unintended consequences. Finding the right balance
between promoting competition and allowing for innovation remains a challenge
for policymakers.