Question

Why does Monopolistic Competition matter?

Answer 1

Monopolistic Competition : It is a market situation characterised by fairly large number of firms producing and selling differentiated goods and services. Pure monopoly and perfect competition are rare in practice. The markets that we come accross in our daily life have characteristics of competition and monopoly. Such a market is called monopolistic competition. It was Edward Chamberlin who popularised monopolistic competition through his book ' The Theory of Monopolistic Competition ' in 1956. Under monopolistic competition , the competition among different producers is semi-monopolistic because the goods produced by different sellers are not homogeneous as under perfect competition, but they are differentiated by several brands and trade marks.

Monopolistic Competition matters due to the following reasons :

(a) Large number of firms : Under monopolistic competition there are a large number of producers to satisfy the needs of the customers.

(b) Product Differentiation : The products of different brands are differentiated on the basis of brands. By differentiation each seller tries to show that his product is different from than those of the others. Differentiation is done using different brand names,packaging,colors,design etc.

(c) Free entry and exit of firms : New firms are free to enter into markets and old firms are free to go out of market.

(d) Important role of selling costs : Under monopolistic competition advertisemnt and selling costs play an important role. Advertising broadens the market and encourages competition.

(e) More elastic competition : Due to product differentiation, the firm enjoys some monopoly power and demand curve will be more elastic and thus downward sloping.

(f) Non price competition : Different producers sell their products at different prices but they compete with each other on the basis of quality,color,packaging,design etc.