Question

Write your responses in complete sentences. Each answer should be two - three paragraphs (150 – 250 words) in length.

1. Two conditions for Monopolistic Competition are that there are a large number of firms and the good is differentiated. Explain why these conditions exist.

Answer 1

Monopolistic Competition

Monopolistic Competition refers to a market situation in which there are large number of firms which sells closely related but differentiated products. Markets of products like soap, toothpaste, AC etc are examples of monopolistic competition.

Now we can say there are some features or conditions of monopolistic competition

1) Large number of Sellers :

There are large number of firms selling closely related goods unlike perfect competition where there is no share in the market, in the monopolistic competition each and every firm has a small share of the market.

Having a large number of sellers in monopolistic competition and each having a limited share in the market separates from other market forms like monopoly and perfect competition.

Also because of product differentiation, large number of sellers arise as sellers selling the same product on the basis of nature but differentiated by size, color, quality etc.

2) Product Differentiation :

This is one of the most important feature or conditions of monopolistic competition. As it is known that there are large number of sellers and each seller has a limited share in the market. So each firm exercise some control on the market through Product differentiation.

Product differentiation refers to differentiating the products on the basis of shape, size, brand, color etc. Although products are the same overall but not they are not a perfect substitute to each other ( just like in case of perfect competition). Due to this buyers are ready to pay different prices to different firms.

For example, suppose you went to a store to purchase sports shoes, there you find shoes of different brands like Nike, Adidas, Reebok etc. So this is a case of monopolistic competition.

Product differentiation separates monopolistic competition from other market forms without this feature this market will become perfect competition.