FEATURES OF MONOPOLISTIC COMPETITION
1) many Sellers
In monopolistic competition there are large numbers of sellers. They are selling the products which are close substitute to each other. They are in the same line of production. As there is consumer's patronage and as the consumers preference is consistent, they are able to exercise a certain degree of monopoly.
2) large number of buyers:
There are large numbers of buyers for every commodity. So, no individual buyers can influence total demand or total price. But the consumer's preference is almost consistent. E.g.: In soap industry if consumer prefers a particular soap say Lux,he will not change his preference due to rise or fall in the price of this soap or even other soap. That is the reason, why the producers in the monopolistic competition are able to exercise a certain degree of monopoly.
3)product Differentiation:
This is one of the important features of monopolistic competition. In this market structure there are may producers in the same line of production and they are producing the commodities which are close substitute to each other. E.g.: In the soap industry - there are many soap like lux, pears, Dettol, etc. As there are many producers in the same line of production they distinguish or differentiate their products from the products of other producers. They have different trade Mark, trade name, colour, size, wrapper shape, etc. This is known as product differentiation.
4) selling cost:
As the consumes preference is consistent, the producers cannot attract the consumer by means of reducing the price. That is way; the producers allocate lot of resources on advertisement and salesman ship. The expenses incurred by the firm on advertisement and salesmanship are called selling cost. It is also includes the commissions paid to agents, window display, etc.
5) Free entry and exist of the firm:
In the monopolistic competition there are no obstacles on the entry and exist of the firm. It means any firm can enter into any industry and can get exist from any industry. It means there is free entry and exist of the firm.
6) Two dimensional competition
In monopolistic competition there are two types of compilation among the producers and sellers.
1)price compilation
2)non- price compilation
If one producer reduces his price of his product then, the other producers will also reduce the price of their products and so their share in the market will not improve. That's way the producer resorts to non- price compilation refers to the compilation in the filed of advertisement and salesmanship. It also include the salary paid to the sales department, commission paid to the agents, guarantee period, warranty period, free service, distribution of free sample, etc.
7)Concept of group:
All the firm producing homogeneous together constitute industry. But in the monopolistic competition the firm are nat selling homogeneous product but differentiated products. So, the concept of industry can't be applied to monopolistic competition. That's way; E.H. chamberline introduced the concept of group in the place of industry. Group is the cluster of firms producing differentiated product.
8) price maker but not the price taker:
In monopolistic competition in the firms can determine the price of their products. Higher the price lower is the quantity demanded or sold and that's way the demand curve or the average revenue curve slopes downwards from left to right as shown in the following diagram.
9) profit in the short run:
In the short run a firm under monopolistic competition may earn supernormal profit or normal profit or it may even incur loss. The super normal profit earned in a monopolistic competition is shown in the following diagram.
OQ is the equilibrium output because a point E MC=MR.
AT OQ output,
AR=QR
AC=QC
As AR>AC (QR>QC), there is profit.
Profit per unit =CR
In the long run, many firms will enter the group and so price will fall. The price will be equal to average cost for every firm. If AR or price is equal average cost then there is normal profit. Therefore, in the long run all the firms under monopolistic competition earn only normal profit.
6) Two dimensional competition
In monopolistic competition there are two types of compilation among the producers and sellers.
1)price compilation
2)non- price compilation
If one producer reduces his price of his product then, the other producers will also reduce the price of their products and so their share in the market will not improve. That's way the producer resorts to non- price compilation refers to the compilation in the filed of advertisement and salesmanship. It also include the salary paid to the sales department, commission paid to the agents, guarantee period, warranty period, free service, distribution of free sample, etc.
7)Concept of group:
All the firm producing homogeneous together constitute industry. But in the monopolistic competition the firm are nat selling homogeneous product but differentiated products. So, the concept of industry can't be applied to monopolistic competition. That's way; E.H. chamberline introduced the concept of group in the place of industry. Group is the cluster of firms producing differentiated product.
8) price maker but not the price taker:
In monopolistic competition in the firms can determine the price of their products. Higher the price lower is the quantity demanded or sold and that's way the demand curve or the average revenue curve slopes downwards from left to right as shown in the following diagram.
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| Diagram |
In the short run a firm under monopolistic competition may earn supernormal profit or normal profit or it may even incur loss. The super normal profit earned in a monopolistic competition is shown in the following diagram.
 |
| Diagram |
AT OQ output,
AR=QR
AC=QC
As AR>AC (QR>QC), there is profit.
Profit per unit =CR
Total profit for 'OQ' output =///////10)Equilibrium in the long run or group equilibrium:
In the long run, many firms will enter the group and so price will fall. The price will be equal to average cost for every firm. If AR or price is equal average cost then there is normal profit. Therefore, in the long run all the firms under monopolistic competition earn only normal profit.
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