Monopolistic competition
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Monopolistic competition is a common market structure where many competing producers sell products that are differentiated from one another (ie. the products are substitutes, but are not exactly alike). Many markets are monopolistically competitive, common examples include the markets for restaurants, cereal, clothing, shoes and service industries in large cities. The "founding father" of the theory of monopolistic competition was Edward Hastings Chamberlin, in his pioneering book on the subject, Theory of Monopolistic Competition (1933).[1]
Monopolistically competitive markets have the following characteristics:
- There are many producers and many consumers in a given market, and no business has total control over the market price.
- Consumers perceive that there are non-price differences among the competitors' products.
- There are few barriers to entry and exit[2].
- Producers have a degree of control over price.
The characteristics of a monopolistically competitive market are almost the same as in perfect competition, with the exception of monopolistic competition having heterogeneous products, and that monopolistic competition involves a great deal of non-price competition (based on subtle product differentiation). A firm making profits in the short run will break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This gives the amount of influence over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule.
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[edit] Problems
While monopolistically competitive firms are inefficient, it is usually the case that the costs of regulating prices for every product that is sold in monopolistic competition by far exceed the benefits; the government would have to regulate all firms that sold heterogeneous products—an impossible proposition in a market economy. A monopolistically competitive firm might be said to be marginally inefficient because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market might be said to be a marginally inefficient market structure because marginal cost is less than price in the long run.
Another concern of critics of monopolistic competition is that it fosters advertising and the creation of brand names. Critics argue that advertising induces customers into spending more on products because of the name associated with them rather than because of rational factors. This is disputed by defenders of advertising who argue that (1) brand names can represent a guarantee of quality, and (2) advertising helps reduce the cost to consumers of weighing the tradeoffs of numerous competing brands. There are unique information and information processing costs associated with selecting a brand in a monopolistically competitive environment. In a monopoly industry, the consumer is faced with a single brand and so information gathering is relatively inexpensive. In a perfectly competitive industry, the consumer is faced with many brands. However, because the brands are virtually identical, again information gathering is relatively inexpensive. Faced with a monopolistically competitive industry, to select the best out of many brands the consumer must collect and process information on a large number of different brands. In many cases, the cost of gathering information necessary to selecting the best brand can exceed the benefit of consuming the best brand (versus a randomly selected brand).
Evidence suggests that consumers use information obtained from advertising not only to assess the single brand advertised, but also to infer the possible existence of brands that the consumer has, heretofore, not observed, as well as to infer consumer satisfaction with brands similar to the advertised brand.[3]
[edit] Examples
In many U.S. markets, producers practice product differentiation by altering the physical composition, using special packaging, or simply claiming to have superior products based on brand images and/or advertising. Toothpastes and toilet papers are examples of differentiated products.
[edit] Notes
- ^ monopolistic competition. Encyclopedia Britannica. http://www.britannica.com/EBchecked/topic/390037/monopolistic-competition
- ^ Joshua Gans, Stephen King, Robin Stonecash, N. Gregory Mankiw (2003). Principles of Economics. Thomson Learning. ISBN 0-17-011441-4.
- ^ Antony Davies & Thomas Cline (2005). "A Consumer Behavior Approach to Modeling Monopolistic Competition". Journal of Economic Psychology 26: 797–826. doi:.
[edit] See also
- Atomistic market
- Imperfect competition
- Microeconomics
- Perfect competition
- Simulations and games in economics education
[edit] External links
- Monopolistic Competition by Elmer G. Wiens
