The monopolistic competition is considered to be a market structure which is a combination of the elements of the competitive and monopoly markets. The monopolistic markets provide the absolute opportunity to the organizations for the market entry and exit along with the scope for the firms to differentiate their products and services. Hence, it places the organizations in perfect position for the development of the inelastic demand curve so that they be able to set the prices in an efficient manner. With a precise focus on the freedom of entry that the monopolistic competition offers to the organizations, supernormal profits have the possibility to encourage the firms in a more prominent manner in entering the market.
With a precise focus on the features of the monopolistic market, it is understandable that the freedom of entry and exit, the capability of the firms to produce differentiated products, the increasing number of firms, the ability of the firms to have inelastic demands, the ability of the firms to make normal profits for the long run, capability of the organizations to make supernormal profits in the short term, play a significant role in the success of the mentioned market.
The diagram for the monopolistic competition is same as the monopoly in the short run. It is evident from the picture that the firm can maximise their profit when MR=MC. Along with that, this is seen to be at output Q1 and Price P1 capability to lead to supernormal profit.
From the diagram, it is visible that the supernormal profit has the capability to encourage the new firms in entering the market competition in the long run. Hence, this becomes crucial for the organizations in reducing the demands in an effective manner and at the same time, it also plays a crucial role in leading the existing firms towards the normal profit.
Efficiency of the firms in monopolistic competition:
Allocative inefficient. The diagram enables the firms to have the knowledge regarding the setting of the price above he marginal cost.
Productive inefficiency. The diagram enables the firms to have the idea of the production that is not aligned with the lowest point of the AC curve.
With a precise focus on the diagram, it is evident that the firms can achieve the dynamic efficiency with the capability of investing the profit in the domain of research and development.
The factors that influence the firms to face these sort of situations, are observed to be the capability of the firms to cut the cost along with the ability to provide better products to the customers.
Considering the example of restaurants, it is visible that the restaurants have high level of competition on the basis of the quality of the foods and prices of the foods. Under such situation, the product differentiation becomes one of the important factor for the success of the restaurants. The level of difficulty for the restaurants in setting up new business or opening new stores are seen to be notably limited and that provides the perfect scope to the organizations in expanding their business in new destinations.
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