Characteristics of Monopolistic Competition

In all competitive exams like SSC, banking and other one-day exams the general studies section is a nightmare for all aspirants. Economics is one of the sub-topic of general studies. Here we will discuss “Monopolistic Competition”. This article will surely help one to understand the concept and give one an edge over other aspirants.

Monopolistic Competition

Monopolistic competition describes a scenario in which multiple companies compete by selling products that are different from each other and therefore not perfect substitutes. Product differentiation can be due to brand, product quality, location, or marketing strategy. Monopolistic competition describes an industry in which multiple companies offer products or services that are similar (but not perfect) substitutes.

Monopolistic competition combines elements of monopoly and perfect competition, a theoretical market state in which companies sell similar products and have the same market share. The term was first used in the 1930s by economists Edward Chamberlain and Joan Robinson to describe the competition that existed between companies with similar (but not identical) products.

Characteristics of Monopolistic Competition

1. A Large number of sellers and buyers: There are a large number of buyers in the market. All buyers have their unique preferences. These buyers are divided into selling companies based on their preferences. For example, different companies sell shampoos to wash hair. Each company advertises its shampoo based on its unique properties, such as a dandruff-controlling shampoo, a root-strengthening shampoo, etc. Buyers buy these shampoos based on their needs.

2. Different prices of products: For example, a leather jacket made by the PUMA brand can cost up to $400, while a good locally produced leather jacket can cost less than $50. Therefore, in monopolistic competition, the same product can have different prices.

3. Seller control over the Price of the Product, but not over the Market: A seller has control over the price of the products produced by his company. Unlike perfect competition, he is not required to maintain the same as other vendors. For example, the PUMA brand sells its jackets at high prices for its brand name.

4. Product Variation: Product variation is an essential feature of monopolistic competition. For example, different tea brands like Tata Tea, Tetley Tea, Society Tea, and Brooke Bond Taj Mahal Tea sell tea at different prices by promoting different characteristics of the tea.

5. Freedom of Entry and Exit: Take the example of a coffee shop in a shopping mall. People enjoy coffee as long as it provides services to people. But, if one day for some reason the owner of the coffee shop wants to close the business. This won’t make a big deal out of the mall coffee business. Initially, people will be surprised and soon move to another nearby coffee shop. Therefore, the entry and exit of a firm from the trading market do not create turbulence as it does in a monopoly market.

6. Incomplete mobility of products: This means that all products are available everywhere, regardless of their origin. For example, in monopolistic competition, it is difficult for companies to change the price of the product by moving it to a different location to sell it. However, companies often move products to a perfectly competitive market.

7. Incomplete knowledge: Organizations use the lack of customer knowledge as a marketing tool. They use advertising to convey any information about their product. The only reason is to maximize sales by attracting more customers.

8. More elastic demand: The demand for the products varies according to the season and the requirement. As a result, the selling company’s revenue generation is not constant and continues to change frequently.
For example, the demand for moisturizers increases during the winter season, while the demand for sunscreen creams increases during the summer season.

9. Advertising: Products are heavily advertised in monopolistic competition. In monopolistic competition, the products produced by different sellers are not the same. They come in different sizes, shapes and different prices. Therefore, sellers need to use advertising to attract customers and promote sales of their products. Due to advertising, each selling company has a different share of the market.
Take the example of an advertisement for bath soap. The sole function of all soaps is to lather and cleanse your body. But the companies assure their buyers that their soaps can perform various functions, such as moisturizing the skin, improving skin radiance, and making skin look younger.

10. Independent decision making: In monopolistic competition, sellers have the right to make important product decisions, such as product size, product size, product colour, and product price, independently. For this reason, different companies in the organization sell similar products at different prices.
For example, the price of an Apple smartphone is much higher than the price of a OnePlus smartphone. Both smartphones serve the same basic purpose but are sold at different prices due to their unique features.

11. Competition without a price: In monopolistic competition, there is also non-price competition between different firms. Companies compete with each other based on brand name, features, size, and shape of products. All of these competing features are unpriced features, and the seller’s company advertises these features to promote sales. These are also known as imaginary differences. There is no difference between the two products, but buyers are led to believe that there is a difference with the help of advertising.

12. Cost of Transportation: Transportation costs play an important role in monopolistic competition. Similar products are sold at different prices due to the cost of transportation in the mobility of the products. The cost of transportation becomes part of the final price of the product.