Question

1. Carefully explain the characteristics of a monopolistically competitive firm. Why do many of these characteristics have “weasel (vague, imprecise) words” in them?

Please show me your thought process. Please explain it as if you are telling it to someone who has no clue about economics.

Answer 1

The monopolistic competition firm describes a common market structure in which many firms have many competitors, but each one sells a slightly different product to the customers in their market.

Many small scale industries or businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and restaurants, cloths shop, tea stall etc.

In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers. for e.g - Resturants A offer pizza with butter and Resturant B offer without butter pizza for customers.

* Monopolistically competitive markets have the following characteristics, which are mentioned here:

• There are many sellers and many buyers in the market, and business has no total control over the market price.
• Buyers perceive that there are non-price differences among the competitor's products.
• There are few barriers to entry and exit.
• Producers have a degree of control over price.
• The principal goal of the firm is to maximize its profits.
• Factor prices and technology are given.
• The decision regarding price and output of any firm does not affect the behavior of other firms in a group.
• Most firm earns only normal profit in the long run.
• Most firm spends substantial amount on advertisement.

In the monopolistic competitive firm, lets take the example of fast moving consumer goods product (FMCG) can be bath soap, tooth paste, shampoo, cold drinks, biscuits etc. For these products have too much companies in the market. For sell their product, they have cut throats competition in their market.

Hindustan Unilever Ltd./ ITC Ltd./ Nestle India/ Britannia Industries etc are many companies in the market. Among these companies have rivarly for capture the market share and retain the customers. That so, they have selling price competition and they maximize the advertisment cost to attract the customers toward their products for purchase.