FEATURES OF MONOPOLISTIC

COMPETITION

SUBMITTED BY
K.POTHANNA SETTI

16331E0046
SECTION A
FIRST SEMESTER

ECONOMICS FOR MANAGERS

DEPARTMENT OF MANAGEMENT STUDIES

MVGR COLLEGE OF ENGINEERING

INTRODUCTION
DEFINITION
STRUCTURE

CONTENT

CONDUCT
FORMS

OF NON-PRICE
COMPETITION INCLUDE
FEATURES
CASE

STUDY ON GREEK
ECONOMY

REFERENCE

INTRODUCTION

The concept of monopolistic competition was presented by American Economist professor

E.H. Chamberlin in his book Theory of Monopolistic Competition published in 1933.It is

that situation of market in which there are many setters of a commodity, but the product of
each seller differs from that of the other sellers In one respect or the other. Thus, product

differentiation Is the hall-mark of monopolistic competition. Firms producing variety of tooth

pastes, such as, Forhans, Colgate, Choice, Signal etc. are examples of monopolistic
competition.

DEFINITION

JS. Hams: Monopolistic competition is market structure where there is a large number

of small sellers. selling differentiated but close substitute products.

Baumol: The term monopolistic competition refers to the market structure in which the
sellers do have a monopoly (they are the only sellers) of their own product, but they are
also subject to substantial competitive pressures from sellers of substitute product.

Chamberlin: Selling costs are costs incurred in order to alter the position or shape of the
demand curve for the product.

STRUCTURE
THERE ARE A LARGE NUMBER OF FIRMS IN THE INDUSTRY:

Firms are generally small with insignificant market share. Concentration ratios for these
industries are low. Similar to perfect competition.

Some barriers to entry exist but they are not insurmountable.

Product differentiation is extensive and may represent a considerable but not insurmountable
barrier to entry.

Firms are generally small, economies of scale are insignificant and firms experience similar

production costs.

CONDUCT

All firms engage in product differentiation. Product differentiation is an attempt to make

the firms products different from those of its competitors.

Product differentiation, advertising and other types of non-price competition are important
to firms in this type of market. Non-price competition includes all methods of competing
with other firms that does not involve price.

Price changes can cause consumers to switch to other brands and so prices are generally
set competitively.

Price fixing is impossible because there are too many firms and pricing and output
conduct of a firm has minimal impact on other firms as a result of the fact that consumers
are ready to switch brands.

FORMS OF NON-PRICE COMPETITION INCLUDE

Advertising: Advertising is the use of promotion and commercials to establish that one

brand is better than rival brands. Advertising can be either persuasive or informative.

Packing: Packaging refers to how the product is presented to the consumer. If expensive
packaging is used consumers may be prepared to pay more for the brand.

Quality: By improving the quality of a product through technology and innovation

consumers may be prepared to insist on a particular brand. Such a brand may prove more
reliable or longer lasting.

FORMS OF NON-PRICE COMPETITION INCLUDE

Location: Retail outlets are often examples of monopolistic competition. Location is an

important factor for these businesses because those with better locations or passing traffic
often are more profitable than other rival business with poor locations.

Warranties: A warranty is a guarantee that the product will last a certain period of time.
Manufacturers may offer to replace or fix the product during this period. Consumers will
naturally prefer those products with a longer warranty.

FEATURES
MAIN FEATURES OF MONOPOLISTIC COMPETITION ARE AS UNDER:

Large number of Firms and Buyers: Under monopolistic competition there are large
number of firms producing the product and also large number of buyer, as in case of
perfect competition. But the size of each firm Is small. It means that each firm ha, only
limited control over the market. Each firm can decide Its own price policy independently.

Easy Entry and Exit of Firms: There is a easy entry and easy exit of firms. If the
existing firms are earning huge profits, some new firms may enter in to the market. In case

of losses to the existing firms, they may exit from the industry.

MAIN FEATURES OF MONOPOLISTIC COMPETITION ARE AS UNDER

Limited Mobility: Under monopolistic competition neither the factors of production not goods
and services are perfectly mobile.

Imperfect Knowledge: Buyers and sellers lack perfect knowledge about the price of the
product. Because It is not possible to compare the products of different firms due to product
differentiation.

Selling Costs: Each firm spends a lot of funds on advertisement and publicity of its products.
With a view to selling more and more units of the product it gives wide publicity of its products
in newspapers, cinemas. journals, radio, TV. etc. The expenses so incurred are called selling

costs.

MAIN FEATURES OF MONOPOLISTIC COMPETITION ARE AS UNDER

Control Over Price: The firms under monopolistic competition have a small amount of

control over the price, they charge. In this market, each firm may quote the different prices
for each differentiated product. Changes in market conditions are signalled to the firm
through changes in their quantity sold at current price (fixed by them).

Non-price Competition: Another feature of monopolistic competition Is that, different

firms compete with one another without changing the price of the product. Take for
instance, firms producing

MAIN FEATURES OF MONOPOLISTIC COMPETITION ARE AS UNDER

Product Differentiation: Product differentiation Is a salient feature of monopolistic

competition. Product differentiation refers to that situation wherein the buyers can
distinguish one product from the other. Number of firms Is large but their products differ
In one respect or the other. However their products are close substitutes. Product

differentiation arises due to the characteristic of the products. e.g. shape. colour,
durability, quality. size. etc. There are many Instances product differentiation. Such as
Lux, Godrej, Rexona. etc. among bathing soap. Similarly Colgate. Choice. Prudent, etc.

among the toothpastes.

MAIN FEATURES OF MONOPOLISTIC COMPETITION ARE AS UNDER

AR and MR Curve: As under monopoly, the average and marginal revenue curves under
monopolistic competition are downwards sloping. It means the firm will have to fix low
pace per unit (AR) to sell more units. Below diagram Indicates AR and MR curves of the
firm under monopolistic competition.

CASE STUDY ON GREEK ECONOMY

WHAT ACTIONS CAN THE GOVERNMENT TAKE TO INCREASE NATIONAL GROWTH IN GREECE?

Simplify and modernize the tax system. Improve the process of budget preparation.

Reform urgently the pension system to ensure its long-term financial viability.

Raise labour market flexibility and tackle poverty. Improve activation policies.

Enhance the effectiveness of competition policy.

Strengthen efficiency of the education system.

Foster innovation and knowledge-based activities and promote a Green fiscal reform

CASE STUDY ON GREEK ECONOMY

IF THE GREEK ECONOMY IS IN RECESSION WHAT WOULD YOU EXPECT TO
BE THE EFFECT ON: A) INFLATION? B) UNEMPLOYMENT C) IMPORTS?
EXPLAIN YOUR ANSWERS.

A) INFLATION: Inflation would soar into the double digits, imports such as food and oil
might need to be rationed, companies that borrowed in euros might go bankrupt, and the
government would have to balance its budget overnight.

B) UNEMPLOYMENT: Jobs are increasingly difficult to come by in Greece - While a

quarter of the population are out of work, youth unemployment is running much higher.
Half of those under 25 are out of work. In some regions of western Greece, the youth
unemployment rate is well above 60%.

C) IMPORTS: Greek imports downfall from 2009 to 2013

REFERENCE

Business Economics (for BBA - 1) By T. R. Jain and O. P. Khanna.

Economics Xii Part A Micro By Arora K G.

Microeconomics: Theory And Applications By D. N. Dwivedi.

Principles of Economics By T. R. Jain and V. K. Ohri.

Greece at a Glance Policies for a Sustainable Recovery By OECD.

How bad are things for the people of Greece? By BBC.

7 key things to know about Greeces debt crisis and what happens next By Washington post.