monopolistic competition essay

Essay on Monopolistic Competition

In this essay we will discuss about Monopolistic Competition. After reading this essay you will learn about: 1. Meaning of Monopolistic Competition 2. Price Determination of a Firm under Monopolistic Competition 3. Chamberlin’s Group Equilibrium 4. Theory of Excess Capacity 5. Selling Costs 6. Wastes of Monopolistic Competition.

• Essay on the Meaning of Monopolistic Competition
• Essay on the Price Determination of a Firm under Monopolistic Competition
• Essay on Chamberlin’s Group Equilibrium
• Essay on Theory of Excess Capacity
• Essay on the Selling Costs
• Essay on Wastes of Monopolistic Competition

Essay # 1. Meaning of Monopolistic Competition:

Monopolistic competition refers to a market situation where there are many firms selling a differentiated product. “There is competition which is keen, though not perfect, among many firms making very similar products.”

No firm can have any perceptible influence on the price-output policies of the other sellers nor can it be influenced much by their actions. According to Salvatore, “Monopolistic competition refers to the market organisation in which there are many firms selling closely related but not identical commodities.”

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Products are close substitutes with a high cross-elasticity and not perfect substitutes, Tata, Lipton, etc. tea; Hamam, Lux etc. soap; Pepsi, Coca Cola, etc. cold drinks are examples of product differentiation. Under monopolistic competition, no single firm controls more than a small portion of the total output of a product.

As the products are close substitutes, a reduction in the price of a product will increase the sales of the firm but it will have little effect on the price-output conditions of other firms, each will lose only a few of its customers. Likewise, an increase in its price will reduce its demand substantially but each of its rivals will attract only a few of its customers.

Therefore, the demand curve (average revenue curve) of a firm under monopolistic competition slopes downward to the right. It is elastic but not perfectly elastic within a relevant range of price at which he can sell any amount.

It means that it has some control over price due to product differentiation and there are price differentials between firms. Despite this, the slope of the demand curve is determined by the general level of the market price for the differentiated product.

In so far as it exercises some control over price, it resembles monopoly and since its demand curve is affected by market conditions, it resembles pure competition. Such a situation is, therefore, characterised as monopolistic competition.

Essay # 2. Price Determination of a Firm under Monopolistic Competition:

The equilibrium of the firm under monopolistic competition follows the usual analysis in the short-run and long-run.

(A) Short-Run Equilibrium Assumptions :

The short-run analysis of the firm under monopolistic competition is based on the following assumptions:

(1) The number of sellers is large and they act independently of each other. Each is a monopolist in his own sphere;

(2) The product of each seller is differentiated from the other products;

(3) The firm has a determinate demand curve (AR) which is elastic;

(4) The factor-services are in perfectly elastic supply for the production of the product in question;

(5) The short-run cost curves of each firm differ from each other; and

(6) No new firms enter the industry.

Explanation:

Given these assumptions, each firm fixes such price and output which maximises its profits. The equilibrium price and output is determined at a point where the short-run marginal cost curve (SMC) cuts the marginal revenue (MR) curve from below.

Since costs differ in the short-run, a firm with lower unit costs will be earning only normal profits. In case, it is able to cover just the average variable cost, it incurs losses.

In Figure 1 (A) the short-run marginal cost curve (SMC) cuts the MR curve at E. This equilibrium point establishes the price QA (=OP) and output OQ. As a result, the firm earns supernormal profits represented by the shaded area PABC.

Figure 1 (B) indicates the same equilibrium point of price and output. But in this case the firm just covers the short-run average unit cost as represented by the tangency of demand curve D and the short-run average unit cost curve SAC at A. It earns normal profits.

Figure 1 (C) shows a situation where the firm is not able to cover its short-run average unit cost and therefore incurs losses. Price set by the equality of SMC and MR curves is QA which covers only the average variable cost.

The tangency of the demand curve D and the average variable cost curve A VC at A makes it a shut-down point. If the firm lowers the price below QA, it will have to stop further production. However at this price, the firm will incur losses equal to the area CBAP during the short-run in the hope of lowering its costs in the long-run.

Monopolistic competition exists when many companies offer competing products or services that are similar, but not perfect, substitutes.

The barriers to entry in a monopolistic competitive industry are low, and the decisions of any one firm do not directly affect its competitors. The competing companies differentiate themselves based on pricing and marketing decisions.

Key Takeaways

• Monopolistic competition occurs when many companies offer products that are similar but not identical.
• Firms in monopolistic competition differentiate their products through pricing and marketing strategies.
• Barriers to entry, or the costs or other obstacles that prevent new competitors from entering an industry, are low in monopolistic competition.

Investopedia / Joules Garcia

Understanding Monopolistic Competition

Monopolistic competition exists between a monopoly and perfect competition , combines elements of each, and includes companies with similar, but not identical, product offerings.

Restaurants, hair salons, household items, and clothing are examples of industries with monopolistic competition. Items like dish soap or hamburgers are sold, marketed, and priced by many competing companies.

Demand is highly elastic for goods and services of the competing companies and pricing is often a key strategy for these competitors. One company may opt to lower prices and sacrifice a higher profit margin , hoping for higher sales. Another may raise its price and use packaging or marketing that suggests better quality or sophistication.

Companies often use distinct marketing strategies and branding to distinguish their products. Because the products all serve the same purpose, the average consumer often does not know the precise differences between the various products, or how to determine what a fair price may be.

Characteristics of Monopolistic Competition

Low barriers to entry.

In monopolistic competition, one firm does not monopolize the market and multiple companies can enter the market and all can compete for a market share. Companies do not need to consider how their decisions influence competitors so each firm can operate without fear of raising competition.

Product Differentiation

Competing companies differentiate their similar products with distinct marketing strategies, brand names, and different quality levels. 

Companies in monopolistic competition act as price makers and set prices for goods and services. Firms in monopolistic competition can raise or lower prices without inciting a price war, often found in oligopolies .

Demand Elasticity

Demand is highly elastic in monopolistic competition and very responsive to price changes. Consumers will change from one brand name to another for items like laundry detergent based solely on price increases.

Advantages and Disadvantages of Monopolistic Competition

Monopolistic competition provides both benefits and pitfalls for companies and consumers.

Few barriers to entry for new companies

Variety of choices for consumers

Company decision-making power for prices and marketing 

Consistent quality of product for consumers

Many competitors limits access to economies of scale

Inefficient company spending on marketing, packaging and advertising

Too many choices for consumers means extra research for consumers

Misleading advertising or imperfect information for consumers

What Is the Difference Between Monopolistic Competition and Perfect Competition?

In perfect competition, the product offered by competitors is the same item. If one competitor increases its price, it will lose all of its market share to the other companies based on market supply and demand forces, where prices are not set by companies and sellers accept the pricing determined by market activity.

In monopolistic competition, supply and demand forces do not dictate pricing. Firms are selling similar, yet distinct products, so firms determine the pricing. Product differentiation is the key feature of monopolistic competition, where products are marketed by quality or brand. Demand is highly elastic, and any change in pricing can cause demand to shift from one competitor to another.

How Does Monopolistic Competition Function in the Short Term and Long Term?

Companies aim to produce a quantity where marginal revenue equals marginal cost to maximize profit or minimize losses. When existing firms are making a profit, new firms will enter the market. The demand curve and the marginal revenue curve shift and new firms stop entering when all firms are making zero profit in the long run. If existing firms are incurring a loss, some firms will exit the market. The firms stop exiting the market until all firms start making zero profit. The market is at equilibrium in the long run only when there is no further exit or entry in the market or when all firms make zero profit in the long run.

What Industry Is an Example of Monopolistic Competition?

Monopolistic competition is present in restaurants like Burger King and McDonald's. Both are fast food chains that target a similar market and offer similar products and services. These two companies are actively competing with one another, and seek to differentiate themselves through brand recognition, price, and by offering different food and drink packages.

What Is the Difference Between Monopolistic Competition and a Monopoly?

A monopoly is when a single company dominates an industry and can set prices for its product without fear of competition. Monopolies limit consumer choices and control production quantity and quality. Monopolistic competitive companies must compete with others, restricting their ability to substantially raise prices without affecting demand and providing a range of product choices for consumers. Monopolistic competition is more common than monopolies, which are discouraged in free-market  nations.

Monopolistic competition exists when many companies offer competitive products or services that are similar, but not exact, substitutes. Hair salons and clothing are examples of industries with monopolistic competition. Pricing and marketing are key strategies for competing companies and often rely on branding or discount pricing strategies to increase market share.

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• What Are the Characteristics of a Monopolistic Market? 16 of 24
• Monopolistic Market vs. Perfect Competition: What's the Difference? 17 of 24
• What are Some Examples of Monopolistic Markets? 18 of 24
• A History of U.S. Monopolies 19 of 24
• What Are the Most Famous Monopolies? 20 of 24
• Monopoly vs. Oligopoly: What's the Difference? 21 of 24
• Oligopoly: Meaning and Characteristics in a Market 22 of 24
• Duopoly: Definition in Economics, Types, and Examples 23 of 24
• Oligopolies: Some Current Examples 24 of 24

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1.5 Monopolistic Competition, Oligopoly, and Monopoly

Learning objective.

• Describe monopolistic competition, oligopoly, and monopoly.

Economists have identified four types of competition— perfect competition , monopolistic competition , oligopoly , and monopoly . Perfect competition was discussed in the last section; we’ll cover the remaining three types of competition here.

Monopolistic Competition

In monopolistic competition , we still have many sellers (as we had under perfect competition). Now, however, they don’t sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in a number of ways, including quality, style, convenience, location, and brand name. Some people prefer Coke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch (at least temporarily).

How is product differentiation accomplished? Sometimes, it’s simply geographical; you probably buy gasoline at the station closest to your home regardless of the brand. At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from another—and better than it. Regardless of customer loyalty to a product, however, if its price goes too high, the seller will lose business to a competitor. Under monopolistic competition, therefore, companies have only limited control over price.

Oligopoly means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low.

Companies in oligopolistic industries include such large-scale enterprises as automobile companies and airlines. As large firms supplying a sizable portion of a market, these companies have some control over the prices they charge. But there’s a catch: because products are fairly similar, when one company lowers prices, others are often forced to follow suit to remain competitive. You see this practice all the time in the airline industry: When American Airlines announces a fare decrease, Continental, United Airlines, and others do likewise. When one automaker offers a special deal, its competitors usually come up with similar promotions.

In terms of the number of sellers and degree of competition, monopolies lie at the opposite end of the spectrum from perfect competition. In perfect competition, there are many small companies, none of which can control prices; they simply accept the market price determined by supply and demand. In a monopoly , however, there’s only one seller in the market. The market could be a geographical area, such as a city or a regional area, and doesn’t necessarily have to be an entire country.

There are few monopolies in the United States because the government limits them. Most fall into one of two categories: natural and legal . Natural monopolies include public utilities, such as electricity and gas suppliers. Such enterprises require huge investments, and it would be inefficient to duplicate the products that they provide. They inhibit competition, but they’re legal because they’re important to society. In exchange for the right to conduct business without competition, they’re regulated. For instance, they can’t charge whatever prices they want, but they must adhere to government-controlled prices. As a rule, they’re required to serve all customers, even if doing so isn’t cost efficient.

A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years (United States Patent and Trademark Office, 2006). During this period, other companies can’t use the invented product or process without permission from the patent holder. Patents allow companies a certain period to recover the heavy costs of researching and developing products and technologies. A classic example of a company that enjoyed a patent-based legal monopoly is Polaroid, which for years held exclusive ownership of instant-film technology (Bellis, 2006). Polaroid priced the product high enough to recoup, over time, the high cost of bringing it to market. Without competition, in other words, it enjoyed a monopolistic position in regard to pricing.

Key Takeaways

• There are four types of competition in a free market system: perfect competition, monopolistic competition, oligopoly, and monopoly.
• Under monopolistic competition , many sellers offer differentiated products—products that differ slightly but serve similar purposes. By making consumers aware of product differences, sellers exert some control over price.
• In an oligopoly , a few sellers supply a sizable portion of products in the market. They exert some control over price, but because their products are similar, when one company lowers prices, the others follow.
• In a monopoly , there is only one seller in the market. The market could be a geographical area, such as a city or a regional area, and does not necessarily have to be an entire country. The single seller is able to control prices.
• Most monopolies fall into one of two categories: natural and legal .
• Natural monopolies include public utilities, such as electricity and gas suppliers. They inhibit competition, but they’re legal because they’re important to society.
• A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process for a limited time, generally twenty years.

Identify the four types of competition, explain the differences among them, and provide two examples of each. (Use examples different from those given in the text.)

Bellis, M., “Inventors-Edwin Land-Polaroid Photography-Instant Photography/Patents,” April 15, 2006, http://inventors.about.com/library/inventors/blpolaroid.htm (accessed January 21, 2012).

United States Patent and Trademark Office, General Information Concerning Patents , April 15, 2006, http://www.uspto.gov/web/offices/pac/doc/general/index.html#laws (accessed January 21, 2012).

Exploring Business Copyright © 2016 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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Monopolistic Competition - KAA and Evaluation Paragraphs

Last updated 20 Feb 2019

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In this short video we look through example KAA and evaluation paragraphs on this question: "Assess the extent to which monopolistic competition leads to economic efficiency."

KAA Paragraph

In monopolistic competition, we assume that there are many firms each selling slightly differentiated products and the barriers to entry are low. An example might be many sandwich shops competing in a city centre. Intense competition between suppliers means that demand is likely to be price elastic (Ped>1) which then means that prices may move closer to marginal cost. Therefore, in contrast to a monopoly, prices for consumers will be lower and this would be an improvement in allocative efficiency of scarce resources.

Evaluation Paragraph

However, firms in monopolistic competition still have pricing power since AR and MR are downward sloping. This is especially true for firms with strong brand loyalty. Even if the entry of new firms & products means that normal profits are made in the long run, price will remain above marginal cost so allocative efficiency is not achieved. The saturation of many differentiated products in monopolistically competition may also lead to a loss of productive efficiency as firms are unable to fully exploit economies of scale in the long run.

• Monopolistic competition
• Economic Efficiency
• Productive Efficiency
• Allocative efficiency

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Monopolistic Competition Notes & Questions (A-Level, IB)

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Monopolistic Competition Definition: Monopolistic Competition is defined as a market structure with a large number of firms, low barriers to entry and differentiated products.

Monopolistic Competition Examples & Explanation: Local restaurants, pubs, hairdressers, and even tutoring businesses tend to fall into the monopolistic competition market structure. These businesses are relatively easy to set-up, meaning they have low barriers to entry. They sell slightly different products to one another (e.g. Irish bar vs Sports bar; Chinese vs Indian takeaway), which gives them some market power to set their own prices. The more differentiated/unique their product is, the less substitutes there are for what they are offering, and the more control they have over prices to maximise profits ( imagine takeaway sushi vs Michelin star sushi ). Despite they are likely to make supernormal profits in the short-run, more firms will enter into the market in the long-run and compete those profits away by offering more substitute products. This will be due to the ease of entry and high contestability of the market. Monopolistic competition is considered less efficient than perfect competition but also not as inefficient as a monopoly .

Monopolistic Competition Economics Notes with Diagrams

Monopolistic competition video explanation – econplusdal.

The left video gives an overview into monopolistic competition, the right looks at what happens in the market structure in the long-run.

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Home Essay Samples Business Mcdonald's

Analysis of Monopolistic Competition on the Example of McDonald's

Table of contents

Introduction, examples of monopolistic competition: mcdonald’s.

• perfect competition
• monopolistic competition
• McDonald's Corporation. (2021). 2020 Annual Report. Retrieved from https://www.aboutmcdonalds.com/content/dam/AboutMcDonalds/Investors/2020%20Annual%20Report.pdf
• Beasley, M. (2016). The McDonaldization of Society: An Investigation into the Changing Character of Contemporary Social Life (8th ed.). Sage Publications.
• Bishop, M. (2019). Monopolistic Competition. Investopedia. Retrieved from https://www.investopedia.com/terms/m/monopolisticcompetition.asp
• Gabaix, X., & Laibson, D. (2019). Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets. The Quarterly Journal of Economics, 134(1), 511-551. https://doi.org/10.1093/qje/qjy025
• Gregoriou, A. (2020). Monopolistic Competition and the Welfare Effects of Trade Liberalization. Journal of International Trade & Economic Development, 29(3), 269-299. https://doi.org/10.1080/09638199.2019.1665826
• Lutz, A. (2017). Why McDonald's Is One of the Most Monopolistic Companies in America. Business Insider. Retrieved from https://www.businessinsider.com/mcdonalds-is-one-of-the-most-monopolistic-companies-in-america-2017-10
• Mises, L. von. (1990). Human Action: A Treatise on Economics (4th ed.). Fox & Wilkes.
• Perloff, J. (2014). Microeconomics (7th ed.). Pearson Education, Inc.
• Rosenbaum, D. (2019). McDonald's: A Monopoly in the Fast Food Industry? Investopedia. Retrieved from https://www.investopedia.com/articles/investing/030916/mcdonalds-monopoly-fast-food-industry.asp
• Trefis Team. (2020). What Is McDonald's Business Model? Forbes. Retrieved from https://www.forbes.com/sites/greatspeculations/2020/07/29/what-is-mcdonalds-business-model/?sh=52f3dfdb149a

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119 Monopolistic Competition Essay Topic Ideas & Examples

Inside This Article

Monopolistic competition is a market structure in which many firms sell products that are similar but not identical. This type of competition can lead to a wide range of essay topics that explore the dynamics of this unique market structure. Here are 119 monopolistic competition essay topic ideas and examples to help you get started:

• The role of advertising in monopolistic competition
• Price discrimination in monopolistic competition markets
• Product differentiation and brand loyalty in monopolistic competition
• The impact of entry and exit barriers on monopolistic competition markets
• The effects of government regulations on monopolistic competition
• How monopolistic competition affects consumer choice
• The role of technology in shaping monopolistic competition markets
• The relationship between market power and market concentration in monopolistic competition
• The impact of globalization on monopolistic competition markets
• The role of innovation in driving monopolistic competition
• The effects of economies of scale on monopolistic competition markets
• The relationship between monopolistic competition and market power
• The impact of mergers and acquisitions on monopolistic competition markets
• The effects of pricing strategies on monopolistic competition markets
• How monopolistic competition affects the distribution of income
• The role of government intervention in monopolistic competition markets
• The impact of market structure on monopolistic competition
• The relationship between monopolistic competition and market failures
• The role of consumer preferences in shaping monopolistic competition markets
• The effects of advertising on monopolistic competition markets
• The impact of entry barriers on monopolistic competition markets
• The relationship between product differentiation and market power in monopolistic competition
• The effects of technological change on monopolistic competition markets
• The role of entry costs in monopolistic competition markets
• The impact of exit barriers on monopolistic competition markets
• The effects of government regulations on monopolistic competition markets
• The relationship between market concentration and market power in monopolistic competition
• The role of innovation in driving monopolistic competition markets

These essay topic ideas and examples can help you explore the complexities of monopolistic competition and its impact on various aspects of the economy. Whether you are studying economics, business, or any other related field, these topics can provide a solid foundation for your research and analysis. Happy writing!

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Oligopoly and Monopolistic Competition

The market is not a constant structure, but an ever-changing and complex construct. The well-known ideals of monopolistic and competitive markets are not as widely applicable as they would seem at first glance. Monopolistic competition and oligopoly are examples of mixed market systems. In terms of output and pricing, they are located between monopoly and perfect competition. This essay presents their definitions and compares them to the perfect competition model.

There are several conditions and factors that define oligopoly and monopolistic competition. The number of firms that enter the market is the most important defining condition, as this number dilutes the monopolistic pricing toward the product’s marginal cost (Mankiw, 2018). The marketing product between firms in these settings is similar. Although it could be identical in an oligopoly, it stays partially unique in monopolistic competition. Firms from these market systems compete for the same customers. Both models, unlike the perfect competition model, allow firms to have an influence on the price.

The monopolistic competition model allows firms to act as a monopoly to a certain degree. However, as Mankiw (2018) states, in the long run, “when firms are making profits, new firms have an incentive to enter the market” (p. 323). The demand curve in this model is downward-sloping, while in the perfect competition model the demand curve is horizontal. This leads to a self-balancing system, where the more firms enter the market, the less the demand will be, and the more firms will have an incentive to exit the market (Mankiw, 2018). The freedom of entry and exit to the market leads to production levels kept at a minimum of the average total cost (Mankiw, 2018). Since the product price is not equal to its marginal cost as in the perfect competition, firms are encouraged to attract customers.

An oligopoly occurs in a market that has a small number of firms covering the majority of that market’s demand. It is defined by a high concentration ratio, which drives the largest firms to be wary of each other’s actions and reactions. Mankiw (2018) states that “a small number of sellers makes rigorous competition less likely and strategic interactions among them vitally important” (p. 321). This approach is defined by a mix of cooperation and self-interest, which are often unbalanced. Nowadays, in order to gain higher ground and a bigger share, oligopolistic firms tend to develop technologies that could potentially turn the market into monopolistic (Ganapati, 2018). In an oligopoly, firms tend to increase production until output and price effects are balanced out.

The product output in this model is less than under the perfect competition model due to profit-driven monopolistic tendencies. As fewer firms are involved in the market, the price gets higher. The prisoner’s dilemma guarantees that all competitors would not set the output or prices close to monopoly parameters due to fear of other companies cheating them by producing more (Mankiw, 2018). In this state of cautious interaction and thorough examination of market influences, firms achieve a lesser outcome and lower profits.

These two market models are more natural in modern economics, as the market is easier to enter. The number of firms on the market depends on the product, and, as Mankiw (2018) argues, “it is hard to decide what structure best describes a market” because “the reality is never as clear-cut as theory” (p. 322). In conclusion, these models allow economists to give an evaluation of a market, but cannot be used as a constant, and markets tend to fluctuate between them.

Ganapati, S. (2018). Growing oligopolies, prices, output, and productivity. [Master’s Thesis, Georgetown University]. Web.

Mankiw, G.N. (2018). Principles of economics (8 th ed.). Cengage Learning.

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