Question

Discuss monopolistic competition, give an example, and explain how it is expected to set price and quantity.

Answer 1

Monopolistic competition is a market situation in which many firms compete with each other to sell their closely related differentiated products.

There are large number of buyers and sellers in these kinds of market and there is a free entry and exit of firms. It is a non-price competion as under imperfect competition firms compete with each other on the basis of their quality of goods, advertisement, promotion strategies, publicity, etc.

A monopolistic competition brings out differentiated products which have close substitutes of each other, but in some cases they are not called as a perfect substitute of a product. Basically, it is called as a reverse face of perfect competitive market.

The purpose of monopolistic competitive firms is to maximize their total profits and also aims to obtain super - normal profits where average revenue is equal to the average cost.

Some examples that makes you easy to understand the monopolistic competition are as follows:-

• Clothing - Many clothes retail outlets sell closely related designs and quality of clothes by focusing on product differentiation and provide different - different brands for the same quality of product.
• Restaurant - Nowadays, we know that restaurants have great pace in a monopolistic market as they are competing on quality of food as much as on prices. And also there is a free entry and exit of restaurants.

Some other examples can be medical stores, grocery stores, dry cleaners, saloons, furniture stores, etc.

A monopolistic competition do its price determination under two kinds of equilibrium:-

1. Short-Run equilibrium
2. Long-Run equilibrium

Detailed explaination about them with a diagram is shown in the image below:-

THATS IT....