What is Monopolistic Competition?
Monopolistic Competition is a type of imperfect competition. In this, there are many producers who sell products that are separated from one another and thus are not perfect alternates. Monopolistic Competition is an intermediate between the monopoly and perfect competition. All firms in the monopolistic competition have the same but a comparatively low degree of market power as all of them are price makers.
Characteristics of Monopolistic Competition
A large Number of Sellers
In a monopolistic competition, there are many firms that sell similar, but not identical products. Each firm is independent and has its own limited share in the market. That means an individual firm has a limited control over the price in the market. A large number of firms leads to competition in the market.
Every firm is in a situation to exercise some degree of control through product differentiation. Product differentiation refers to distinguishing the products on the basis of brand, size, color, shape etc. The product of the firm is close but not a perfect standby. The implication of ‘product differentiation’ is that buyers of the product differentiation between the same products by different organizations. This type of product differentiation may be real or imaginary. Real differences are like- design, the material used, skills etc. whereas imaginary differences are through advertising, trade mark and so on.
Free Entry and Exit of Firms
Like the perfect competition, under the monopolistic competition, the firms can enter and exit freely. The firms will enter when the existing firms are making super-normal proceeds. After the new firms have entered the market, the supply tends to increase that would decrease the price and thus, the current firms will only be left with the normal profits. Similarly, if the present firms are supporting losses, some of the minimal firms will leave. This will automatically reduce the supply because of which price tends to rise and the existing ones are left with the normal proceeds.
Another feature of monopolistic competition is that every firm tries to encourage its products by various types of outflows. The advertisement is the most important constituent of the selling cost that has an effect on the demand and the cost of the product. The main objective of a monopolist is to earn maximum profits.
Lack of Perfect Knowledge
There are many buyers and sellers who don’t have perfect knowledge of the market. There are countless products each being a close alternate of the other. The buyers don’t have knowledge about these products, their qualities, and prices.
In the case of the monopolistic competition, both the factors of production and the good and services are not completely mobile.
Any firm that is under the monopolistic competition is neither a price taker nor a price maker. Thus, by creating a unique product or by establishing a particular reputation, every firm has some control over the price. The power of price control depends upon how intensely the shoppers are close to the brand.
These are some of the features that a monopolistic competition holds.