Question

Describe the assumptions and characteristics of the monopolistic competition market. Monopolistic competition market differs from full competition and monopoly markets in terms of its features? (Identify all market types and assumptions mentioned in the question. Review market conditions, structure, for short and long term.Use graphics in your answer)

Answer 1

Answer- Under monopolistic competition it is assumed that it a market situation i which there are large number of firms which sell closely related but differentiated products. For e.g market of products like soap, toothpaste, AC etc.

Characteristics

A. Large number of sellers

B. Product Differentiation

C. Selling costs : it refers to the expenses incurred on marketing, sales promotion and advertisement of the product.

D. Freedom of entry and exist in the market

E. Lack of perfect knowledege

F. Price maker

Differences between monopolistic and perfect competition

A. Nature of the product: under perfect competition products are homogeneous. Under monopolistic competition products are heterogeneous

B. Selling cost: There is no selling cost under perfect competition. There is a heavy selling cost under monopolistic competition

C. Price: Firms are price taker under perfect competition as price is determined by the industry. Firm has partial control over price due to product differentiation

D. Demand curve: Demand curve is perfectly elastic under perfect competition but demand curve slopes downwards under monopolistic competition

Differences between monopoly and monopolistic competition

A. Number of sellers: Therr is a single seller under monopoly market but there are large number of sellers under monopolistic competition

B. Nature of the product: Under monopoly there are no substitute of the product whereas under monopolistic competition products are differentiated on the basis of brand, size, color etc

C. Demand: Under monopoly downward sloping demand curve is less elastic due to absence of close substitutes. On the other hand under monopolistic competition downward sloping demand curve is more elastic due to presence of close substitutes

D. Selling cost: Low selling cost are incurred under monopoly. Heavy selling cost are incurred under monopolistic competition.