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Evaluation of Monopolistic Competition

March 6, 2019 by admin 1 Comment

EVALUATION OF MONOPOLISTIC COMPETITION

Merits

1. An important merit of monopolistic competition is that it is much closer to reality than several other models of market structure. Firstly, it incorporates the facts of product differentiation and selling costs. Secondly, it can be easily used for the analysis of duopoly and oligopoly.

2. Under monopolistic competition it is possible to see that even when each individual firm produces under conditions of increasing returns, not only the firm under consideration but the entire group of firms can be in equilibrium.

3. Moreover, monopolistic competition is able to show that even when each individual firm is producing under increasing returns, it still earns only normal profit in the long run.

Demerits

1. The biggest conceptual difficulty with monopolistic competition is the concept of a ‘group’ of firms. There is no standard theoretical foundation for deciding the boundaries of a group.

2. Related with the concept of a group of firms, who face the difficulty of defining the meaning of a ‘close substitute’. We are not told at what values of cross elasticity, two products become close substitutes of each other.

The theory of monopolistic competition fails to take into account the fact that the demand by final consumers is largely influenced by the retail dealers because the consumers themselves are not fully aware of the technical qualities of the product.

 

Salient features of the Monopolistic Competition

March 6, 2019 by admin Leave a Comment

(a) The first feature of monopolistic competition, as mentioned above, is product differentiation. A buyer can get a specific type of the ‘product’ only from one final source (may be, through the dealers and sub-dealers, etc.).

(b) Product differentiation necessitates incurring of selling expenses on the part of firms under market structure of monopolistic competition.

(c) Monopolistic competition is characterised by a large number of sellers. The demand and supply conditions of these sellers are inter-dependent.However, in spite of their large number, no individual seller becomes a price taker. He has the authority to demand a price of his choice, though he also

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Definition of Monopolistic Competition

March 6, 2019 by admin Leave a Comment

MONOPOLISTIC COMPETITION

A monopolistic competition is defined as that market structure in which each seller produces a ‘differentiated product’. The concept of product differentiation means that the product marketed by one seller can be distinguished from the products marketed by other sellers in some form or other. Some of the important methods of product differentiation include trade marks, brand names, size, packing, or colour etc. of the item, and technical specifications, etc.

Thus, in this market structure, each seller is a monopolist of his differentiated product. The buyers can get it only from him and from none else. At the same time, however, the products offered by different sellers are close substitutes of each other. The buyers are always comparing the prices of their products together with the perceived ‘quality’ of each. In other words, there is also an intense competition between suppliers for a share in the market. For this reason, it is a market structure in which there is a competition between a group of firms while each firm is a monopolist of its own product. It is, therefore, termed as monopolistic competition.  [Read more…]

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