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The term ‘monopolistic’ is an adjective that relates to a person or a business that has an exclusive control or possession of the supply of or the trade in a product or a service.

Monopolistic competition definition:

Monopolistic Competition is the defined by the characteristic of an industry wherein a lot of firms offer commodities or services that are similar, yet not perfect substitutes. There are barriers to entry as well as exit in a monopolistic competitive industry are generally low and the decisions of any one of the firms that do not directly impact those of the competitors. Monopolistic Competition is closely associated to the business strategy of brand differentiation. Monopolistic Competition takes place when any industry has many firms which offer products that tend to be a lot similar yet are not identical. Unlike a monopoly, these firms have little potential to set curtail supply or to raise costs for increasing their profits. Firms in the Monopolistic Competition typically attempts to differentiate their products for achieving the above market returns. Heavy advertising and marketing is very common amongst the firms in a Monopolistic Competition and some economists criticize this as something which is not useful at all.

Monopolistic competition examples:

One of the best example of Monopolistic Competition can be stated that of the fast food companies like that of McDonald and Burger King who sell burgers in the market are the most common kind of instances of Monopolistic Competition. The two organizations sell an almost same product but they are not the substitute for one another. Now which product a particular consumer likes the most and of which organization, completely relies on them. Apart from the burger, other products are also offered in these organizations like French fries and soft drinks etc. All of these products of the mentioned organizations are of same nature, yet there is no congruency in between the products that are sold by the two and each one has a slightly diverse taste and shape.

            Other examples of Monopolistic Competition are as follows:

• Restaurants that compete on the quality of food as much as they compete on price. Product differentiation is the key component of the business. There are comparatively low barriers to entry in setting up of a new restaurant.
• Hairdressers provide a service that will provide firms a reputation for the quality of their hair cutting.
• Television programs- globalization has enhanced the diversity of the Television programs from networks all across the world. The consumers can select between domestic channels, yet also import from other nations and new services like the services of Netflix.
• Clothing- the designer label clothes are all about the differentiation in their brand and products.

Monopolistic competition graph:

In the short run, the graph for Monopolistic Competition is similar as monopoly; the firms maximize profit where MR= MC. This is at the output Q1 and price P1 that leads to supernatural profit as shown below:

Figure 1: short run monopolistic competition diagram

For the long run, the demand curve shifts to the left for the new firms that enters the market. In the long- run Monopolistic Competition. The supernormal profit motivates new firms to enter. It reduces the demand for existing firms and leads to the normal profit.

Figure 2: long run monopolistic competition graph

Characteristic of monopolistic competition:

The characteristics of monopolistic competition or the markets that are monopolistically competitive are as follows:

• There are multiple producers and consumers in the market and no business has complete control over the price in the market.
• Consumer perceive that there are non- price differences amongst the products of their competitors.
• Forms that operate with the notion that their actions will not impact other firm’s actions.
• There are potentially very few barriers to entry as well as exit.
• The producers have a certain degree of control over the cost.
• The fundamental goal of the firm is to enhance the profits.
• Factor costs and technology are given aspects.
• A firm is assumed to behave as if they knew their demand and their cost curves with perfect certainty.
• The decision regarding the cost and result of any firm does not impact the behavior of other firms in a group.
• Every firm earn only normal profit in the long run.
• Every firm spend a substantial amount on the adverts; the publicity as well as advert costs are known as the selling costs.

Who sets the price in a monopolistic competition?

As in the monopoly, firms in the monopolistic competition are the ones that set the price or makers instead of the price takers. Yet, the firms’ nominal ability to set the prices is efficiently offset by the fact that the demand of the products is highly elastic with price.

Monopoly vs. perfect competition:

Monopolistic competition has a market structure where there are multiple sellers, selling the close substitute products/ services to the buyers. Perfect competition has a market structure where there are multiple sellers selling same products/ services to the buyers.

In perfect competition, the products offered are standardized; in Monopolistic competition, there is product differentiation.

In Monopolistic competition, each form offer goods at their own price; in perfect competition, it is the demand and supply forces that determines the cost for the whole industry.

As compared to Monopolistic competition, the entry as well as exist are easy in perfect competition.

In Monopolistic competition the AR or the average revenue is greater than the MR or the Marginal Revenue; thus, for increasing the sales the firms have to lower their price. In the perfect competition, the AR and the MR has a curve that coincides with one another.