Monopolistic Competition

INTRODUCTION Pure monopoly and consummate(a) con melter argon cardinal extreme cases of commercialize organise. In reality, in that respect argon marts having vainglorious routine of ca intentrs competing with several(prenominal)ly early(a) in order to lot their harvesting in the grocery store. frankincense, on that point is monopoly on the ane hand and completed contention, on the other hand. Such a mixture of monopoly and accurate tilt is c haillyed non private- placeprise(a) disputation. It is a case of im ameliorate argument. The seat of non rivalrous contender describes a common commercialise structurein which dissipateds project numerous competitors, scarce each integrity covers a slightly varied increase.monopo identifyic contender as a merchandise structure was first tack together in the 1930s by Ameri trick economic expertEdward Chamberlin, and English economistJoan Robinson. just about sm any businesses start under conditions of non emulous tilt, including freelancely draw and operated high- highroad stores and restaurants. In the case of restaurants, each whiz offers something different and possesses an element of remark fitness, that all atomic enactment 18 essentially competing for the analogous customers. The end of the given go bad is the field of operation of noncompetitive asp viperiration. The paper consists of introduction, body, conclusion and bibliography.In the introduction the aim of the become is defined and the structure of the paper is draw. The body gives the definition of monopolistic aspiration, studies it of import characteristics and comments on the main advantages and disadvantages of monopolistic rivalry. Conclusion sums up the results of the study. Bibliography comprises the list of references apply when carrying out the work. MONOPOLISTIC COMPETITION monopolistic competitionis a example ofim better competition much(prenominal) that competing erectrs sell int ersection points that be severalisefrom mavin another as good precisely not perfectsubstitutes, much(prenominal)(prenominal) as from shiting, quality, or location.In monopolistic competition, a dissipated scoops the outlays charged by its rivals as given and ignores the impact of its own outlays on the expenses of other tights. In a monopolistically competitive trade, upstandings can be make believe give c argonmonopoliesin the inadequate supply, including by using market power to turn back pay. In the spacious turn, however, other squ atomic number 18s unload the market and the benefits of specialty reduction with competition the market becomes much like aperfectly competitiveone where tautens cannot gain economic profit.In practice, however, if consumer rationality/innovativeness is low and heuristics be preferred,monopolistic competitioncan fall intonatural monopoly, even in the stop absence of g e very(prenominal)(prenominal) come innment intervent ion. In the presence of coercive g eitherwherenment, monopolistic competition de actuate fall intogovernment-granted monopoly. Unlike perfect competition, the sign of the zodiac maintains sp ar capacity. Models of monopolistic competition ar frequently used to model industries. Examples of industries with market structures standardised to monopolistic competition includerestaurants,cereal,clothing,shoes, and serfeebleness industries in grownup cities.The launch father of the theory of monopolistic competition isEdward Hastings Chamberlin, who wrote a pioneering concur on the subjectTheory of Monopolistic Competition(1933). Joan Robinson published a bookThe Economics of Imperfect Competitionwith a comparable to(predicate) pro topographic point of traceing perfect from imperfect competition. Monopolistically competitive markets live the adjacent characteristics * on that point atomic number 18 many producers and many consumers in the market, and no business has total agree over the market expense. * Consumers perceive that in that respect are non- value differences among the competitors produces. in that respect are somebarriers to admittanceand lead. * Producers arrive a dot of take in over price. The enormous- dribble characteristics of a monopolistically competitive market are close to the similar as a perfectly competitive market. Two differences betwixt the 2 are that monopolistic competition produces conglomerate crossroads and that monopolistic competition involves a great(p) deal of non-price competition, which is based on subtle harvest distinction. A satisfying devising profits in the short run forget nonetheless onlybreak evenin the long run because crave ordain decrease and honest total monetary value depart increase.This substance in the long run, a monopolistically competitive dissolute ordain make zeroeconomic profit. This illustrates the amount of influence the smashed has over the market because of tick loyalty, it can raise its prices without losing all of its customers. This fashion that an respective(prenominal) cockeyeds get bias is descending(prenominal)s sloping, in contrast to perfect competition, which has aperfectly e utmost(a)ic take up schedule. Monopolistically competitive markets exhibit the following characteristics 1. apiece firm makes independent closings about price and output, based on its product, its market, and its be of work. . Knowledge is widely spread between participants, hardly it is tall(a) to be perfect. For example, diners can review all the batting orders available from restaurants in a town, onward they make their choice. Once inside the restaurant, they can view the menu again, before ordering. However, they cannot fully appreciate the restaurant or the meal until subsequently they have dined. 3. Theentrepreneurhas a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision making. 4. in that location is granting immunity to place down or leave the market, as there are no majorbarriers to enteringor exit. 5. A central possess of monopolistic competition is that products are severalise. thither are four main types of speciality a. bodily product differentiation, where firms use size, design, colour, shape, per frameance, and lark abouts to make their products different. For example, consumer electronics can easily be physically differentiated. b. Marketing differentiation, where firms try to differentiate their product by typical case and other promotional techniques.For example, breakfast cereals can easily be differentiated finished packaging. c. Human capital differentiation, where the firm wees differences through the acquisition of its employees, the train of training received, distinctive uniforms, and so on. d. Differentiation through distri saveion, including diffusion via chain armor order or through internet shop ping, such as Amazon. com, which differentiates itself from handed-down bookstores by sell online. 6. Firms areprice makersand are confront with a downward sloping deal wind up.Because each firm makes a unique product, it can charge a higher or refuse price than its rivals. The firm can circuit its own price and does not have to take it from the industry as a whole, though the industry price whitethorn be a guideline, or becomes a constraint. This also delegacy that the demand curve will slope downwards. 7. Firmsoperating under monopolistic competition usuallyhave to engage in advertize. Firms are often in fierce competition with other ( topical anaesthetic anesthetic) firms offering a like product or service, and whitethorn need to advertise on a local basis, to let customers know their differences.Common methods of publicizing for these firms are through local press and radio, local cinema, posters, leaflets and special promotions. 8. Monopolistically competitive firms a re anticipate to beprofit maximisersbecause firms tend to be small with entrepreneurs actively gnarly in managing the business. 9. at that place are usually a large total of independent firms competing in the market. harvest-home differentiation Monopolistic competition firms sell products that have real or perceived non-price differences. However, the differences are not so great as to eliminate other goods as substitutes.Technically, the cross price breeze of demand between goods in such a market is positive. In detail, the XED would be high. Monopolistic competition goods are take up described as close just now imperfect substitutes. The goods perform the same elemental functions yet have differences in qualities such as type, style, quality, reputation, appearance, and location that tend to distinguish them from each other. For example, the basic function of get vehicles is basically the same to imprint people and objects from point A to B in commonsense entertai n and safety.Yet there are many different types of motor vehicles such as motor scooters, motor cycles, trucks, cars and SUVs and many variations even inside these categories. There are many firms in each monopolistic competition product group and many firms on the side lines prepared to enter the market. A product group is a collection of similar products. The fact that there are many firms gives each MC firm the emancipation to tag prices without engaging in strategic decision making regarding the prices of other firms and each firms actions have a negligible impact on the market.For example, a firm could cut prices and increase sales without fear that its actions will make a motion justificatory responses from competitors. How many firms will an MC market structure yield at market equilibrium? The answer depends on factors such as resolute embodys, economies of scale and the degree of product differentiation. For example, the higher the fixed cost, the less firms the mark et will support. Also the greater the degree of product differentiation the more the firm can take apart itself from the pack the fewer firms there will be at market equilibrium.In the long run there is free compliance and exit. There are numerous firms waiting to enter the market each with its own unique product or in pursuit of positive profits and any firm uneffective to spoil its costs can leave the market without incurring village costs. This self-assertion implies that there are low start up costs, no change posture costs and no exit costs. The cost of entering and exit is very low. Each monopolistic competition firm independently sets the name of permutation for its product. The firm gives no consideration to what effect its decision may have on competitors.The theory is that any action will have such a negligible effect on the overall market demand that an MC firm can act without fear of propel heightened competition. In other words each firm feels free to set pr ices as if it were a monopoly kind of than an oligopoly. Monopolistic competition firms have some degree of market power. Market power way of life that the firm has say-so over the terms and conditions of exchange. An MC firm can raise it prices without losing all its customers. The firm can also lower prices without triggering a potentially pestilential price war with competitors.The source of an MC firms market power is not barriers to entry since they are low. Rather, an MC firm has market power because it has relatively few competitors, those competitors do not engage in strategic decision making and the firms sells differentiated product. Market power also pith that an MC firm faces a downward sloping demand curve. The demand curve is topingly rubbery although not flat. There are two sources of inefficiency in the MC market structure. First, at its optimum output the firm charges a price that exceeds peripheral costs, the MC firm maximizes profits where MR = MC.Sin ce the MC firms demand curve is downward sloping this means that the firm will be charging a price that exceeds marginal costs. The monopoly power possessed by an MC firm means that at its profit maximizing take aim of outturn there will be a net discharge of consumer (and producer) surplus. The endorse source of inefficiency is the fact that MC firms operate with inordinateness capacity. That is, the MC firms profit maximizing output is less than the output associated with minimum second-rate cost. some(prenominal) a PC and MC firm will operate at a point where demand or price equals average cost.For a PC firm this equilibrium condition occurs where the perfectly elastic demand curve equals minimum average cost. A MC firms demand curve is not flat but is downward sloping. Thus in the long run the demand curve will be tangent to the long run average cost curve at a point to the left of its minimum. The result is excess capacity. turn monopolistically competitive firms are u neffective, it is usually the case that the costs of regulating prices for any product that is sold in monopolistic competition far exceed the benefits of such regulation.The government would have to regulate all firms that sold heterogeneous productsan out(predicate) proposition in amarket economy. A monopolistically competitive firm might be say to be marginally in cost-effective because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market might be said to be a marginally inefficient market structure because marginal cost is less than price in the long run. Another maintenance of critics of monopolistic competition is that it fostersadvertisingand the creation ofbrand names.Critics argue that advertising induces customers into spending more on products because of the name associated with them rather than because of rational factors. Defenders of advertising difference this, arguing that brand names can represent a p lug of quality and that advertising helps reduce the cost to consumers of weighing the tradeoffs of numerous competing brands. There are unique entropy and tuition processing costs associated with accepting a brand in a monopolistically competitive environment. In a monopoly market, the consumer is approach with a single brand, making culture gathering relatively inexpensive.In a perfectly competitive industry, the consumer is faced with many brands, but because the brands are virtually identical information gathering is also relatively inexpensive. In a monopolistically competitive market, the consumer must collect and process information on a large number of different brands to be able to select the best of them. In many cases, the cost of gathering information necessity to selecting the best brand can exceed the benefit of eat the best brand instead of a randomly selected brand.Evidence suggests that consumers use information obtained from advertising not only to assess th e single brand advertised, but also to infer the possible existence of brands that the consumer has, heretofore, not observed, as intimately as to infer consumer satisfaction with brands similar to the advertised brand The advantages of monopolistic competition Monopolistic competition can bring the following advantages 1. There are no significantbarriers to entry therefore markets are relativelycontestable. 2. Differentiation creates diversity, choice and returns.For example, a typical high street in any town will have a number of different restaurants from which to choose. 3. The market is more efficient than monopoly but less efficient than perfect competition less allocatively and less productively efficient. However, they may be dynamically efficient, innovative in terms of new-made production processes or new products. For example, retailers often constantly have to develop new slipway to take up and retain local custom. The disadvantages of monopolistic competitionThere are several potential disadvantages associated with monopolistic competition, including 1. Some differentiation does not create utility but generates unnecessary waste, such as excess packaging. advertizing may also be considered wasteful, though most is informative rather than persuasive. 2. As the diagram illustrates, assuming profit maximisation, there is allocative inefficiency in two the long and short run. This isbecause price is above marginal cost in both cases. In the long run the firm is less allocatively inefficient, but it is pipe down inefficient. . There is a tendency for excess capacity because firms can never fully exploit their fixed factors because mass production is difficult. This means they areproductively inefficientin both the long and short run. However, this is may be outweighed by the advantages of diversity and choice. As an economic model of competition, monopolistic competition is more realistic than perfect competition many acquainted(predicate) an d commonplace markets have many of the characteristics of this model. Conclusion Our study gives us an prospect to come to the following conclusion.Monopolistic competition is amarket structurein which several or manysellerseach produce similar, butslightlydifferentiatedproducts. Each producercan set itspriceand quantity without affecting the marketplace as a whole. Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, firms are left with excess production capacity. It is a type of competition within an industry where * every last(predicate) firms produce similar yet not perfectly substitutable products. each firms are able to enter the industry if the profits are attractive. * either firms are profit maximizers. * All firms have some market power, which means none are price takers. Monopolistic competition has certain features, one of which is that there are large number of sellers producin g differentiated products. So, competition among them is very keen. Since number of sellers is large, each seller produces a very small part of market supply. So no seller is in a position to influence price of product. Every firm is limited in its size.Product differentiation is one of the most important features of monopolistic competition. In perfect competition, products are homogeneous in nature. On the contrary, here, every producer tries to view as his product dissimilar than his rivals product in order to maintain his separate identity. This boosts up the competition in market. So, every firm acquires some monopoly power. The feature of emancipation of entry and exit leads to stiff competition in market. poverty-stricken entry into the market enables new firms to come with close substitutes.Free entry or exit maintains normal profit in the market for a longish span of time. Selling cost is another unique feature of monopolistic competition. In such type of market, due t o product differentiation, every firm has to incur some additional expenditure in the form of selling cost. This cost includes sales promotion expenses, advertisement expenses, salaries of marketing staff, etcetera And the last feature of monopolistic competition is that a firm is cladding downward sloping demand curve i. e. elastic demand curve.It means one can sell more at lower price and vice versa. BIBLIOGRAPHY 1. Ayers R. and Collinge R. , Microeconomics, Pearson, 2003 2. J. Gans, S. King, N. Gregory Mankiw, Principles of Economics, Thomson Learning, 2003 3. Hirschey, M, Managerial Economics Rev. Ed, Dryden, 2000 4. http//www. britannica. com/EBchecked/topic/390037/monopolistic-competition 5. http//www. investopedia. com/terms/m/monopolisticmarket. asp 6. http//kalyan-city. blogspot. com/2010/11/monopolistic-competition-meaning. htmlMonopolistic CompetitionINTRODUCTION Pure monopoly and perfect competition are two extreme cases of market structure. In reality, there are marke ts having large number of producers competing with each other in order to sell their product in the market. Thus, there is monopoly on the one hand and perfect competition, on the other hand. Such a mixture of monopoly and perfect competition is called monopolistic competition. It is a case of imperfect competition. The model of monopolistic competition describes a commonmarket structurein which firms have many competitors, but each one sells a slightly different product.Monopolistic competition as a market structure was first identified in the 1930s by American economistEdward Chamberlin, and English economistJoan Robinson. Many small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and restaurants. In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers. The aim of the given work is the study of monop olistic competition. The paper consists of introduction, body, conclusion and bibliography.In the introduction the aim of the work is defined and the structure of the paper is described. The body gives the definition of monopolistic competition, studies it main characteristics and comments on the main advantages and disadvantages of monopolistic competition. Conclusion sums up the results of the study. Bibliography comprises the list of references used when carrying out the work. MONOPOLISTIC COMPETITION Monopolistic competitionis a type ofimperfect competitionsuch that competing producers sell products that aredifferentiatedfrom one another as good but not perfectsubstitutes, such as from branding, quality, or location.In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms. In a monopolistically competitive market, firms can behave likemonopoliesin theshort run, including by using mar ket power to generate profit. In thelong run, however, other firms enter the market and the benefits of differentiation decrease with competition the market becomes more like aperfectly competitiveone where firms cannot gain economic profit.In practice, however, if consumer rationality/innovativeness is low and heuristics are preferred,monopolistic competitioncan fall intonatural monopoly, even in the complete absence of government intervention. In the presence of coercive government, monopolistic competition will fall intogovernment-granted monopoly. Unlike perfect competition, the firm maintains cease capacity. Models of monopolistic competition are often used to model industries. Examples of industries with market structures similar to monopolistic competition includerestaurants,cereal,clothing,shoes, and service industries in large cities.The founding father of the theory of monopolistic competition isEdward Hastings Chamberlin, who wrote a pioneering book on the subjectTheory of Monopolistic Competition(1933). Joan Robinsonpublished a bookThe Economics of Imperfect Competitionwith a comparable theme of distinguishing perfect from imperfect competition. Monopolistically competitive markets have the following characteristics * There are many producers and many consumers in the market, and no business has total control over the market price. * Consumers perceive that there are non-price differences among the competitors products. There are fewbarriers to entryand exit. * Producers have a degree of control over price. The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless onlybreak evenin the long run because demand will decrease and average total cost will increase.This means in the long run, a monopolistically competitive firm will make zeroeconomic profit. This illustrates the amount of influence the firm has over the market because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firms demand curve is downward sloping, in contrast to perfect competition, which has aperfectly elasticdemand schedule. Monopolistically competitive markets exhibit the following characteristics 1. Each firm makes independent decisions about price and output, based on its product, its market, and itscosts of production. . Knowledge is widely spread between participants, but it is unlikely to be perfect. For example, diners can review all the menus available from restaurants in a town, before they make their choice. Once inside the restaurant, they can view the menu again, before ordering. However, they cannot fully appreciate the restaurant or the meal until after they have dined. 3. Theentrepreneurhas a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision making. 4.There is freedom to enter or leave the market, as there are no majorbarriers to entryor exit. 5. A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation a. Physical product differentiation, where firms use size, design, colour, shape, performance, and features to make their products different. For example, consumer electronics can easily be physically differentiated. b. Marketing differentiation, where firms try to differentiate their product by distinctive packaging and other promotional techniques.For example, breakfast cereals can easily be differentiated through packaging. c. Human capital differentiation, where the firm creates differences through the skill of its employees, the level of training received, distinctive uniforms, and so on. d. Differentiation through distribution, including distribution via mail order or through internet shopping, such as Amazon. com, which differentiates itself from traditional bookstores by selling online. 6. Firms areprice makersand are faced with a downward slopingdemand curve.Because each firm makes a unique product, it can charge a higher or lower price than its rivals. The firm can set its own price and does not have to take it from the industry as a whole, though the industry price may be a guideline, or becomes a constraint. This also means that the demand curve will slope downwards. 7. Firmsoperating under monopolistic competition usuallyhave to engage in advertising. Firms are often in fierce competition with other (local) firms offering a similar product or service, and may need to advertise on a local basis, to let customers know their differences.Common methods of advertising for these firms are through local press and radio, local cinema, posters, le aflets and special promotions. 8. Monopolistically competitive firms are assumed to beprofit maximisersbecause firms tend to be small with entrepreneurs actively involved in managing the business. 9. There are usually a large numbers of independent firms competing in the market. Product differentiation Monopolistic competition firms sell products that have real or perceived non-price differences. However, the differences are not so great as to eliminate other goods as substitutes.Technically, the cross price elasticity of demand between goods in such a market is positive. In fact, the XED would be high. Monopolistic competition goods are best described as close but imperfect substitutes. The goods perform the same basic functions but have differences in qualities such as type, style, quality, reputation, appearance, and location that tend to distinguish them from each other. For example, the basic function of motor vehicles is basically the same to move people and objects from poin t A to B in reasonable comfort and safety.Yet there are many different types of motor vehicles such as motor scooters, motor cycles, trucks, cars and SUVs and many variations even within these categories. There are many firms in each monopolistic competition product group and many firms on the side lines prepared to enter the market. A product group is a collection of similar products. The fact that there are many firms gives each MC firm the freedom to set prices without engaging in strategic decision making regarding the prices of other firms and each firms actions have a negligible impact on the market.For example, a firm could cut prices and increase sales without fear that its actions will prompt retaliatory responses from competitors. How many firms will an MC market structure support at market equilibrium? The answer depends on factors such as fixed costs, economies of scale and the degree of product differentiation. For example, the higher the fixed costs, the fewer firms th e market will support. Also the greater the degree of product differentiation the more the firm can separate itself from the pack the fewer firms there will be at market equilibrium.In the long run there is free entry and exit. There are numerous firms waiting to enter the market each with its own unique product or in pursuit of positive profits and any firm unable to cover its costs can leave the market without incurring liquidation costs. This assumption implies that there are low start up costs, no sunk costs and no exit costs. The cost of entering and exit is very low. Each monopolistic competition firm independently sets the terms of exchange for its product. The firm gives no consideration to what effect its decision may have on competitors.The theory is that any action will have such a negligible effect on the overall market demand that an MC firm can act without fear of prompting heightened competition. In other words each firm feels free to set prices as if it were a mono poly rather than an oligopoly. Monopolistic competition firms have some degree of market power. Market power means that the firm has control over the terms and conditions of exchange. An MC firm can raise it prices without losing all its customers. The firm can also lower prices without triggering a potentially ruinous price war with competitors.The source of an MC firms market power is not barriers to entry since they are low. Rather, an MC firm has market power because it has relatively few competitors, those competitors do not engage in strategic decision making and the firms sells differentiated product. Market power also means that an MC firm faces a downward sloping demand curve. The demand curve is highly elastic although not flat. There are two sources of inefficiency in the MC market structure. First, at its optimum output the firm charges a price that exceeds marginal costs, the MC firm maximizes profits where MR = MC.Since the MC firms demand curve is downward sloping thi s means that the firm will be charging a price that exceeds marginal costs. The monopoly power possessed by an MC firm means that at its profit maximizing level of production there will be a net loss of consumer (and producer) surplus. The second source of inefficiency is the fact that MC firms operate with excess capacity. That is, the MC firms profit maximizing output is less than the output associated with minimum average cost. Both a PC and MC firm will operate at a point where demand or price equals average cost.For a PC firm this equilibrium condition occurs where the perfectly elastic demand curve equals minimum average cost. A MC firms demand curve is not flat but is downward sloping. Thus in the long run the demand curve will be tangent to the long run average cost curve at a point to the left of its minimum. The result is excess capacity. While monopolistically competitive firms are inefficient, it is usually the case that the costs of regulating prices for every product t hat is sold in monopolistic competition far exceed the benefits of such regulation.The government would have to regulate all firms that sold heterogeneous productsan impossible proposition in amarket economy. A monopolistically competitive firm might be said to be marginally inefficient because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market might be said to be a marginally inefficient market structure because marginal cost is less than price in the long run. Another concern of critics of monopolistic competition is that it fostersadvertisingand the creation ofbrand names.Critics argue that advertising induces customers into spending more on products because of the name associated with them rather than because of rational factors. Defenders of advertising dispute this, arguing that brand names can represent a guarantee of quality and that advertising helps reduce the cost to consumers of weighing the tradeoffs of numero us competing brands. There are unique information and information processing costs associated with selecting a brand in a monopolistically competitive environment. In a monopoly market, the consumer is faced with a single brand, making information gathering relatively inexpensive.In a perfectly competitive industry, the consumer is faced with many brands, but because the brands are virtually identical information gathering is also relatively inexpensive. In a monopolistically competitive market, the consumer must collect and process information on a large number of different brands to be able to select the best of them. In many cases, the cost of gathering information necessary to selecting the best brand can exceed the benefit of consuming the best brand instead of a randomly selected brand.Evidence suggests that consumers use information obtained from advertising not only to assess the single brand advertised, but also to infer the possible existence of brands that the consumer ha s, heretofore, not observed, as well as to infer consumer satisfaction with brands similar to the advertised brand The advantages of monopolistic competition Monopolistic competition can bring the following advantages 1. There are no significantbarriers to entry therefore markets are relativelycontestable. 2. Differentiation creates diversity, choice and utility.For example, a typical high street in any town will have a number of different restaurants from which to choose. 3. The market is more efficient than monopoly but less efficient than perfect competition less allocatively and less productively efficient. However, they may be dynamically efficient, innovative in terms of new production processes or new products. For example, retailers often constantly have to develop new ways to attract and retain local custom. The disadvantages of monopolistic competitionThere are several potential disadvantages associated with monopolistic competition, including 1. Some differentiation does not create utility but generates unnecessary waste, such as excess packaging. Advertising may also be considered wasteful, though most is informative rather than persuasive. 2. As the diagram illustrates, assuming profit maximisation, there is allocative inefficiency in both the long and short run. This isbecause price is above marginal cost in both cases. In the long run the firm is less allocatively inefficient, but it is still inefficient. . There is a tendency for excess capacity because firms can never fully exploit their fixed factors because mass production is difficult. This means they areproductively inefficientin both the long and short run. However, this is may be outweighed by the advantages of diversity and choice. As an economic model of competition, monopolistic competition is more realistic than perfect competition many familiar and commonplace markets have many of the characteristics of this model. Conclusion Our study gives us an opportunity to come to the follow ing conclusion.Monopolistic competition is amarket structurein which several or manysellerseach produce similar, butslightlydifferentiatedproducts. Each producercan set itspriceand quantity without affecting the marketplace as a whole. Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, firms are left with excess production capacity. It is a type of competition within an industry where * All firms produce similar yet not perfectly substitutable products. All firms are able to enter the industry if the profits are attractive. * All firms are profit maximizers. * All firms have some market power, which means none are price takers. Monopolistic competition has certain features, one of which is that there are large number of sellers producing differentiated products. So, competition among them is very keen. Since number of sellers is large, each seller produces a very small part of market supply. So no seller is in a position to control price of product. Every firm is limited in its size.Product differentiation is one of the most important features of monopolistic competition. In perfect competition, products are homogeneous in nature. On the contrary, here, every producer tries to keep his product dissimilar than his rivals product in order to maintain his separate identity. This boosts up the competition in market. So, every firm acquires some monopoly power. The feature of freedom of entry and exit leads to stiff competition in market. Free entry into the market enables new firms to come with close substitutes.Free entry or exit maintains normal profit in the market for a longer span of time. Selling cost is another unique feature of monopolistic competition. In such type of market, due to product differentiation, every firm has to incur some additional expenditure in the form of selling cost. This cost includes sales promotion expenses, advertisement expenses, salaries o f marketing staff, etc. And the last feature of monopolistic competition is that a firm is facing downward sloping demand curve i. e. elastic demand curve.It means one can sell more at lower price and vice versa. BIBLIOGRAPHY 1. Ayers R. and Collinge R. , Microeconomics, Pearson, 2003 2. J. Gans, S. King, N. Gregory Mankiw, Principles of Economics, Thomson Learning, 2003 3. Hirschey, M, Managerial Economics Rev. Ed, Dryden, 2000 4. http//www. britannica. com/EBchecked/topic/390037/monopolistic-competition 5. http//www. investopedia. com/terms/m/monopolisticmarket. asp 6. http//kalyan-city. blogspot. com/2010/11/monopolistic-competition-meaning. html