Monopolistic Competition

Topics: Perfect competition, Substitute good, Competition Pages: 8 (2921 words) Published: September 20, 2011
Question 1.1 – Monopolistic Competitors3
Question 1.2 Non-price competitors5
Question 1.3 – Substitutes & Compliments6
Perfect substitutes as in the Chocolate Industry:7
Perfect complement8
Question 2.1 - Structuralist model of the inflation process9 Question 2.2 - Inflation targeting approach9

Question 1.1 – Monopolistic Competitors
Monopolistic competition is a market situation in which there is a large number of sellers and large number of buyers whereas monopoly means a market situation in which there is only a single seller or supplier of goods and services in the entire market and large number of buyers. South Africa’s chocolate market is a monopolistic market situation since it has got more than one supplier, the major ones being Cadbury and Nestle, and a rapidly growing large market – buyers, being “more than R3-billion, and growing at an estimated 3% per annum” according to Angela Zachariasen and Lorna Schofield, 31 July 2008.

In monopolistic competition, there are close substitutes in the sense that products are different in terms of size, colour, packaging, brand, price, shape and so on as in case of chocolates, soap, toothpaste et cetra but in monopoly, there is no close substitute of the good. Thus in monopolistic competition, products and services are not homogeneous but they are slightly differentiated from those of competitors. For example, Cadbury’s chocolate slabs, Dairy Milk, Top Deck, Wholenut, Mint Crisp Fruit & Nut or Lunch Bar can be easily substituted for Nestle`s brands that include Bar-One, KitKat, Smarties, Tex, Crisp, Rolo, Quality Street and Passions. Another feature of monopolistic competition is that firms engage in other forms of competition such as aggressive advertising but in monopoly, there is hardly ever any advertising. This is mainly due to the fact that where there are many sellers each and every player would like to get a fair share of the market since it is impossible to get the whole market share, thus the need to advertise and do promotions. This closely identifies with the chocolate companies in South Africa, Cadbury and Nestle, that normally carry out vigorous advertising campaigns, in-store and outdoor promotions. On the other hand, where there is only one market player, monopoly, there is no need for aggressive advertising campaigns rather the advertising in this situation serves to inform the public about certain organizational or operational changes and developments rather than to out compete rivalries.

Another distinct feature of a monopolistic competition is that firms are free to enter or exit the industry. As the market becomes lucrative, any firm can enter the market as there are no barriers to entry and when competition intensifies and becomes unbearable the same firm is free to exit the industry. The history of Cadbury and Nestlé in South Africa goes back to the early 1900s, when both first established their factories in the Eastern Cape. On the other hand, a monopoly operates with no threat from other entries and can not freely exit the industry due to regulatory rules, nature of business and so on. In monopolistic competition, demand curve faced by the firm is more elastic because of availability of close substitutes. It means if a firm raises its price, it will lose its large market share as customers in large will shift to close substitutes available in the market whilst in monopoly, the demand curve faced by the firm is less elastic because there are no close substitutes. The later implies that if the firm raises its price, quantity demanded will not drastically fall quantity as there is only one player in the market. Unlike the monopolistic market in South African chocolate industry with 2 dominant players, Cadbury and Nestle, in a monopoly market situation entry is restricted and there are no close substitutes for that particular product and the later exists in some cases like where; 1.there are patent...

References: 1. Carbaugh, Robert (2006). Contemporary Economics: An Applications Approach. Cengage Learning.
2. Mankiw, Gregory (2008). Principle of Economics. Cengage Learning.
3. Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall.
4. MANCOSA Economics Module, 2010
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