Question

What sets monopolistic competition apart from perfect competition or oligopoly?

In what ways do firms in monopolistic competition behave as those in perfect competition and in what ways do they behave as firms in oligopolies or monopolies?

Identify a product or service you purchase where sellers fit the definition of monopolistic competition? What is the size of the seller? Is the seller earning high profits or a normal return on investment? Does the seller use non-price competition? If so, which types?

What might happen to the number of sellers/competitors or the size of a typical seller if the number of customers doubled? Or fell?

Why are markets characterized by monopolistic competition less efficient than those characterized by perfect competition? What are the benefits of product differentiation and are they worth the costs in terms of loss of production and allocation efficiency?

Answer 1

1. Monopolistic competitive firms have some control over the price of commodity due to product differentiation while firms under perfect competition does not have any control over the price. Firms under perfect competition are price takers.

There are large number of buyers and sellers under monopolistic competition while there are limited sellers under oligopoly market.

Perfect Competition is a form of market structure in which there is free entry and exit of firms and firms are selling homogeneous and identical products in the market. Firms under this form of market are price takers rather than price makers. Industry determines the equilibrium price from the demand and supply curve intersection. Sellers can sell any unit of commodity at that price and firms does not have any price control over the commodity. If one seller try to charge higher price then it will lose all his customers because all firms are selling similar products in every respect like color, shape, brand, etc.

Monopolistic competition refers to a market situation in which there are large number of buyers and sellers. The sellers sell closely related or differentiated products but not identical product. The products are close substitutes of each other. Product differentiation is the most important feature of monopolistic competition. Each firm under monopolistic competition enjoys the monopoly over the brand of the commodity and thus the firm has the control over the price of the commodity. Under monopolistic competition, MR < AR and AR and MR curve slope downwards and MR curve lies below AR curve. But these curves are more elastic. Example: Firms producing different brands of shampoos like Sunsilk, Pantene, Head & Shoulders, Dove etc. Monopolistic competition combines the features of monopoly and perfect competition.

Oligopoly is a market structure characterized by the presence of a few large firms who produces homogeneous or differentiated products intensely competing against each other and recognizing interdependence in their decision-making. Under this type of market, prices are normally rigid as firms are afraid of immediate reactions of the rival firms which may start price war. The demand curve facing an oligopoly firm is indeterminate because of high degree of interdependence and uncertainty among oligopolistic firms. The firm does not know how his rival firms react to its decisions. Sales and profits of the firms are affected by the rivals' firm's actions. Example: there are only a few auto-producers in the Indian market. Maruti, Tata, Ford, Fiat are some well-known brand names.

2. Monopolistic behave as perfect competition in the characteristic of large number of buyers and sellers and secondly on free entry and exit of firms in the market.

Monopolistic behave as oligopolistic in the characteristic of some market power and product differentiation.

3. Example of monopolistic market is firms producing different brands of toothpastes like Colgate, Close-up, Pepsodent, etc. Sellers are few who sell a particular brand which we want. Seller earn normal profit in the long run.