MONOPOLISTIC COMPETITION

MONOPOLISTIC COMPETITION
Monopolistic Competition market structure is a blend of monopoly and competition. It refers to a market structure in which many producers produce goods which are close substitutes of one another. But there will be product differentiation to identify with the firm and a particular brand of product will have its own group of buyers. Prof. CHAMBERLIN introduced this concept.

Features of Monopolistic Competition:

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Large number of firms each firm determines price and output. Product differentiation- advertisements. Existence of selling cost- involves expenditure. Free entry and free exit no barriers. Different prices for differentiated products consumers can change preferences. Control over the price enjoys some sort of monopoly, if brand is established. Nature of AR and MR Curve: Not steep sensitive to prices.

CONDITIONS UNDER MONOPOLISTIC COMPETITION:

Each firm attempts to maximize its profits. Therefore, it will choose that price and level of output which gives maximum profits, and this will be achieved at a point where MR = MC. Complicated problems arise due to competition. Therefore, to maximize its profits, the firm can do the following ways: Changes in prices price-output combination should be such to maximize profits. Improvement in quality to attract the customers. Incur selling cost ads, salesmanship, propaganda., etc attract new customers.

EQUILIBRIUM UNDER MONOPOLISTIC COMPETITION (Short run):

Short run: Firms will go on maximizing profits, till marginal cost is equal to marginal revenue (MR=MC). In short run, equilibrium of a firm under monopolistic competition is like that of a monopolist. On account of different degrees of consumer preferences, elasticities of demand curves of different firms may be different under monopolistic competition. Cost curves of the firms may also differ from each other. Accordingly, prices charges by various firms may not be identical. Firms may earn super normal profits, normal profits or losses depending upon the average cost curve in relative to the position of the average revenue /demand curve. Diagrams:________.

Long run (Group Equilibrium)

Chamberlin calls industry as an group (Cross elasticity). Long run: In this market structure, firms earn only normal profits competition. To gain business, sell at lower prices. Due to competition, there is increasing number of new firms come up. Demand of factors of production increases. As such, remuneration paid for factors of production increases. Firms face higher cost to production (average cost) and try for MR=MC. Two conditions are important for long run: MR=MC and AR=AC. The long run equilibrium implies group equilibrium.

In the long run, the existing firm do not have any incentive to adjust their price but new entrants are attracted by lucrative profit margins. (Diagram) As new firms enter the group, the total market demand for the product must be shared out amongst larger number of firms reducing the market share of each firm. Therefore, each firm expects to sell less now at each price, the demand curve (AR) of the firm shifts to the left. Each shift to the left of the demand curve will be followed by a price output adjustment, as the firm reaches a new equilibrium position by equating the new MR curve to its MC curve. The process continues until supernormal profits are eliminated. The final equilibrium position in the LONG RUN shows that economies of scale are not fully exploited by the firm and there is EXCESS CAPACITY which is UNUTILIZED CAPACITY.

SELLING COST:

In monopolistic Competition, Selling cost plays an important part to a maximum extent.

Difference between production cost and selling cost: Production cost: Costs which are incurred by a firm to produce a given variety of product- raw materials, wages, interest, etc, manufacture of the commodity and its transportation to markets.

Selling cost: Cost which are incurred for increasing the sales of the product is selling cost. These costs include all those expenses which are made to secure a demand for the product.

Selling costs my be incurred on, advertisement, sales incentives to staff, special allowances to salesman display and demonstrations, etc.

Expenditure on advertisement and other sales promotion activities not only shifts the demand curve (AR) to the right, but also makes it more elastic by changing the pattern of wants of the consumers.

Advertisement is of two types: Informative and persuasive. Effects of selling costs on demand curve: Selling costs/expenditure affects the position of demand curve, without change in price. (It shifts to the right).

Selling costs/expenditure affects the shape of demand curve, if price is changed lowered. (It may take the shape of horizontal curve).

Diagrams_______. With selling costs there is a possibility to increase the sales and get normal profits.

End of Monopolistic Competition Market Structure.

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