MONOPOLISTIC COMPETITION AND ITS FEATURES
Monopolistic Competition is a type of market structure where there are many firms in the market, but each offers a slightly different product. It is characterized by low barriers to entry and exit, which creates fierce competition. As a result of low barriers to entry, new competitors constantly enter the market to prevent existing firms from making super-normal profits. One example of monopolistic competition is hairdressing. There are many firms that offer a slightly differentiated service, whilst competition is equally strong.
A market that has a Monopolistic structure can be seen as a mixture between a monopoly and perfect competition. Whilst monopoly and perfect competition are at completely different ends of the spectrum; monopolistic competition is somewhere in between. It is similar to a monopoly in the fact a firm can make supernormal profits in the short term. Yet at the same time, there is easy market entry and exit, with few barriers to entry: similar to perfect competition.
Also Monopolistic competition definition says that it stands for an industry in which many firms service similar products which are not a perfect substitute. There are very low barriers to entry or exit in monopolistic competition. In this competition, one firm decision doesn’t affect the whole industry or another firm. Monopolistic competition is just related to the business strategy of brand variation.
Features of Monopolistic Competition
- A large number of sellers: In a market with monopolistic competition, there are a large number of sellers who have a small share of the market. There are many sellers involved in the market of monopolistic competition. They also own some small shares of that market.
- Product differentiation: In monopolistic competition, all brands try to create product differentiation to add an element of monopoly over the competing products. This ensures that the product offered by the brand does not have a perfect substitute. Therefore, the manufacturer can raise the price of the product without having to worry about losing all its customers to other brands. However, in such a market, while all brands are not perfect substitutes, they are close substitutes for each other. Hence, the seller might lose at least some customers to his competitors.
- Freedom of entry or exit: Like in perfect competition, firms can enter and exit the market freely. Any firm can enter or exit in this industry for monopolistic competition. They are free to get involved in this or they can also get out of this as per their wish. It is not necessary to explain the reasons behind it.
- Non-price competition: In monopolistic competition, sellers compete on factors other than price. These factors include aggressive advertising, product development, better distribution, after-sale services, etc. Sellers don’t cut the price of their products but incur high costs for the promotion of their goods. If the firms indulge in price-wars, which is the possibility under perfect competition, some firms might get thrown out of the market.