monopolistic competition (group 8)

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CHAPTER VIII

Monopolistic Competition 1


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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 is a type of market

structure characterized by (1) small firms, (2)

differentiated products and (3) easy market entryand exit.
http://www.economicsonline.co.uk/Business_economics/Competition_and_market_structures.htmlhttp://www.economicsonline.co.uk/Business_economics/Competition_and_market_structures.html


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Many small sellers- monopolistically

competitive market is comprised of a large

number of independently-acting firms andbuyers. Just like perfect competition, the

exact number of firms cannot be

determined.


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Differentiated product- product

differentiation is the process of creating real

or apparent differences between goods and

services sold in the market. A differentiatedproduct has close, but not perfect substitutes.

Product differentiation can be real or

imagined.


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We can therefore say that in a monopolistically

competitive market, the product of one firm

can be differentiated from that of another. An

efficient producer will use non-pricecompetitive methods to convince his or her

consumers to pay a higher price for his or her

product. The most common form of non-price

competition is advertising.


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There are four main types of differentiation:


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Physical product differentiation, where

firms use size, design, colour, shape,

performance, and features to make their

products different. For example, consumerelectronics can easily be physically

differentiated.



Marketing differentiation, where firms try to

differentiate their product by distinctive

packaging and other promotional techniques.For example, breakfast cereals can easily be

differentiated through packaging.



Human capital differentiation, where the

firm creates differences through the skill of

its employees, the level of training

received, distinctive uniforms, and so on.



Differentiation through distribution,

including distribution via mail order or

through internet shopping, such as

Amazon.com, which differentiates itselffrom traditional bookstores by selling online.



Easy entry and exit- in a monopolistically

competitive market there are no barriers to entrypreventing new firms entering the market or

obstacles in the way of existing firms leaving the

market. Entry into a monopolistically competitive

market is not quite as easy as entry into a perfectlycompetitive market.

The number of firms operating in such a market is

large; each firm has small market share and firms

have limited ability to influence prices.



Market promotion- is one key to get sales back.



Arguments for advertisements



Some of the arguments in favor of advertising are thefollowing:

Advertising is informative;

Advertising increases sales and permitseconomies scale;

Advertising increases sales and contributes to

economic growth;

Advertising supports the media; and Advertising increases competition and lowers

prices



Arguments against advertisements



Some of the arguments against advertising are thefollowing:

Advertising is not informative but competitive;

The economies of scale are illusory; Advertising raises the cost curve;

Advertisers may use their influence to bias the

media;

Advertising is used as an entry barrier; and

Advertising is not a productive activity



Product Differentiation and Demand Elasticity



The demand curve of a firm in monopolisticcompetition market structure is downward sloping

because of the preference of customers for the

features of the differentiated product. This type of

curve is based on the notion that the firm can changeits price without losing all of its business because

buyers do not see any perfect substitute. Thus, the

fewer the substitutes, the less elastic the demand

curve will be.



Examples of monopolistic competition

Examples of monopolistic competition can befound in every high street.

Monopolistically competitive firms are most

common in industries where differentiation is

possible, such as:

The restaurant business

Hotels and pubs General specialist retailing

Consumer services, such as hairdressing


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Prepared by:

John Nelson Reyes

Angelie Paras

Agosto Perlas

Grace Lemeric

Noby Grace Servita

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monopolistic competition (group 8)

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