A monopolistic industry has plenty sellers and plenty buyers, where the sellers are located smack between the price takers and price makers. It is an imperfect market.
its features include:
A. Differentiation of product/service, each seller offers unique items for sale. These product may have substitutes but not the exact same. The differentiation mostly stems from the characteristics of the product/service.
B. Presence of many sellers, with ease of entry, multiple sellers are in the industry though the number is not as large as perfect competition.
C. Cost of production of goods or providing of service are also varied per seller.
D. Selling price of product/service is relatively within the purview of sellers/provider because 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 (Kunar, n.d.).
E. A corollary of the cost and price variation is the profit variance. What is put into production and other things considered by seller determines the price, though it is worthy to note that goods/services in this industry are usually elastic, so the lower the prive the higher the demand.
F. There are no barriers to entry and exit similar to free market but unlike other industries. Due to normal profit gained by existing entities, new entities come in, just to drive price down due to increased supply which leads to less profit. Some entities leave because of this reduced profit which drives supply down and profit/demand up and existing entities earn normal profit again .
G. Less mobility: of both factors of production and finished goods/services (Kumar).
H. Imperfect knowledge of industry by entities within it both buyers and sellers, with the market flooded with substitutes.
I. Marketing: Products are differentiated and these differences are made known to the buyers through advertisement and promotion. These costs constitute a substantial part of the total cost under monopolistic competition (Agarwal, 2017)
An example is a barber shop, in my home country there one on almost every street, with each shop providing unique services at unique prices. You could always tell when someone that lives on my street is just from a visit to the barber’s shop, he was a bit heavy handed with the black dye, so customers always had a black artificially extended hairlines, but the shop offered lower prices than most shops in the local. This business requires low startup capital so many people venture into it and competition present but not as fierce as other industries due the size of most firms in the industry.
A monopolistically competitive firm is not efficient because it does not produce at the minimum of its average cost curve or produce where P = MC. Thus, a monopolistically competitive firm will tend to produce a lower quantity at a higher cost and charge a higher price than a perfectly competitive firm (“Principles Of Microeconomics”, n.d.). Though the buyer has more options to pick from and there are incentives for better product/service in this variety-riddled industry.
Reference
Agarwal, P. (2017, December 10th). Cost Theory: Monopolistic Competition Market Structure. Retrieved from https://www.intelligenteconomist.com/market-structure-monopolistic-competition/
Kumar, M. (n.d.). 7 Main Features of Monopolistic Competition. Retrieved from http://www.economicsdiscussion.net/monopolistic-competition/7-main-features-of-monopolistic-competition/7297
Principles of Microeconomics (n.d.). Retrieved from https://pressbooks.bccampus.ca/uvicecon103/chapter/8-3-monopolistic-competition/
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