Thesuccess of individual firms depends on the type of competition thatexists in the markets in which they operate. Monopolistic is one ofthe key types of competition that influence the success of differentfirms in the market. A monopolistic competition is differentiatedfrom other types of market using many characteristics. However, it isdefined as an imperfect type of market where many companies tend tocompete with each other by selling services or products that aredifferentiated from (Hunt 73). This type of competition wasidentified in 1930 by Edward Chamberlin and Joan Robinson. Some ofthe key industries where the monopolistic type of competition existsinclude cereals, clothing, shoes, pubs, general retail, restaurant,and customer service. This paper will provide a discussion of theconcept of monopolistic competition, with a focus on itscharacteristics, disadvantages, and advantages.
Thedifferentiation of products offered in the market is among the keyfeatures that are used to differentiate the monopolistic from othertypes of competition. Monopolistic firms are able to sell productsthat have real non-price differentiation (Carson 2). This type ofdifferentiation is achieved when the firm produces goods withcharacteristics (such as quality, appearance, reputation, andlocation) that cannot be easily matched by other companies. Theability of the monopolistic firms to differentiate their productsensures that they do not have a perfect substitution in the market.The lack of products with similar features gives the firm some powersto influence the level of output as well as changes in the price ofits products. Consumers are also willing to pay for the prices set bythe monopolistic company since they cannot get similar products inthe market.
Thenumber of sellers
Themonopolistic competition is characterized by the existence of a largenumber of companies, but they are less compared to those that existin the perfect market. The existence of a relatively small number ofcompeting firms compared to a perfect market implies that individualcompanies can retain some control over their output (Carson 2). Firmsin a monopolistic competition assume that their respective price andoutput policies will not face severe reactions from other players inthe market. This gives monopolistic enterprises an opportunity topursue their own price as well as the output policies. Consequently,firms that compete with monopolistic enterprises do not have anyreason to react to their policies or business strategies.
Themarket power that is enjoyed by monopolistic companies is derivedfrom the fact that they compete with a few enterprises. In addition,each firm in the monopolistic market tends to focus on production aswell as the sale of differentiated products. Consequently, the firmsin the market do not find the reason to engage in strategic decisionmaking processes (Carson 3). These features of a monopolistic marketgive individual firms some power to control the market without thefear of losing their respective shares. For example, a monopolisticcompany can increase the price of its products without experiencing adrop in its sales volume since other firms will not react negativelytowards its decision.
Freedomof entry or exit
Themonopolistic market provides firms with unlimited freedom to enter orleave the market. New firms are motivated to enter the monopolisticmarket when the existing ones are making supernormal profits. It isassumed that new investors will continue entering the market untilthe supernormal gains are reduced to normal levels (Bellante 18). Onthe contrary, the existing companies will continue exiting as long asthey continue making losses. The two processes, exit and entry, willcontinue taking place until firms that are operating in themonopolistic market start making normal profits. These relationshipssuggest that operations in the monopolistic market are largelydetermined by the prevailing conditions.
Theamount of available knowledge
Boththe buyers and sellers lack perfect information about the each otherand the market in general. The market is characterized by theexistence of a large number of products, but consumers lack perfectknowledge about their respective prices and qualities (Rao 90). Thelack of perfect knowledge creates a scenario in which a large numberof consumers purchase commodities that they select out of a fewoptions that are sold within their geographical areas. At times,consumers may be aware of the existence of cheaper products, but failto go for them after feeling lethargic or lack time. Similarly,sellers in the monopolistic competition lack knowledge about thepreferences of their potential customers, which denies them theopportunity to take advantage of the prevailing situations.
Theattempt made by firms to maximize their profits by managing theircost of sales is a common phenomenon. For example, advertising costis among the most significant types of expenses that determine thefirms’ profit margin. The large amount of money spent onadvertising is attributed to the fact that companies that operate inthe monopolistic market face stiff competition from the local firmsthat offer products that address similar needs. This forces them toapply different advertising methods, such as sales promotion, localcinema, leaflets, radio, and posters. Therefore, the amount of profitthat each firm makes depends on its ability to increase thepopularity of its brand using the cheapest advertising strategiesavailable in the market (Hunt 77). In essence, firms strive tomaximize the shareholder wealth by reducing the cost of sales.
TheConcept of Equilibrium in the
Thepossibility of achieving equilibrium is influenced by the ease withwhich new firms are able to leave or enter the market depending onprevailing conditions. In the short-run, it is possible for firms tomake supernormal profits, which attracts new companies that wish totake advantage of the situation. The entry of a large number of newfirms leads to an increase in elasticity of goods supplied by theexisting firms, which shifts the demand curve leftwards. The price ofthe same goods reduces from P to C as shown in figure 1. The declinein the amount of profits continues until the supernormal profit iseroded completely, when equilibrium is achieved.
Figure1: Achievement of equilibrium in the short-run
Sources:Economics Online Limited (1)
Similarly,the possibility of making supernormal profits in the long-runattracts new firms that intend to take advantage of the situation. Along-term equilibrium is reached when the existing firms can onlymake a normal profit (Economics Online Limited 1). A further entry offirms forces the existing companies to make loses, which disruptequilibrium. This suggests that firms in the monopolistic market arelikely to gain more by staying in the short-run. They try to maintainthe short-run status through differentiation and innovation.
Somemarket conditions force firms to engage in wasteful practices as theytry to outdo their rivals. For example, some enterprises choose todifferentiate themselves through smart or excess packaging, whichdoes not enhance the quality of their products (Bellante 17). Inaddition, the high level of competition forces firms to engage inexpensive and persuasive marketing campaigns. Some firms sell theirproducts below the production cost, with the objective of kickingtheir rivals out of the market.
Ahigh level of inefficiency is another major drawback associated withthe monopolistic competition. The monopolistic competition creates asituation in which the firms are inefficient in the short-term aswell as in the long-run. The high level of inefficiency is attributedto the fact that firms are unable to reach their maximumproductivity. Mass production is considered to be impossible, whichimplies that all firms operating in the monopolistic market areunable to utilize their fixed assets to the maximum levels (Bellante20). However, companies can maximize their competitiveness by takingadvantage of choice and diversity, which outweighs the drawbacksassociated with inefficiencies.
Thereare three key benefits associated with the monopolistic marketcompared to other types of competition. The first advantage of themonopolistic market is the promotion of a stiff competition. This isa disadvantage to individual firms, but it protects customers fromthe risk of being exploited by monopolies (Rao 85). The developmentof a stiff competition is associated with the free entry of firms,which ensures that the existing firms can only earn a normal profitfrom products that they sell to consumers. This reduces the risk ofexploitation.
Secondly,the monopolistic competition creates the opportunity for thedevelopment of services and products that of a high quality. Themarket provides incentives for companies to improve on quality inorder to make temporary economic profits (Hunt 77). However, firmsassume the burden of improvement in the level of quality, which isaccomplished by lowering the cost of production. This leads to thecreative destruction of firms, but customers benefit since theyaccess quality service and products.
Third,the tendency of many firms to enhance their level of competitivenessthrough differentiation enables customers to have a greater varietyand choice. Firms try to avoid a direct competition with their rivalsby adding unique features to their products, which is a benefit tothe customers (Rao 17).
Thecapacity of individual firms to succeed depends on the type ofcompetition existing in the market in which they operate. Themonopolistic competition is characterized by the existence ofmultiple firms that tend to outperform each other by introducingdifferent features into their products as well as services. The mainbenefit of differentiation is the possibility of competition orincreasing the market share of the services as well as the productsoffered by the organization without the need to engage in price wars.The unlimited freedom of entry allows new investors to join themarket as long as there is room for making some profits. This is adisadvantage to existing firms, but it gives customers an opportunityto access affordable, variety, and quality products.
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