Monopolistic Competition

Reviewed by Komal | Updated on Aug 27, 2020

Introduction

What is monopolistic competition?

Monopolistic competition is typical of an industry in which many companies offer identical, but not perfect, products or services. There are low barriers to entry and exit in a competitive monopoly market, and any firm's decisions do not directly affect those of its rivals. Monopoly competition is closely linked to the brand differentiation business strategy.

Understanding the monopolistic competition

Monopoly competition is a midfielder between monopoly and perfect competition (a purely theoretical state), combining elements of each. All firms have the same, relatively low degree of market power in monopoly competition; they are all considered as the price makers.Demand is extremely elastic in the long run, which means it is sensitive to changes in prices. Economic profit is positive in the short run, but in the long run it reaches zero. Companies tend to advertise aggressively in monopoly market.

Monopolistic competition is a form of competition that characterises a number of industries in their daily lives that are familiar to consumers. Restaurants, hair salons, garments and consumer electronics are some examples. We will use the example of household cleaning products to illustrate the characteristics of monopolistic competition.

Why is Monopolistic Competition important to differentiate product?

Because all the goods have the same purpose sellers have relatively few options to distinguish their deals from those of other companies. There may be lower-quality ""discount"" varieties, but it's hard to tell if the higher-priced options are actually any better. The consequence of this confusion is incomplete information: the average consumer does not know the precise variations between the different products, or what the fair price is for any of them.

Monopolistic competition leads to heavy marketing, as different organisations need to distinguish between the products that are broadly similar. One organisation could choose to lower the price of its cleaning product, sacrificing a higher profit margin in exchange for higher sales, ideally. Another could go the other way, raising the price and using packaging that suggests quality and sophistication. In fact, each of the brands could be equally effective.