Question

Discuss one of the following market structures – Monopolistic Competition or Oligopoly.           In your discussion include assumptions, examples, conclusions, efficiency, and      comparisons with other market structures. (You may want to use a graph.)

Answer 1

Monopolistic Competition

Monopolistic competition is a combination of both monopoly and competitve markets. Monopolistic market structure is a type of imperfect market competition in which producers sell products that are differentiated and are not perfect substitutes of each other. Products can be differentiated on the basis of brand or quality.

In monopolistic market structure there is freedom of entry and exit. Products of monopolits are differentiated and hence they face inelastic demand curve and so they can set prices. Since there is freedom of entry for new firms,supernormal profit in short run will attract more firms to enter the market leading to normal profit in short run.

Features

• freedom of entry and exit
• there are many firms
• firms produces differentiated products
• producers are price makers since products are not close substitute of each other
• firms make supernormal profit in short run and normal profits in long run

Assumptions

• freedom of entry;any firm can start business in the market
• there are large number of firms and so each firm has singnificantly small share of market
• each firm is independent to take their own decisions since no single firm can affect the market
• each firm produces differentiated product. hence there are no close substitutes.

Examples of Monopolistic Competition

• Restaurants : each restaurant provide different taste and quality of food. They compete on prices also.
• TV programmes: each tv programme give different kind of entertainment ,depending on the taste and preferences of people.
• Clothing: products can be differentiated on the basis of bvrand,quality, price etc
• hair dresser: service can be differenated on the basis of qualtiy of service,etc

Efficiency of firms in monopolistic competition

• Firms have higher cost than perfectly competitive firms
• allocative inefficiency. Price is greater than marginal cost
• productive inefficiency .average cost is not at its minimum in the long run

Monopolistic competition and Monopoly

The key difference between monopolistic competition and monopoly is that ,in monopolisitic competition there are no barriers to entry. Any firm can start business in the market at any time. Therefore in long run,market will be competitve with firms making normal profit

Monopolistic competition and perfect competition

In monopolistic competition,firm produces differentiated products. Each prodcut can be differentiated from other on the basis of brand,quality etc hence each producer is a price taker and faces inelastic demand curve unlike perfect competiton in which products sold by the firms are close substitutes of each other and has no control over the market and faces elastic demand curve.