Monopolistic Competition Meaning and Features
Monopolistic Competition Meaning
Monopolistic competition, as the name itself implies, is a blend of monopoly and perfect competition. It refers to the market situation in which many producers produce and sell goods which are closely related to each other and close substitutes but they are not identical. In this respect each firm will have some monopoly at the same time the firm has to compete in the market will other firms as they produce close substitutes. Also they are large number of sellers who follow an independent price policy.
Thus we can say that monopolistic competition is an intermediate situation between perfect competition and monopoly.
Monopolistic Competition Features
The main features of monopolistic competition are
1. Existence of large number of firms
Under monopolistic competition the number of firms producing a commodity will be very large. No seller controls a major portion of the total output. Hence each firm has a very limited control over the price of the product.
2. Product differentiation
Product differentiation is the essence of monopolistic competition. The aim of product differentiation is to make the product unique in the minds of the consumers. Product differentiation helps in establishing a branch. The effect of product differentiation is that producers have some degree of monopoly power. For example: Any toilet soap is a substitute for the toilet soap produced by different firms. But by popularizing a particular brand with specific aroma, size, shape, colour, the firm captures a portion of the market and the consumer will become used to that brand.
3. Selling costs
The presence of selling cost is another feature of monopolistic competition. Product differentiation is the essence of monopolistic competition. Product differentiation helps the firms to build a brand and acquire more market share. For this purpose, firms have to enter expenses to popularize his brand. Such expenses are called selling cost or advertisements.
4. Freedom of entry and exit of firms
Another important feature is the freedom for any firm to enter into the field and produce the commodity under his own brand name. There are no barriers of entry as found under monopoly.
5. Nature of demand curve
Under monopolistic competition, a single firm can control only a small portion of the total output. Though there is product differentiation, as products are close substitutes, a reduction in price leads to increase in sales and vice-versa. Therefore the demand curve of a firm under monopolistic competition slopes downwards to the right. It is highly elastic but not perfectly elastic.
Thus in monopolistic competition the features of monopoly and perfect competition are partially present.