The degree of competition in a monopolistic market is less than that in a market with perfect competition but more than that in an oligopoly and ofcourse a monopoly. The characteristics of a market with monopolistic competition are as follows:
a) There are a large number of buyers
b) There are a large number of sellers
c) The product is differentiated only due to branding
d) There are free entry and exit barriers
e) Perfect Factor mobility
f) Differentiated product
Monopolistic competition combines the basic elements of both perfect competition and monopoly. The element of monopoly in monopolistic competition arises from the fact that each firm has an absolute right to produce and sell a branded or patented product. Other firms are prevented by laws from producing and selling a branded of other firms. This gives a firm monopoly power over production, pricing and sale of its own branded product. For example, consider toilet soap industry. There are a number of brand names avialiable in the market- Lux, Hama, Palmolive, Pears, Fairglow, Rexona etc. Each of these branded toilet soaps is produced and sold by a company having monopoly power over the product.
Monopolistic competition refers to a market structure in which a large number of sellers sell differentiated products which are close substitutes for one another.
Characteristics/Features of Monopolistic Competition
- Large number of Buyers and sellers
Under monopolistic competition there are very large number of firms, but not as large as in perfect competition. Each firm produces a small portion of industry output, each buyer also purchases a very small part of the industry output. The product must be produced by 50 to 100 or more firms, with each firm’s product a fairly close substitute for the products of the other firms in the same product group.
- Product differentiation
Product differentiation is the basis of and the main distinctive characteristic of monopolistic competition that distinguishes it from monopoly and perfect competition. Under monopolistic competition, the firms differentiate their products from one another in respect of their shape, size, colour, design, minor qualitative differences, efficiency is use, some extra facility, packaging, after sale service, guarantee and warrantee, etc. The basic purpose of product differentiation is to make the consumers believe that a product is different from others and thereby to create brand loyalty of the consumers. Product differentiation affects firm’s demand curve in a significant way.
- Free entry and exit
New firms are free to enter the monopolistically competitive industry and to quit at will. Entry of new firms reduces the market share of the existing ones and exit of firms does the opposite. These consequences of free entry and free exit lead to intensive competition among the firms for both retaining and increasing their market share.
- Selling costs
Every producer (or seller) tries to promote its own product through different types of expenditures, such as attractive packaging, higher commission to distributors, sales promotion, advertisements and other incentives. These are selling costs that must be considered along with production costs.
- Independent decision making
Similar to monopoly, individual firms in a monopolistic market can take decision about the price and output of their own products, independent of decisions of rival firms. Due to the presence of a large number of firms selling heterogeneous products, each firm decides on its price and output, based on individual demand and cost, in this it does not take into account the possible reactions of rival firms.
- Imperfect Knowledge
Information about cost, quality, price etc. is not uniformly available to all buyers and sellers in the market.
- Flat demand curve
The demand curve tends to be flat because this is a market situation between monopoly and perfect competition.
Difference between Monopolistic and Perfect Competition
(i) Under Perfect competition, products are homogeneous, whereas under monopolistic competition, products are differentiated by brand name, trade mark, design, colour and shape, packaging, credit terms, prompt after-sales service etc. Products are so differentiated that buyers can easily distinguish between the products of different firms. Despite product differentiation, each product remains a close substitute for the rival products.
(ii) While decision making under perfect competition is independent of other firms, in monopolistic competition competition, firm’s decisions and business behavior are not absolutely independent of each other.
(iii) Another important factor that distinguishes monopolistic competition from perfect competition is the difference in the number of sellers. Under perfect competition, the number of sellers is very large as in case of agricultural products, retail business and share markets, whereas under monopolistic competition competition, the number of sellers is large but limited.