Monopolistic Competition

Topics: Perfect competition, Economics, Monopoly Pages: 8 (2929 words) Published: January 26, 2012
Pure monopoly and perfect competition are two extreme cases of market structure. In reality, there are markets having large number of producers competing with each other in order to sell their product in the market. Thus, there is monopoly on the one hand and perfect competition, on the other hand. Such a mixture of monopoly and perfect competition is called monopolistic competition. It is a case of imperfect competition. The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. Monopolistic competition as a market structure was first identified in the 1930s by American economist Edward Chamberlin, and English economist Joan Robinson. Many small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and restaurants. In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers. The aim of the given work is the study of monopolistic competition. The paper consists of introduction, body, conclusion and bibliography. In the introduction the aim of the work is defined and the structure of the paper is described. The body gives the definition of monopolistic competition, studies it main characteristics and comments on the main advantages and disadvantages of monopolistic competition. Conclusion sums up the results of the study.

Bibliography comprises the list of references used when carrying out the work.

Monopolistic competition is a type of imperfect competition such that competing producers sell products that are differentiated from one another as good but not perfect substitutes, such as from branding, quality, or location. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In a monopolistically competitive market, firms can behave like monopolies in the short run, 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 rationality/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 industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject “Theory of Monopolistic Competition” (1933).  Joan Robinson published a book “The Economics of Imperfect Competition” with a comparable theme of distinguishing perfect from imperfect competition. Monopolistically competitive markets have the following characteristics: * There are many producers and many consumers in the market, and no business has total control over the market price. * Consumers perceive that there are non-price differences among the competitors' products. * There are few barriers to entry and exit.

* Producers have a degree of control over price.
The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition...

Bibliography: 2. J. Gans, S. King, N. Gregory Mankiw, Principles of Economics, Thomson Learning, 2003
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