monopolistic competition

1. Monopolistic Competition

2. Meaning of Monopolistic Competition • Monopolistic competition is that market structure in which there is keen competition, but neither perfect nor pure, among a large number of producers or suppliers. • They have some degree of monopoly because of their differential products. • Thus monopolistic competition is a mixture of perfect competition and a certain degree of monopoly power.

3. Thus, Monopolistic Competition can also be described as: A market situation where there are many producers but each offers a slightly differentiated product.

4. Major Sectors • Monopolistic competition is commonly found in many field in retail, service and manufacturing industries. • Examples of retail:- clothe stores, chemists, electrical appliances, grocery, etc. • Service Industry:- restaurants, beauty saloons, health clubs, etc. • Manufacturing:- shoes, garments, cosmetics, furniture manufacturing , etc.

5. Characteristics of Monopolistic Competition Large number of sellers No product homogeneity Product differentiation: It is the distinguishing feature of monopolistic competition, that product of each seller is branded and identified A firm has a limited degree of control over the market as a relatively small percentage of total market is shared by individual firms.

6. Characteristics (Cont’d) 5. Large number of buyers: Unlike perfect competition, here buying is by choice and not by chance 6. There is free entry of firms. 7. Two-dimensional competition:- • Price competition, where firms compete with each other on the price issue and • Non-price competition, where competition is based on product variation and selling costs.

7. Characteristics (Cont’d) 8. Selling costs:- this too is an unique feature. Since products are differentiated, advertising and sales promotion becomes an integral part of goods marketing. Outlays incurred on this account are termed as selling cost. This distinguishes, where there is no need to advertise products, because goods are homogeneous.

8. Characteristics (Cont’d) 9. The group:- since there is no homogeneity of product we can’t think of industry. Here the concept of group was introduced, which is a cluster of firms, producing very related but differentiated goods. 10. Negative sloping demand curve: Firms demand curve (or AR curve) slopes downward to the right.

9. 11. The goal of firm is profit maximizing , both in the short run and in long run. 12. There is market imperfection, i.e. imperfect knowledge about market. 13. The prices of factors and technology are given.

10. Product differentiation Product differentiation means that goods are close substitutes but are not homogeneous. They differ in colour,name, packing, size, quality,etc. Basis for Product Differentiation • Physical differences • Convenience • Reputations • Unconscious fears and desires • Snob appeal • Customized products

11. Product differentiation does not necessarily mean there areany physical differences among products • They might all be the same, but how they are sold may make all the difference • There are, of course, some very real physical product differences. • Buyers often differentiate based on real physical differences, but differentiation is still taking place in the buyers mind, and it may or may not be based on real physical differences • Main objective of product differentiation is to increase the influence of the producer in the determination of price. the producer is no longer a price taker, he becomes a price maker

12. DETERMINATION OF PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION Firm under monopolistic competition produces up to that limit where its produces up to that limit where its marginal cost is equal to marginal revenue, (MC=MR) and MC curve cuts MR curve from below. In case of monopolistic competition, price and group equilibrium position of firm and group will be studied in two parts: (1)Firm’s equilibrium and (2) Group’s equilibrium. Copyright © 2008 Pearson Addison Wesley. All rights reserved.

13. A Monopolistically Competitive Firm: Above Normal Profit Profit is maximized when MR = MC The profit-maximizing output is 125 pairs of Tommy jeans per day. The profit-maximizing price is $75 per pair. ATC is $25 per pair, so The firm makes an economic profit of $6,250 a day Copyright © 2008 Pearson Addison Wesley. All rights reserved.

14. A Monopolistically Competitive Firm: Normal Profit 1. The output that maximizes profit is 75 pairs of Tommy jeans a day. 2. The price is $50 per pair. Average total cost is also $50 per pair. 3.Economic profit is zero. Copyright © 2008 Pearson Addison Wesley. All rights reserved.

15. A Monopolistically Competitive Firm: Economic Loss 1. Loss minimized when MC = MR 2.The loss-minimizing output is 40,000 customers. 3.The price is $40 per month, which is less than ATC. 4.The firm incurs an economic loss. Copyright © 2008 Pearson Addison Wesley. All rights reserved.

16. Group equilibrium Under monopolistic competition ,the word ‘group’ is used for industry ,but there is a difference between industry and group An industry consists of firms which produce homogeneous product, where as a group is composed of firms which produce a differentiated product. For ex. Shoe making firms like Bata, liberty, woodland etc. Copyright © 2008 Pearson Addison Wesley. All rights reserved.

17. Excess Capacity • Excess Capacity • A firm has excess capacity if the quantity it produces is less that the quantity at which average total cost is a minimum. • A firm’s efficient scale is the quantity of production at which average total cost is a minimum. • Markup • A firm’s markup is the amount by which price exceeds marginal cost. Copyright © 2008 Pearson Addison Wesley. All rights reserved.

18. 1. The efficient scale is 100 pairs of jeans a day 2. The quantity produced is less than the efficient scale and the firm has excess capacity. 3. Price exceeds marginal cost by the amount of the markup Copyright © 2008 Pearson Addison Wesley. All rights reserved.

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20. In perfect competition, the efficient quantity is produced and price equals marginal cost. Copyright © 2008 Pearson Addison Wesley. All rights reserved.

21. Selling cost Copyright © 2008 Pearson Addison Wesley. All rights reserved. selling costs may be defined as costs necessary to persuade a buyer to buy one product rather than another or to pay from one seller rather than another Selling cost is based on two assumptions i)Buyers do not have perfect knowledge about different types of products ii)Buyers demand and tastes can be changed

22. Non –price competition • Non-price competiton is a type of competiton in which all the firms under monopolistic competion continue to indulge in a competitive race of attracting more and more customers by offering them different services and free gifts. • Thus the firm competes not on the basis of price but by other non-price measures such as • changing the quality of the product • Intensively publicity services • Fancy packing • Free gift like spoons,calender,ball-pen, • Organizing discount sales etc. • Main aim of the firm is to maximise its sales and profit. Copyright © 2008 Pearson Addison Wesley. All rights reserved.

23. Difference between monopoly and oligopoly Copyright © 2008 Pearson Addison Wesley. All rights reserved.

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25. Difference between monopoly and oligopoly Copyright © 2008 Pearson Addison Wesley. All rights reserved.