When we talk about monopolistic competition, we are referring to the competition that exists between the different monopolies, it is a type of competition in which there is a quite significant amount of producers that act within the market without a dominant control given by them. It is frequent to observe it in product markets that we normally observe in supermarkets, all of these with specific and particular characteristics that make them different from each other, but with a certain resemblance to enter into competition with other producers.
What is monopolistic competition?
Monopolistic competition is a type of competition in which producers sell products in a market, but the products are not the same, they differ from each other by brand, quality or location. Within monopolistic competition, a company that manufactures products takes other companies' prices as data and overlooks the impact of its own prices on other companies' prices.
This competition is not necessarily for prices, but for product quality, service, location, advertising and packaging types. Every seller who offers a product has the ability and advantage to raise or lower prices. Within a monopolistic market, companies behave and have monopoly characteristics, including the use of market power to generate large profits. In theory, companies that compete in a monopolistic manner maximize their profits, because they are small, and entrepreneurs and owners actively participate in all the management of their businesses. In short term, they have excellent profits.
Characteristics of monopolistic competition
- The companies that participate in it tend to behave like monopolies.
- Producers compete based on their product’s quality, price and marketing in order to place the product on the market.
- They attach great importance to quality, design, and the facility that the customer has to access the product.
- In them, there are many producers and consumers, and none of them manages to have total control over the market price.
- Consumers know and perceive that there are differences in prices between the competitor’s products.
- Producers are not able to have full control over the market price.
- Monopolistic competition occurs mainly when there are many sellers within the market, where there is little interdependence between different firms to quote products, where pricing is difficult.
- The main tool of this type of companies is the difference between products.
- It has a constantly changing range of products that are in competition within the market.
- Having low costs in capital requirements, companies can enter or exit the market very easily.
- The quality offered in terms of the product can be based on its function, materials, design and the manpower needed to manufacture the product.
- Companies are able to control the product price, but at the same time, are limited by the large number of similar products on the market.
Advantages of monopolistic competition
- There are no defined barriers to the entry of products into the market.
- Different products create diversity, choice and utility.
- The market is more efficient than the monopoly, but less efficient than the competition. However, they can be dynamically efficient, innovative in terms of new production processes or new products.
- As they are easier to enter and exit, these companies enter a market where current companies obtain economic benefits and have the opportunity to exit when money is being wasted.
- A large amount of waste is generated which is not necessary, for example, packaging.
- Advertising is sometimes considered an unnecessary expense, as sometimes it is only informative and not persuasive.
- In long-term, companies are seen as less efficient and inefficient.
- These types of companies can exceed their economic profits, causing their profit to become zero after some time.
- The demand is very sensitive to price changes, due to the different range of offers that are similar.
- The amount of economic investment is higher than in a normal company because they must have more competition, and more money is spent developing products that are different and excessive advertising expenses.
A very common example of monopolistic competition is, for example, restaurants. They serve different dishes or menus at different prices, providing different types of local utilities. Furniture stores sell different types of pieces made of different materials. Retailers selling clothing have a broad range of prices. Another example that we can mention are books, because their prices vary depending on the subjects and the public to be reached.
Written by Gabriela Briceño V.