Monopolistic competition is a type of imperfect competition such that competing producers produce similar yet not perfectly substitutable products . Monopolistic competition as a market structure was first identified in the 1930s by American economist Edward Chamberlin, and English economist Joan Robinson. In short run , a firm in monopolistically competitive market can behave like monopolies including by using market power to generate profit. In the long run, however, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like a perfectly competitive one where firms cannot gain economic profit. In practice, however, if consumer innovativeness is low and heuristics are preferred, monopolistic competition can fall into natural monopoly, even in the complete absence of government intervention. In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Examples of Monopolistic Competition industries include shoes (Nike and Adidas) , shirts (Padini and Burberry) and cars (Proton and Perodua) .
The Characteristics of Monopolistic Competition
* Ease of entry of new firms in the long run because there are no significant barriers to entry.
* Many sellers that do not take into account rivals’ reactions.
* One of the most Unique characteristic of monopolistic competition is product differentiation where the goods that are sold are not homogenous products.
Entry in Monopolistic Competition
There are no significant barriers to entry Monopolistic Competition . New firms may easily start the production of close substitutes for existing products . Due to easy entry and exit of Monopolistic Competition , the economic profit tend to be eliminated in the long run . Price and Output Determination in Monopolistic Competition
Monopolistic Competition Firms do not regard price as a given by a market conditions , hence Monopolistic Competition sellers are price searchers . The demand curve of each firm is downward sloping because each firm are selling differentiated products but the demand curve is elastic because of many close substitutes . Product Differentiation
Product differention is the accentuation of unique product qualities , real or perceived to develop a specific product identity . With differentiation , buyers believe that the products of the various sellers are not the same , whether the products are actually physically different or not . Product differentiation leads to preferences among buyers to deal with particular sellers or to purchase the products of particular sellers . Sources of product differentiation
* Physical differences
* Prestige considerations
* Service Considerations
Physical differences arise when the product of one firm is physically different from the product of other firms. The differences among products seemingly endless . These differences can exist due to materials used, chemical composition, shape, size, taste, or color. For example, the most popular product of Manny Mustard's House of Sandwich is the Deluxe Club Sandwich. While many restaurants sell club sandwiches, Manny makes his with barbecue sauce rather than mayonnaise. It is similar to other club sandwiches, but slightly different. Another example is offered by the Fleet Foot 30 running shoe produced by the Master Foot Company. The Fleet Foot 30 has ankle stabilizers and an extra thick cushioned insole. Other running shoes, such as the OmniFast 9000 sold by OmniRun lacks both of these features, but it is available in five different color schemes and uses velcro fasteners rather than shoestrings.
Product differentiation can also result from...