Monopolistic competition is one of the imperfect types of market structure. It refers to that market in which many producers produce goods which are close substitutes of each other. The number of producers is sufficiently large and each one of them produces goods which are similar, but not homogeneous, products are not homogeneous as in the case of perfect competition, but neither are they remote substitutes as in the case of perfect competition, but neither are they remote substitutes as in monopoly. What that really means is that in monopolistic competition there are various ‘monopolists’ competing with each other. The competing monopolists do not produce identical goods. Neither do they produce goods which are completely different. Product differentiation means that products are different in some ways, but not altogether. Thus, we have a market in which features of monopoly and competition are found mixed up or existing together. Such a market structure is called Monopolistic competition.
Features of Monopolistic Competition
Monopolistic competition is perhaps most common of the market situations which we find in the actual world. The producers of toothpaste are working under conditions of monopolistic competition. Cibaca, Colgate, Forhans, etc. are all close substitutes of each other. Similarly, different types of soaps are also substitutes of each other. Thus in all such cases, the producers are supplying differentiated goods in a market that is characterized by monopolistic competition. The main features or assumptions of monopolistic completion are discussed below:
Product Differentiation. Each firm produces a specific variety or brand of industry’s product. This means that each firm distinguishes its product from the other by giving it a specific brand name and specific features. This is called product differentiation or each firm can be said to be selling differentiated products as against the homogeneous or identical products under perfect competition.
Large Number of Firms. Under monopolistic competition, the industry consists of a large number of firms. Due to this large number, each firm ignores the possible reaction of other firms to any change in price and output decision that a firm makes. Thus, each firm makes a decision a based on its own demand and cost conditions without bothering how other firms would reach to this decision.
Freedom of Entry and Exit. Like perfect competition in the monopolistic competition there is a complete freedom for new firms to come into the industry or for firms to leave the industry. If the existing firms are making supernormal profits, new firms to leave the industry.
Symmetrical Increase or Decrease in Demand. This means that when new firms come into the industry, they take away customers equally from all the existing firms. This means that demand for all the existing firms contracts equally when new firms enter and share the market.
Selling Costs. Another important feature of monopolistic competition is the ‘selling costs’. Selling cost refers to those expenses which have to be incurred in selling the commodity. Since each one of the producer differentiates its products from the others, it would incur much of expenditure by way of publicity, propaganda and advertisement, and hence promote its sale. Expenses incurred on the decoration of shops, constructing beautiful show – cases and the payments made to the salesmen of selling costs. Since under perfect competition, the product is homogeneous, no money is needed to be spent by way of selling costs.
Salesmanship and Sales Strategy. Under monopolistic competition consumers get a liking for a particular brand of the product and prefer it to other similar products. The product attachment makes the producer of that product a semi monopolist for these products – attached and brand loyal customers. Salesmanship, the quantity and competence of the seller and product preference. Sales strategy like ‘discount sales’ and ‘hire – purchase’ that are so common in the market, too attract customers. All such things are non – existent under perfect competition.
Incomplete Knowledge. When consumers do not have complete knowledge of the product quality, product prices and other market conditions, they usually are by publicity and advertisement to make their choice and preference. Hence, they generally do not look out for the alternative products and buy the one at the given price.
Transport Costs and Transportation Difficulties. In the real market scenario, transport costs and difficulties in moving from place to place in search of better bargains, makes the consumers stick to nearby markets and purchase goods even when prices there may be higher than in the other parts of the market. High transport costs, waste of time in moving to farther places, sheer inertia, etc. make the market the market imperfect or monopolistic.