What types of food are sold in restaurants? Besides your basic categories of Italian, Chinese, Indonesian, Mexican, French or American, you also have Fast Food, your basic diner, or elegant restaurants. What makes you go to one restaurant versus another? Even with the same basic ingredients and recipes, one restaurant is able to make their pasta, steak or hamburger taste better than the others. This is product differentiation and it is a crucial characteristic which defines a monopolistically competitive market. On the other hand a perfectly competitive market would be a farmers market. Many farmers bring their produce to the same location. This meets the first condition of a perfectly competitive market. The goods and services need to be identical to one another. Let's suppose you are looking for tomatoes at the farmers market. One tomato should be able to be substituted in for another. So that no farmer is able to offer a huge reduction in price. This means farmers are equally aware of growing conditions, transportation costs, cost for rental of space to sell the product at the market, and Finally, if it is known that the price of tomatoes is high, other people need to be able to enter the market and sell tomatoes. In addition, Price and quantity are determining by all buyers and sellers as they interact in the market place. (Mankiw.N, 1997, p.62).
Monopolistic Competition contains elements of both perfect competition and monopolies. Monopolistic competition is a market that has many small firms selling products that are similar but not the same. It is a market structure that contains many firms, product differentiation, and ease of entry into the market. Which there are many sellers in this industry on the other words there are lots of competition, it's easy for firms to enter this industry and for existing firms to exit, Firms in this industry sell differentiated products and Firms in this industry frequently advertise usually on a local level. One of the main features of monopolistic competition is the concept of product differentiation.
This refers to how a firm will try to make their product look different from their competitors such as style, size, colour, quality, packaging, advertising, and service. The difference may lie in the packaging of the product, the ingredients, the service, the name of the product, or the difference even be only seeming by consumers. In addition Monopolistic competitive firms receive short run profits, not long run profits. This is because entry of new firms, advertising, and other expenses will cause profits to decline. Anyway these firms do not always allocate resources efficiently.
Best example here is the restaurant business. Do restaurants produce a standardized product? No. There is a huge variation in the type of food served by restaurants, both in quality and regional variety. This implies that restaurant owners, unlike farmers, have some control over price. While few Chinese restaurants would get away with charging $25 for a meal, like Indonesia restaurants can, there are price variations within each category. The way economic theory captures that distinction is to draw a downward sloping demand curve for firms in a monopolistically competitive market: restaurant owners can and do lower price to attract more customers. The fact that the product is not identical from restaurant to restaurant allows restaurants some control over price.
Finally model of monopolistic competition is more realistic than the purely competitive. All firms, small or large, differentiate, if not through different ingredients, certainly in the way that they package, name, distribute, or service their products. Advertising is also very common; it benefits the firm because of the greater exposure to a larger market and often benefits the consumer by informing her/him of the choices available. If any firm marks up its prices too much, another firm will...