Characteristics of Monopolistic Competition

Monopolistic Competition

Monopolistic competition, as the name itself implies, is a blending of monopoly and competition. Monopolistic competition refers to the market situation in which a large number of sellers produce goods which are close substitutes of one another. The products are similar but not identical. The particular brand of product will have a group of loyal consumers. In this respect, each firm will have some monopoly and at the same time the firm has to compete in the market with the other firms as they produce a fair substitute. The essential features of monopolistic competition are product differentiation and existence of many sellers.

The following are the examples of monopolistic competition in Indian context.

1. Shampoo    - Sun Silk, Clinic Plus, Ponds, Chik, Velvette, Kadal, Head and Shoulder, Pantene, Vatika, Garnier, Meera

2. Tooth Paste - Binaca, Colgate, Forhans, Close-up, Promise, Pepsodent, Vicco Vajradanti, Ajanta, Anchor, Babool.

Characteristics of Monopolistic Competition

(i) Existence of Large Number of firms: Under monopolistic competition, the number of firms producing a commodity will be very large. The term 'very large' denotes that contribution of each firm towards the total demand of the product is small. Each firm will act independently on the basis of product differentiation and each firm determines its price-output policies. Any action of the individual firm in increasing or decreasing the output will have little or no effect on other firms.

(ii) Product differentiation: Product differentiation is the essence of monopolistic competition. Product differentiation is the process of altering goods that serve the same purpose so that they differ in minor ways.

Product differentiation can be brought about in various ways. Product differentiation is attempted through (a) physical difference; (b) quality difference; (c) imaginary difference and (d) purchase benefit difference. It may be by using different quality of the raw material and different chemicals and mixtures used in the product. Difference in workmanship, durability and strength will also make product differentiation. Product differentiation may also be effected by offering customers some benefits with the sale of the product. Facilities like free servicing, home delivery, acceptance of returned goods, etc. would make the customers demand that particular brand of product when such facilities are available. Product differentiation through effective advertisement is another method. This is known as sales promotion. By frequently advertising the brand of the product through press, film, radio, and TV, the consumers are made to feel that the brand produced by the firm in question is superior to that of other brands sold by other firms.

1.  Selling Costs: From the discussion of 'product differentiation', we can infer that the producer under monopolistic competition has to incur expenses to popularise his brand. This expenditure involved in selling the product is called selling cost. According to Prof. Chamberlin, selling cost is 'the cost incurred in order to alter the position or shape of the demand curve for a product'. Most important form of selling cost is advertisement. Sales promotion by advertisement is called non-price competition.

2.  Freedom of entry and exit of firms: Another important feature is the freedom of any firm to enter into the field and produce the commodity under its own brand name and any firm can go out of the field if so chosen. There are no barriers as in the case of monopoly

Monopolistic competition presupposes that customers have definite preferences for particular varieties or brand of products. Hence pricing is not the problem but product differentiation is the problem and competition is not on prices but on products.