Question

Discuss in detail the main characteristics of monopolistic competition.

Answer 1

Explanation:

The main features of monopolistic competition are as under:

1. Large Number of Buyers and Sellers:

There are large number of firms but not as large as under perfect competition.

That means each firm can control its price-output policy to some extent. It is assumed that any price-output policy of a firm will not get reaction from other firms that means each firm follows the independent price policy.

2. Free Entry and Exit of Firms:

Like perfect competition, under monopolistic competition also, the firms can enter or exit freely. The firms will enter when the existing firms are making super-normal profits. With the entry of new firms, the supply would increase which would reduce the price and hence the existing firms will be left only with normal profits. Similarly, if the existing firms are sustaining losses, some of the marginal firms will exit. It will reduce the supply due to which price would rise and the existing firms will be left only with normal profit.

3. Product Differentiation:

Another feature of the monopolistic competition is the product differentiation. Product differentiation refers to a situation when the buyers of the product differentiate the product with other. Basically, the products of different firms are not altogether different; they are slightly different from others. Although each firm producing differentiated product has the monopoly of its own product, yet he has to face the competition. This product differentiation may be real or imaginary. Real differences are like design, material used, skill etc. whereas imaginary differences are through advertising, trade mark and so on.

4. Selling Cost:

Another feature of the monopolistic competition is that every firm tries to promote its product by different types of expenditures. Advertisement is the most important constituent of the selling cost which affects demand as well as cost of the product. The main purpose of the monopolist is to earn maximum profits; therefore, he adjusts this type of expenditure accordingly.

5. Lack of Perfect Knowledge:

The buyers and sellers do not have perfect knowledge of the market. There are innumerable products each being a close substitute of the other. The buyers do not know about all these products, their qualities and prices.

6. Less Mobility:

Under monopolistic competition both the factors of production as well as goods and services are not perfectly mobile.

7. More Elastic Demand:

Under monopolistic competition, demand curve is more elastic. In order to sell more, the firms must reduce its price.

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Answer 2

Firms freely enter and exit and decision-making are independent are the characteristics of monopolistic competition.

What are the features of monopolistic competition?

• There are a large number of buyers and sellers are present in this market
• In monopolistic competition, product differentiation is used based on the quality of the product
• The new technologies are used in this market
• The main aim of the firm is to earn a high profit
• The goods do not transfer easily from one place to another in this market