essay about monopolistic competition

Monopolistic Competition – definition, diagram and examples

Definition: Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term.

A monopolistic competitive industry has the following features:

• Many firms.
• Freedom of entry and exit.
• Firms produce differentiated products.
• Firms have price inelastic demand; they are price makers because the good is highly differentiated
• Firms make normal profits in the long run but could make supernormal profits in the short term
• Firms are allocatively and productively inefficient.

Diagram monopolistic competition short run

The firm maximises profit where MR=MC. This is at output Q1 and price P1, leading to supernormal profit

Monopolistic competition long run

In the long-run, supernormal profit encourages new firms to enter. This reduces demand for existing firms and leads to normal profit. I

Efficiency of firms in monopolistic competition

• Allocative inefficient. The above diagrams show a price set above marginal cost
• Productive inefficiency. The above diagram shows a firm not producing on the lowest point of AC curve
• Dynamic efficiency. This is possible as firms have profit to invest in research and development.
• X-efficiency. This is possible as the firm does face competitive pressures to cut cost and provide better products.

Examples of monopolistic competition

• Restaurants – restaurants compete on quality of food as much as price. Product differentiation is a key element of the business. There are relatively low barriers to entry in setting up a new restaurant.
• Hairdressers. A service which will give firms a reputation for the quality of their hair-cutting.
• Clothing. Designer label clothes are about the brand and product differentiation
• TV programmes – globalisation has increased the diversity of tv programmes from networks around the world. Consumers can choose between domestic channels but also imports from other countries and new services, such as Netflix.

Limitations of the model of monopolistic competition

• Some firms will be better at brand differentiation and therefore, in the real world, they will be able to make supernormal profit.
• New firms will not be seen as a close substitute.
• There is considerable overlap with oligopoly – except the model of monopolistic competition assumes no barriers to entry. In the real world, there are likely to be at least some barriers to entry
• If a firm has strong brand loyalty and product differentiation – this itself becomes a barrier to entry. A new firm can’t easily capture the brand loyalty.
• Many industries, we may describe as monopolistically competitive are very profitable, so the assumption of normal profits is too simplistic.

Key difference with monopoly

In monopolistic competition there are no barriers to entry. Therefore in long run, the market will be competitive, with firms making normal profit.

Key difference with perfect competition

In Monopolistic competition, firms do produce differentiated products, therefore, they are not price takers (perfectly elastic demand). They have inelastic demand.

New trade theory and monopolistic competition

New trade theory places importance on the model of monopolistic competition for explaining trends in trade patterns. New trade theory suggests that a key element of product development is the drive for product differentiation – creating strong brands and new features for products. Therefore, specialisation doesn’t need to be based on traditional theories of comparative advantage, but we can have countries both importing and exporting the same good. For example, we import Italian fashion labels and export British fashion labels. To consumers, the importance is the choice of goods.

Readers Question : if all firms in a monopolistic competitive industry were to merge would that firm produce as many different brands or just one brand?

Interesting question. I think it is an open-ended question with many different possibilities. One approach is to think how firms in different industries may behave if they did merge. Bearing in mind the model of monopolistic competition doesn’t always stand up to scrutiny too well in the real world.

If the firms merged together, there is no certainty how they would behave.

In some industries, it makes sense to have many differentiated brands creating an illusion of competition and providing a barrier to entry.

How many soap powders are there? About 35. But, most of these brands are owned by two companies, Unilever and Proctor and Gamble. Having brand proliferation means it is harder for a new firm to enter the market. This is because a new firm would have to compete against 30 established brands as opposed to 2. There is less chance of getting a good market share with so many brands. Therefore the new firm would have an incentive to keep different brands to deter competitors.

However, if you have merge different brands there may be economies of scale. You can devote more resources and investment to improving that particular product and maximising its efficiency. This might be appropriate for an industry like computer software or computers. There used to be many different brands of computers until the pc came to dominate.

Are the different brands catering to different sectors of the market. If you take the restaurant business, there is a big difference between Chinese and Indian. If 2 restaurants merge, they would be better off retaining distinct business. It would make no sense to have a restaurant which offered a mixture of Chinese/Indian – consumers would trust it less.

If you fear the arrival of a powerful company, it might be good to consolidate your brands. For example, there are many small search engines, but they would be better off combining forces to compete against the mighty Google.

43 thoughts on “Monopolistic Competition – definition, diagram and examples”

Was requesting for economic restrictions for monopolistic competition

All great actions and thoughts have a negligible beginning.

I work hard, I insist, I will succeed

Thanks a lot sir you explain easily the topic and this is very helpful for me

it was helpful kindly send some more important information to my gmail, will appreciate

why is not possible for monopoly to exist to a large extent in agriculture?

hello sir, Could you please tell me that which theme you uses ?

Explain the dertemination of the optimal price and output combination in a monopolistic competition.use the resulting equilibrium to illustrate the statement that ‘production inefficient is a necessary price to pay for product variety’ comment on this statement (25)

hi, how is a monopolistic competition different from monopoly? thanks

In monopolistic competition there are no barriers to entry. Theoretically, if firms have no barriers to entry or exit, there will be mass competition as everyone wants to get a piece of the super normal profit. If this happens, there will be decreased demand for a specific product or service, as theres more substitue goods. leading to firms in monopolistic competition acheiving normal profit in the long run. Whereas with monopolies, the low competition means they control supply, without the threat of competition offering more supply to boost market cap and sales, leading to them being able to keep demand constant and acheive supernormal profits in both the long and short run.

Monopoly cannot exist in large extent in agriculture because the Monopoly you are talking about is short run

I’m happy to have learnt something new

Comments are closed.

10.1 Monopolistic Competition

Learning objectives.

By the end of this section, you will be able to:

• Explain the significance of differentiated products
• Describe how a monopolistic competitor chooses price and quantity
• Discuss entry, exit, and efficiency as they pertain to monopolistic competition
• Analyze how advertising can impact monopolistic competition

Monopolistic competition involves many firms competing against each other, but selling products that are distinctive in some way. Examples include stores that sell different styles of clothing; restaurants or grocery stores that sell a variety of food; and even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names. There are over 600,000 restaurants in the United States. When products are distinctive, each firm has a mini-monopoly on its particular style or flavor or brand name. However, firms producing such products must also compete with other styles and flavors and brand names. The term “monopolistic competition” captures this mixture of mini-monopoly and tough competition, and the following Clear It Up feature introduces its derivation.

Clear It Up

Who invented the theory of imperfect competition.

Two economists independently but simultaneously developed the theory of imperfect competition in 1933. The first was Edward Chamberlin of Harvard University who published The Economics of Monopolistic Competition . The second was Joan Robinson of Cambridge University who published The Economics of Imperfect Competition . Robinson subsequently became interested in macroeconomics and she became a prominent Keynesian, and later a post-Keynesian economist. (See the Welcome to Economics! and The Keynesian Perspective chapters for more on Keynes.)

Differentiated Products

A firm can try to make its products different from those of its competitors in several ways: physical aspects of the product, location from which it sells the product, intangible aspects of the product, and perceptions of the product. We call products that are distinctive in one of these ways differentiated products .

Physical aspects of a product include all the phrases you hear in advertisements: unbreakable bottle, nonstick surface, freezer-to-microwave, non-shrink, extra spicy, newly redesigned for your comfort. A firm's location can also create a difference between producers. For example, a gas station located at a heavily traveled intersection can probably sell more gas, because more cars drive by that corner. A supplier to an automobile manufacturer may find that it is an advantage to locate close to the car factory.

Intangible aspects can differentiate a product, too. Some intangible aspects may be promises like a guarantee of satisfaction or money back, a reputation for high quality, services like free delivery, or offering a loan to purchase the product. Finally, product differentiation may occur in the minds of buyers. For example, many people could not tell the difference in taste between common varieties of ketchup or mayonnaise if they were blindfolded but, because of past habits and advertising, they have strong preferences for certain brands. Advertising can play a role in shaping these intangible preferences.

The concept of differentiated products is closely related to the degree of variety that is available. If everyone in the economy wore only blue jeans, ate only white bread, and drank only tap water, then the markets for clothing, food, and drink would be much closer to perfectly competitive. The variety of styles, flavors, locations, and characteristics creates product differentiation and monopolistic competition.

Perceived Demand for a Monopolistic Competitor

A monopolistically competitive firm perceives a demand for its goods that is an intermediate case between monopoly and competition. Figure 10.2 offers a reminder that the demand curve that a perfectly competitive firm faces is perfectly elastic or flat, because the perfectly competitive firm can sell any quantity it wishes at the prevailing market price . In contrast, the demand curve, as faced by a monopolist, is the market demand curve, since a monopolist is the only firm in the market, and hence is downward sloping.

The demand curve as a monopolistic competitor faces is not flat, but rather downward-sloping, which means that the monopolistic competitor can raise its price without losing all of its customers or lower the price and gain more customers. Since there are substitutes, the demand curve facing a monopolistically competitive firm is more elastic than that of a monopoly where there are no close substitutes. If a monopolist raises its price, some consumers will choose not to purchase its product—but they will then need to buy a completely different product. However, when a monopolistic competitor raises its price, some consumers will choose not to purchase the product at all, but others will choose to buy a similar product from another firm. If a monopolistic competitor raises its price, it will not lose as many customers as would a perfectly competitive firm, but it will lose more customers than would a monopoly that raised its prices.

At a glance, the demand curves that a monopoly and a monopolistic competitor face look similar—that is, they both slope down. However, the underlying economic meaning of these perceived demand curves is different, because a monopolist faces the market demand curve and a monopolistic competitor does not. Rather, a monopolistically competitive firm’s demand curve is but one of many firms that make up the “before” market demand curve. Are you following? If so, how would you categorize the market for golf balls? Take a swing, then see the following Clear It Up feature.

Are golf balls really differentiated products?

Monopolistic competition refers to an industry that has more than a few firms, each offering a product which, from the consumer’s perspective, is different from its competitors. The U.S. Golf Association runs a laboratory that tests 20,000 golf balls a year. There are strict rules for what makes a golf ball legal. A ball's weight cannot exceed 1.620 ounces and its diameter cannot be less than 1.680 inches (which is a weight of 45.93 grams and a diameter of 42.67 millimeters, in case you were wondering). The Association also tests the balls by hitting them at different speeds. For example, the distance test involves having a mechanical golfer hit the ball with a titanium driver and a swing speed of 120 miles per hour. As the testing center explains: “The USGA system then uses an array of sensors that accurately measure the flight of a golf ball during a short, indoor trajectory from a ball launcher. From this flight data, a computer calculates the lift and drag forces that are generated by the speed, spin, and dimple pattern of the ball. ... The distance limit is 317 yards.”

Over 1800 golf balls made by more than 100 companies meet the USGA standards. The balls do differ in various ways, such as the pattern of dimples on the ball, the types of plastic on the cover and in the cores, and other factors. Since all balls need to conform to the USGA tests, they are much more alike than different. In other words, golf ball manufacturers are monopolistically competitive.

However, retail sales of golf balls are about $500 million per year, which means that many large companies have a powerful incentive to persuade players that golf balls are highly differentiated and that it makes a huge difference which one you choose. Sure, Tiger Woods can tell the difference. For the average amateur golfer who plays a few times a summer—and who loses many golf balls to the woods and lake and needs to buy new ones—most golf balls are pretty much indistinguishable.

How a Monopolistic Competitor Chooses Price and Quantity

The monopolistically competitive firm decides on its profit-maximizing quantity and price in much the same way as a monopolist. A monopolistic competitor, like a monopolist, faces a downward-sloping demand curve, and so it will choose some combination of price and quantity along its perceived demand curve.

As an example of a profit-maximizing monopolistic competitor, consider the Authentic Chinese Pizza store, which serves pizza with cheese, sweet and sour sauce, and your choice of vegetables and meats. Although Authentic Chinese Pizza must compete against other pizza businesses and restaurants, it has a differentiated product. The firm’s perceived demand curve is downward sloping, as Figure 10.3 shows and the first two columns of Table 10.1 .

We can multiply the combinations of price and quantity at each point on the demand curve to calculate the total revenue that the firm would receive, which is in the third column of Table 10.1 . We calculate marginal revenue, in the fourth column, as the change in total revenue divided by the change in quantity. The final columns of Table 10.1 show total cost, marginal cost, and average cost. As always, we calculate marginal cost by dividing the change in total cost by the change in quantity, while we calculate average cost by dividing total cost by quantity. The following Work It Out feature shows how these firms calculate how much of their products to supply at what price.

Work It Out

How a monopolistic competitor determines how much to produce and at what price.

The process by which a monopolistic competitor chooses its profit-maximizing quantity and price resembles closely how a monopoly makes these decisions process. First, the firm selects the profit-maximizing quantity to produce. Then the firm decides what price to charge for that quantity.

Step 1. The monopolistic competitor determines its profit-maximizing level of output. In this case, the Authentic Chinese Pizza company will determine the profit-maximizing quantity to produce by considering its marginal revenues and marginal costs. Two scenarios are possible:

• If the firm is producing at a quantity of output where marginal revenue exceeds marginal cost, then the firm should keep expanding production, because each marginal unit is adding to profit by bringing in more revenue than its cost. In this way, the firm will produce up to the quantity where MR = MC.
• If the firm is producing at a quantity where marginal costs exceed marginal revenue, then each marginal unit is costing more than the revenue it brings in, and the firm will increase its profits by reducing the quantity of output until MR = MC.

In this example, MR and MC intersect at a quantity of 40, which is the profit-maximizing level of output for the firm.

Step 2. The monopolistic competitor decides what price to charge. When the firm has determined its profit-maximizing quantity of output, it can then look to its perceived demand curve to find out what it can charge for that quantity of output. On the graph, we show this process as a vertical line reaching up through the profit-maximizing quantity until it hits the firm’s perceived demand curve. For Authentic Chinese Pizza, it should charge a price of $16 per pizza for a quantity of 40.

Once the firm has chosen price and quantity, it’s in a position to calculate total revenue, total cost, and profit. At a quantity of 40, the price of $16 lies above the average cost curve, so the firm is making economic profits. From Table 10.1 we can see that, at an output of 40, the firm’s total revenue is $640 and its total cost is $580, so profits are $60. In Figure 10.3 , the firm’s total revenues are the rectangle with the quantity of 40 on the horizontal axis and the price of $16 on the vertical axis. The firm’s total costs are the light shaded rectangle with the same quantity of 40 on the horizontal axis but the average cost of $14.50 on the vertical axis. Profits are total revenues minus total costs, which is the shaded area above the average cost curve.

Although the process by which a monopolistic competitor makes decisions about quantity and price is similar to the way in which a monopolist makes such decisions, two differences are worth remembering. First, although both a monopolist and a monopolistic competitor face downward-sloping demand curves, the monopolist’s perceived demand curve is the market demand curve, while the perceived demand curve for a monopolistic competitor is based on the extent of its product differentiation and how many competitors it faces. Second, a monopolist is surrounded by barriers to entry and need not fear entry, but a monopolistic competitor who earns profits must expect the entry of firms with similar, but differentiated, products.

Monopolistic Competitors and Entry

If one monopolistic competitor earns positive economic profits, other firms will be tempted to enter the market. A gas station with a great location must worry that other gas stations might open across the street or down the road—and perhaps the new gas stations will sell coffee or have a carwash or some other attraction to lure customers. A successful restaurant with a unique barbecue sauce must be concerned that other restaurants will try to copy the sauce or offer their own unique recipes. A laundry detergent with a great reputation for quality must take note that other competitors may seek to build their own reputations.

The entry of other firms into the same general market (like gas, restaurants, or detergent) shifts the demand curve that a monopolistically competitive firm faces. As more firms enter the market, the quantity demanded at a given price for any particular firm will decline, and the firm’s perceived demand curve will shift to the left. As a firm’s perceived demand curve shifts to the left, its marginal revenue curve will shift to the left, too. The shift in marginal revenue will change the profit-maximizing quantity that the firm chooses to produce, since marginal revenue will then equal marginal cost at a lower quantity.

Figure 10.4 (a) shows a situation in which a monopolistic competitor was earning a profit with its original perceived demand curve (D 0 ). The intersection of the marginal revenue curve (MR 0 ) and marginal cost curve (MC) occurs at point S, corresponding to quantity Q 0 , which is associated on the demand curve at point T with price P 0 . The combination of price P 0 and quantity Q 0 lies above the average cost curve, which shows that the firm is earning positive economic profits.

Unlike a monopoly, with its high barriers to entry, a monopolistically competitive firm with positive economic profits will attract competition. When another competitor enters the market, the original firm’s perceived demand curve shifts to the left, from D 0 to D 1 , and the associated marginal revenue curve shifts from MR 0 to MR 1 . The new profit-maximizing output is Q 1 , because the intersection of the MR 1 and MC now occurs at point U. Moving vertically up from that quantity on the new demand curve, the optimal price is at P 1 .

As long as the firm is earning positive economic profits, new competitors will continue to enter the market, reducing the original firm’s demand and marginal revenue curves. The long-run equilibrium is in the figure at point Y, where the firm’s perceived demand curve touches the average cost curve. When price is equal to average cost, economic profits are zero. Thus, although a monopolistically competitive firm may earn positive economic profits in the short term, the process of new entry will drive down economic profits to zero in the long run. Remember that zero economic profit is not equivalent to zero accounting profit . A zero economic profit means the firm’s accounting profit is equal to what its resources could earn in their next best use. Figure 10.4 (b) shows the reverse situation, where a monopolistically competitive firm is originally losing money. The adjustment to long-run equilibrium is analogous to the previous example. The economic losses lead to firms exiting, which will result in increased demand for this particular firm, and consequently lower losses. Firms exit up to the point where there are no more losses in this market, for example when the demand curve touches the average cost curve, as in point Z.

Monopolistic competitors can make an economic profit or loss in the short run, but in the long run, entry and exit will drive these firms toward a zero economic profit outcome. However, the zero economic profit outcome in monopolistic competition looks different from the zero economic profit outcome in perfect competition in several ways relating both to efficiency and to variety in the market.

Monopolistic Competition and Efficiency

The long-term result of entry and exit in a perfectly competitive market is that all firms end up selling at the price level determined by the lowest point on the average cost curve. This outcome is why perfect competition displays productive efficiency : goods are produced at the lowest possible average cost. However, in monopolistic competition, the end result of entry and exit is that firms end up with a price that lies on the downward-sloping portion of the average cost curve, not at the very bottom of the AC curve. Thus, monopolistic competition will not be productively efficient.

In a perfectly competitive market, each firm produces at a quantity where price is set equal to marginal cost, both in the short and long run. This outcome is why perfect competition displays allocative efficiency: the social benefits of additional production, as measured by the marginal benefit, which is the same as the price, equal the marginal costs to society of that production. In a monopolistically competitive market, the rule for maximizing profit is to set MR = MC—and price is higher than marginal revenue, not equal to it because the demand curve is downward sloping. When P > MC, which is the outcome in a monopolistically competitive market, the benefits to society of providing additional quantity, as measured by the price that people are willing to pay, exceed the marginal costs to society of producing those units. A monopolistically competitive firm does not produce more, which means that society loses the net benefit of those extra units. This is the same argument we made about monopoly, but in this case the allocative inefficiency will be smaller. Thus, a monopolistically competitive industry will produce a lower quantity of a good and charge a higher price for it than would a perfectly competitive industry. See the following Clear It Up feature for more detail on the impact of demand shifts.

Why does a shift in perceived demand cause a shift in marginal revenue?

We use the combinations of price and quantity at each point on a firm’s perceived demand curve to calculate total revenue for each combination of price and quantity. We then use this information on total revenue to calculate marginal revenue, which is the change in total revenue divided by the change in quantity. A change in perceived demand will change total revenue at every quantity of output and in turn, the change in total revenue will shift marginal revenue at each quantity of output. Thus, when entry occurs in a monopolistically competitive industry, the perceived demand curve for each firm will shift to the left, because a smaller quantity will be demanded at any given price. Another way of interpreting this shift in demand is to notice that, for each quantity sold, the firm will charge a lower price. Consequently, the marginal revenue will be lower for each quantity sold—and the marginal revenue curve will shift to the left as well. Conversely, exit causes the perceived demand curve for a monopolistically competitive firm to shift to the right and the corresponding marginal revenue curve to shift right, too.

A monopolistically competitive industry does not display productive or allocative efficiency in either the short run, when firms are making economic profits and losses, nor in the long run, when firms are earning zero profits.

The Benefits of Variety and Product Differentiation

Even though monopolistic competition does not provide productive efficiency or allocative efficiency, it does have benefits of its own. Product differentiation is based on variety and innovation. Most people would prefer to live in an economy with many kinds of clothes, foods, and car styles; not in a world of perfect competition where everyone will always wear blue jeans and white shirts, eat only spaghetti with plain red sauce, and drive an identical model of car. Most people would prefer to live in an economy where firms are struggling to figure out ways of attracting customers by methods like friendlier service, free delivery, guarantees of quality, variations on existing products, and a better shopping experience.

Economists have struggled, with only partial success, to address the question of whether a market-oriented economy produces the optimal amount of variety. Critics of market-oriented economies argue that society does not really need dozens of different athletic shoes or breakfast cereals or automobiles. They argue that much of the cost of creating such a high degree of product differentiation, and then of advertising and marketing this differentiation, is socially wasteful—that is, most people would be just as happy with a smaller range of differentiated products produced and sold at a lower price. Defenders of a market-oriented economy respond that if people do not want to buy differentiated products or highly advertised brand names, no one is forcing them to do so. Moreover, they argue that consumers benefit substantially when firms seek short-term profits by providing differentiated products. This controversy may never be fully resolved, in part because deciding on the optimal amount of variety is very difficult, and in part because the two sides often place different values on what variety means for consumers. Read the following Clear It Up feature for a discussion on the role that advertising plays in monopolistic competition.

How does advertising impact monopolistic competition?

The U.S. economy spent about $180.12 billion on advertising in 2014, according to eMarketer.com. Roughly one third of this was television advertising, and another third was divided roughly equally between internet, newspapers, and radio. The remaining third was divided between direct mail, magazines, telephone directory yellow pages, and billboards. Mobile devices are increasing the opportunities for advertisers.

Advertising is all about explaining to people, or making people believe, that the products of one firm are differentiated from another firm's products. In the framework of monopolistic competition, there are two ways to conceive of how advertising works: either advertising causes a firm’s perceived demand curve to become more inelastic (that is, it causes the perceived demand curve to become steeper); or advertising causes demand for the firm’s product to increase (that is, it causes the firm’s perceived demand curve to shift to the right). In either case, a successful advertising campaign may allow a firm to sell either a greater quantity or to charge a higher price, or both, and thus increase its profits.

However, economists and business owners have also long suspected that much of the advertising may only offset other advertising. Economist A. C. Pigou wrote the following back in 1920 in his book, The Economics of Welfare :

It may happen that expenditures on advertisement made by competing monopolists [that is, what we now call monopolistic competitors] will simply neutralise one another, and leave the industrial position exactly as it would have been if neither had expended anything. For, clearly, if each of two rivals makes equal efforts to attract the favour of the public away from the other, the total result is the same as it would have been if neither had made any effort at all.

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Access for free at https://openstax.org/books/principles-economics-3e/pages/1-introduction

• Authors: Steven A. Greenlaw, David Shapiro, Daniel MacDonald
• Publisher/website: OpenStax
• Book title: Principles of Economics 3e
• Publication date: Dec 14, 2022
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-economics-3e/pages/1-introduction
• Section URL: https://openstax.org/books/principles-economics-3e/pages/10-1-monopolistic-competition

© Jul 18, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.

Presentations made painless

• Get Premium

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!

Want to research companies faster?

Instantly access industry insights

Let PitchGrade do this for me

Leverage powerful AI research capabilities

We will create your text and designs for you. Sit back and relax while we do the work.

Explore More Content

• Privacy Policy
• Terms of Service

© 2024 Pitchgrade

• Monopolistic Competition

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 08, 2023

Are You Retirement Ready?

Table of contents, what is monopolistic competition.

Monopolistic competition is a market structure where there are many small firms that produce differentiated products. Unlike perfect competition, each firm has some market power due to product differentiation, which allows them to charge slightly higher prices than their competitors .

However, because there are many firms producing similar but not identical products, consumers have a range of choices and can switch to another product if the price of one becomes too high.

As a result, firms in a monopolistically competitive market must engage in non-price competition, such as advertising and product differentiation, to attract customers.

Characteristics of Monopolistic Competition

Monopolistic competition is characterized by several key features:

Large Number of Small Firms . There are many firms operating in the market, none of which dominates the market.

Differentiated Products . Each firm produces a product that is distinct from its competitors' products, either through quality, design, or branding.

Some Market Power . Each firm has some control over the price of its product due to product differentiation, but this control is limited because there are many substitutes available to consumers.

Non-price Competition . Firms in a monopolistically competitive market compete using advertising, product development, and other marketing strategies to attract customers rather than relying on lower prices.

These characteristics create a market structure that combines elements of both monopoly and perfect competition, resulting in a market where firms have some market power, but not enough to eliminate competition altogether.

Examples of Monopolistic Competition

Monopolistic competition can be observed in a variety of industries, but here are some examples:

Restaurants

These are a good example of monopolistically competitive markets because they offer different types of cuisine, ambiance, and price range, which creates a range of options for consumers.

This differentiation allows each restaurant to have some control over its pricing strategy, but not enough to eliminate competition.

Clothing companies differentiate their products through design, quality, and brand image. This differentiation creates a range of options for consumers, giving each clothing company some market power over its pricing strategy.

Consumers often choose clothing based on brand image, style, and quality, rather than just the price.

Electronics

Companies producing electronics such as smartphones, laptops, and televisions are also good examples of monopolistically competitive markets. These companies differentiate their products through technology, features, and design.

For example, Apple's iPhone and Samsung's Galaxy phones have different designs, features, and operating systems, which create a range of options for consumers.

These industries have many firms competing for market share and offering slightly different products, making them good examples of monopolistically competitive markets.

Benefits of Monopolistic Competition

Monopolistic competition offers several benefits to both consumers and firms:

Consumer Choice

In a monopolistically competitive market, consumers have a range of options to choose from, leading to greater consumer satisfaction and utility.

Product Differentiation

Firms in a monopolistically competitive market differentiate their products, which encourages innovation and leads to a greater variety of products for consumers.

The need for product differentiation in a monopolistically competitive market drives firms to innovate and create new products, technologies, and marketing strategies to attract consumers.

This can lead to technological advancements and greater efficiency in the market.

Overall, monopolistic competition encourages competition, innovation, and variety, benefiting both consumers and firms in the market.

Challenges of Monopolistic Competition

While monopolistic competition offers some benefits, it also presents several challenges:

Barriers to Entry

The product differentiation in monopolistically competitive markets can make it difficult for new firms to enter the market and compete with established firms. This can lead to reduced competition and market inefficiencies.

Higher Prices for Consumers

Firms in a monopolistically competitive market have some market power, which allows them to charge slightly higher prices than in a perfectly competitive market.

This can lead to higher prices for consumers and reduced consumer surplus.

Inefficient Allocation of Resources

Monopolistic competition can lead to an inefficient allocation of resources, as firms may spend resources on advertising and product differentiation rather than on improving their production process.

This can result in less efficient use of resources and higher costs for consumers.

Applications of Monopolistic Competition

Monopolistic competition has several practical applications in business and government policies:

Business Strategy and Marketing

Firms in a monopolistically competitive market must focus on product differentiation and non-price competition to attract customers.

This can include investing in research and development, creating unique brand identities, and developing marketing campaigns to promote their products.

Government Regulation and Antitrust Policies

Because monopolistic competition can lead to market inefficiencies and reduced competition, governments may regulate these markets to promote fair competition and protect consumers.

Antitrust laws may be used to prevent monopolistic practices, such as price-fixing, collusion, or abuse of market power.

Understanding the characteristics and implications of monopolistic competition can help businesses make strategic decisions and help governments develop effective policies to promote competition and protect consumers.

Comparison of Monopolistic Competition with Other Market Structures

Monopolistic competition is just one of several market structures, each with its unique features:

• Perfect Competition

In a perfectly competitive market , many small firms sell identical products with no market power. Prices are determined by supply and demand , and there are no barriers to entry or exit.

Unlike the monopolistic competition, there is no product differentiation or non-price competition.

In a monopoly, there is only one firm in the market with complete market power. The firm can set prices and restrict output without facing competition. There are significant barriers to entry, making it difficult for new firms to enter the market.

Monopolistic competition sits between the extreme market structures of perfect competition and monopoly, with some market power due to product differentiation but still facing competition from other firms.

In an oligopoly, there are only a few firms in the market, each with a significant market share.

The firms may have some market power and engage in non-price competition, but there are significant barriers to entry and exit, making it difficult for new firms to enter the market.

Oligopoly is similar to monopolistic competition in that there are barriers to entry and a small number of firms, but with more market power and less product differentiation.

Final Thoughts

Monopolistic competition is a market structure in which many small firms produce differentiated products, leading to some market power and non-price competition.

This market structure offers benefits such as consumer choice, product differentiation, and innovation but also presents challenges such as barriers to entry, higher prices for consumers, and inefficient allocation of resources.

It is important to note that monopolistic competition is just one of several market structures, each with unique features and implications. You can speak to a wealth management professional to learn more about monopolistic competition.

Monopolistic Competition FAQs

What is monopolistic competition, and how does it differ from perfect competition.

Monopolistic competition is a market structure where many small firms produce differentiated products, creating some market power but still facing competition. Unlike perfect competition, firms have some control over the price of their product due to product differentiation.

What are some examples of industries that demonstrate monopolistic competition?

Monopolistic competition can be observed in industries such as restaurants, clothing, and electronics, where firms differentiate their products through features, design, and branding to attract customers.

What are the benefits of monopolistic competition?

Monopolistic competition offers benefits such as consumer choice, product differentiation, and innovation, as firms must constantly develop new products, technologies, and marketing strategies to remain competitive.

What are the challenges of monopolistic competition?

The need for product differentiation can create barriers to entry, making it difficult for new firms to enter the market and compete with established firms. This can lead to market inefficiencies and higher prices for consumers. Furthermore, monopolistic competition can result in an inefficient allocation of resources.

How can businesses and policymakers navigate the challenges of monopolistic competition?

Understanding the characteristics, benefits, and challenges of monopolistic competition is essential for businesses and policymakers seeking to navigate this market structure effectively. This includes investing in research and development, creating unique brand identities, and developing marketing campaigns to promote their products. Governments may also regulate these markets to promote fair competition and protect consumers through antitrust laws.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

Related Topics

• Command Economy
• Cost-Push Inflation
• Demand-Pull Inflation
• Economic Outlook
• Free Market Economy
• GDP Per Capita
• Gross Domestic Product (GDP)
• Gross National Product (GNP)
• Hyperinflation
• Inferior Goods
• Knowledge Economy
• Liquidity Constraints
• Macro Environment
• Mixed Economy
• Operation Twist
• Producer Price Index (PPI)
• Purchase Annual Percentage Rate (APR)
• Real Gross Domestic Product (GDP)
• Trade Deficit
• What Does the 80/20 Rule Mean?
• Wholesale Price Index (WPI)

Ask a Financial Professional Any Question

Discover wealth management solutions near you, our recommended advisors.

Claudia Valladares

WHY WE RECOMMEND:

Fee-Only Financial Advisor Show explanation

Bilingual in english / spanish, founder of wisedollarmom.com, quoted in gobanking rates, yahoo finance & forbes.

IDEAL CLIENTS:

Retirees, Immigrants & Sudden Wealth / Inheritance

Retirement Planning, Personal finance, Goals-based Planning & Community Impact

Taylor Kovar, CFP®

Certified financial planner™, 3x investopedia top 100 advisor, author of the 5 money personalities & keynote speaker.

Business Owners, Executives & Medical Professionals

Strategic Planning, Alternative Investments, Stock Options & Wealth Preservation

We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it.

Fact Checked

At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content.

Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications.

They regularly contribute to top tier financial publications, such as The Wall Street Journal, U.S. News & World Report, Reuters, Morning Star, Yahoo Finance, Bloomberg, Marketwatch, Investopedia, TheStreet.com, Motley Fool, CNBC, and many others.

This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible.

Why You Can Trust Finance Strategists

Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year.

We follow strict ethical journalism practices, which includes presenting unbiased information and citing reliable, attributed resources.

Our goal is to deliver the most understandable and comprehensive explanations of financial topics using simple writing complemented by helpful graphics and animation videos.

Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others.

Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs.

How It Works

Step 1 of 3, ask any financial question.

Ask a question about your financial situation providing as much detail as possible. Your information is kept secure and not shared unless you specify.

Step 2 of 3

Our team will connect you with a vetted, trusted professional.

Someone on our team will connect you with a financial professional in our network holding the correct designation and expertise.

Step 3 of 3

Get your questions answered and book a free call if necessary.

A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation.

Where Should We Send Your Answer?

Just a Few More Details

We need just a bit more info from you to direct your question to the right person.

Tell Us More About Yourself

Is there any other context you can provide.

Pro tip: Professionals are more likely to answer questions when background and context is given. The more details you provide, the faster and more thorough reply you'll receive.

What is your age?

Are you married, do you own your home.

• Owned outright
• Owned with a mortgage

Do you have any children under 18?

• Yes, 3 or more

What is the approximate value of your cash savings and other investments?

• $50k - $250k
• $250k - $1m

Pro tip: A portfolio often becomes more complicated when it has more investable assets. Please answer this question to help us connect you with the right professional.

Would you prefer to work with a financial professional remotely or in-person?

• I would prefer remote (video call, etc.)
• I would prefer in-person
• I don't mind, either are fine

What's your zip code?

• I'm not in the U.S.

Submit to get your question answered.

A financial professional will be in touch to help you shortly.

Part 1: Tell Us More About Yourself

Do you own a business, which activity is most important to you during retirement.

• Giving back / charity
• Spending time with family and friends
• Pursuing hobbies

Part 2: Your Current Nest Egg

Part 3: confidence going into retirement, how comfortable are you with investing.

• Very comfortable
• Somewhat comfortable
• Not comfortable at all

How confident are you in your long term financial plan?

• Very confident
• Somewhat confident
• Not confident / I don't have a plan

What is your risk tolerance?

How much are you saving for retirement each month.

• None currently
• Minimal: $50 - $200
• Steady Saver: $200 - $500
• Serious Planner: $500 - $1,000
• Aggressive Saver: $1,000+

How much will you need each month during retirement?

• Bare Necessities: $1,500 - $2,500
• Moderate Comfort: $2,500 - $3,500
• Comfortable Lifestyle: $3,500 - $5,500
• Affluent Living: $5,500 - $8,000
• Luxury Lifestyle: $8,000+

Part 4: Getting Your Retirement Ready

What is your current financial priority.

• Getting out of debt
• Growing my wealth
• Protecting my wealth

Do you already work with a financial advisor?

Which of these is most important for your financial advisor to have.

• Tax planning expertise
• Investment management expertise
• Estate planning expertise
• None of the above

Where should we send your answer?

Submit to get your retirement-readiness report., get in touch with, great the financial professional will get back to you soon., where should we send the downloadable file, great hit “submit” and an advisor will send you the guide shortly., create a free account and ask any financial question, learn at your own pace with our free courses.

Take self-paced courses to master the fundamentals of finance and connect with like-minded individuals.

Get Started

To ensure one vote per person, please include the following info, great thank you for voting., get in touch with a financial advisor, submit your info below and someone will get back to you shortly..

Essay on Monopolistic Competition

This term paper investigates the economic theory of monopolistic competition and its applicability to the modern business environment. In the study, monopolistic competition and its effects on a variety of industries—including technology, healthcare, and retail—are examined in three news items. The literature review contrasts and compares the writers’ viewpoints and provides significant facts, figures, and statistics to support the conclusions. The concerns discussed in the articles are examined using economic theory and concepts in the discussion section. The main findings and suggestions for decision-makers, companies, and consumers are outlined in the decision.

Monopolistic Competition

Monopolistic competition is a market structure where many firms compete by selling differentiated products. Each firm has some degree of market power, which allows them to charge higher prices than in a perfectly competitive market. Monopolistic competition can lead to product innovation but also lead to higher costs, reduced consumer welfare, and market inefficiencies. Hence, the need to examine the implications of monopolistic competition in various industries, including technology, healthcare, and retail.

Literature Review

Nick Dearden’s article “Breaking Corporate Monopolies: A Prerequisite for Democracy’s Survival” delves into the perils of corporate monopolies and their detrimental effects on democratic systems. The author posits that consolidating economic power among a select group of corporations and individuals harms democratic procedures and intensifies disparities in social and economic realms. Dearden illustrates the technology sector, wherein a few corporations, including Facebook, Google, and Amazon, hold a dominant position in the market and exercise significant control over extensive quantities of data and information. The author posits that the unregulated authority of these entities presents a potential hazard to personal privacy, freedom of expression, and democratic engagement and advocates for more robust antitrust policies to dismantle these monopolistic structures (Dearden, 2023). The article additionally examines the function of monopolies in sustaining environmental deterioration, labor exploitation, and the consolidation of wealth and authority. According to Dearden, addressing these concerns will necessitate a fundamental reorganization of the economy that prioritizes social justice, public goods, and democratic control (Dearden, 2023). Dearden’s article underscores the pressing necessity of mitigating the adverse effects of corporate monopolies on democratic processes and advocates for increased governmental intervention to foster competition and safeguard the public welfare.

According to the second article, “Pfizer and Moderna Hike Prices for COVID-19 Vaccines in EU Deals,” Pfizer and Moderna recently increased the cost of their COVID-19 vaccines. According to the article’s citations of industry experts, the pharmaceutical sector is characterized by monopolistic competition, with a few significant companies controlling the market for necessary medications and vaccines. According to the paper, the high pricing of COVID-19 vaccinations results from pharmaceutical companies’ monopolistic market position and a lack of industry competition. In particular, the COVID-19 pandemic is used to show the issue of monopolistic competition in the pharmaceutical sector. Data cited by the author demonstrates that Pfizer and Moderna increased the cost of their COVID-19 vaccines in recent agreements with the European Union, even though these vaccines were created with public monies and are crucial for containing the pandemic (Paolo et al., 2021). The article indicates that pharmaceutical companies’ market dominance, which has a substantial amount of control over the pricing of necessary medications and vaccinations, is partially to blame for the high prices of COVID-19 vaccines. According to the report, several variables contribute to this market power, such as the high costs of medication development and regulatory barriers to entry for new businesses. The article also mentions how, especially in poor nations, a lack of competition in the pharmaceutical sector can result in higher prices and restricted access to necessary medicines and vaccinations (Paolo et al., 2021). In order to encourage competition in the market, the article recommends that legislators increase financing for public research, lower regulatory barriers to entry for new businesses, and enact price restrictions on necessary medications and vaccines.

The article comprehensively analyzes the theory and empirical evidence pertaining to monopolistic competition. The article examines the genesis of the notion, its fundamental characteristics, and its ramifications for market results, including pricing, gains, and well-being. The article provides an overview of the empirical evidence about the incidence and ramifications of monopolistic competition in diverse sectors such as healthcare, technology, and retail. The article concludes that monopolistic competition can yield varying economic efficiency and welfare effects, contingent upon particular market conditions and policy interventions. The article thoroughly analyzes monopolistic competition and its impact on market results. The author emphasizes that monopolistic competition represents a market structure characterized by imperfect competition, wherein firms can differentiate their products and encounter demand curves that slope downwards (Leonhardt, 2018). The ability of firms to exercise market power and set prices above their marginal costs results in increased profitability. The author posits that monopolistic competition may engender heightened innovation and product diversity, conferring consumer advantages. This article reviews empirical evidence of monopolistic competition across industries. Retailers can differentiate their products by location and service quality. In the healthcare sector, healthcare providers such as hospitals and physicians may distinguish their offerings by emphasizing their quality and reputation. Companies can distinguish their offerings within the technology sector by incorporating unique features and compatibility measures. The article posits that the incidence of monopolistic competition within these sectors has the potential to result in augmented prices and profits. However, it may also prove advantageous for consumers by fostering more incredible innovation and a more comprehensive range of products (Leonhardt, 2018). The article additionally examines the function of policy interventions in overseeing monopolistic competition. According to the author, implementing antitrust policies and regulations can promote competition and deter market power exploitation by dominant entities. The author advises policymakers to exercise caution to avoid impeding innovation and product differentiation, as these factors can benefit consumers.

The three news items about monopolistic competition can be analyzed using various economic theories. Market power—the ability of enterprises to affect pricing, output, and other market outcomes—can be used first. Due to product differentiation and branding, monopolistic corporations have some market strength, yet they compete with other firms making comparable but not identical items. Market power can be enormous in industries with a few dominating enterprises, like electronics and pharmaceuticals, resulting in higher pricing, lesser output, and lower customer welfare. Second, market structure theory can compare perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition has many tiny enterprises making identical items, no market power, and no entrance or exit restrictions. Monopolistic competition is characterized by several enterprises producing differentiated products, some barriers to entry and departure, and some market dominance. Oligopoly is characterized by a few dominating enterprises producing similar or identical items with high entry and exit barriers and market dominance. Finally, a monopoly is a single firm with market strength, a unique product, and high entry and exit obstacles. Third, we can assess monopolistic competition’s welfare effects using consumer surplus. Consumer surplus is the gap between consumers’ maximum price for a product and their actual price. In perfect competition, firms charge the marginal cost of production, and consumers gain from the competition, maximizing consumer surplus. Monopolistic competition reduces consumer surplus because companies overcharge over marginal cost, giving consumers fewer choices and inferior quality.

Dearden claims that concentrating wealth and power in a few significant businesses distorts market competition stifles innovation, reduces customer choice, and increases inequality. In economics, “monopoly power” occurs when one or more enterprises dominate the market and set pricing and output. The second paper discusses pharmaceutical market dominance and COVID-19 vaccine costs. The paper implies that Pfizer and Moderna can charge exorbitant prices and limit access to critical pharmaceuticals and vaccines due to a lack of competition and regulation (Paolo et al., 2021). Price limits, compulsory licensing, and other policies can make vital medications and vaccinations inexpensive, especially during public health emergencies. The third paper examines monopolistic competition and market outcomes theoretically and empirically. Depending on market conditions and regulatory interventions, monopolistic competition can boost economic efficiency and welfare. Research and development subsidies, consumer protection legislation, and regulatory monitoring can help policymakers balance product differentiation and innovation with limited competition and higher prices.

To sum it up, the three articles demonstrate that monopolistic competition is relevant in today’s economy: market concentration and lack of competition in technology, healthcare, and retail hurt consumers. According to theory and research, monopolistic competition can improve or harm welfare depending on market conditions and regulatory interventions. To improve financial results, policymakers, firms, and consumers should be aware of the effects of monopolistic competition and endeavor to promote competition, protect consumers, and regulate market dominance.

Dearden, N. (2023). Breaking corporate monopolies is the only way to save democracy.  Open Democracy . https://www.opendemocracy.net/en/oureconomy/corporate-monopolies-are-threat-to-democracy-public-interest/

Leonhardt, D. (2018). The Monopolization of America.  The New York Times . https://www.nytimes.com/2018/11/25/opinion/monopolies-in-the-us.html

Paolo, D., Kuchler, H., Khan, M. (2021). Pfizer and Moderna raise EU Covid vaccine prices.  FINANCIAL TIMES . https://www.ft.com/content/d415a01e-d065-44a9-bad4-f9235aa04c1a

Cite This Work

To export a reference to this article please select a referencing style below:

Related Essays

Strategic management in a globalized economy, walmart’s social responsibility policies: a comprehensive analysis based on corporate social responsibility research, improving patient safety and quality of care: the role of leadership in implementing evidence-based practices, jetblue’s acquisition of spirit airlines, cross-functional management and organization behavior, barclays bank analysis, popular essay topics.

• American Dream
• Artificial Intelligence
• Black Lives Matter
• Bullying Essay
• Career Goals Essay
• Causes of the Civil War
• Child Abusing
• Civil Rights Movement
• Community Service
• Cultural Identity
• Cyber Bullying
• Death Penalty
• Depression Essay
• Domestic Violence
• Freedom of Speech
• Global Warming
• Gun Control
• Human Trafficking
• I Believe Essay
• Immigration
• Importance of Education
• Israel and Palestine Conflict
• Leadership Essay
• Legalizing Marijuanas
• Mental Health
• National Honor Society
• Police Brutality
• Pollution Essay
• Racism Essay
• Romeo and Juliet
• Same Sex Marriages
• Social Media
• The Great Gatsby
• The Yellow Wallpaper
• Time Management
• To Kill a Mockingbird
• Violent Video Games
• What Makes You Unique
• Why I Want to Be a Nurse
• Send us an e-mail

Want to create or adapt books like this? Learn more about how Pressbooks supports open publishing practices.

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.

Share This Book

• Search Search Please fill out this field.
• Monopolistic Markets

Perfect Competition

Special considerations, the bottom line.

• Government & Policy

Monopolistic Market vs. Perfect Competition: What's the Difference?

• Antitrust Laws: What They Are, How They Work, Major Examples
• Understanding Antitrust Laws
• Federal Trade Commission (FTC)
• Clayton Antitrust Act
• Sherman Antitrust Act
• Robinson-Patman Act
• How and Why Companies Become Monopolies
• Discriminating Monopoly
• Price Discrimination
• Predatory Pricing
• Bid Rigging
• Price Maker
• Monopolistic Competition
• What Are the Characteristics of a Monopolistic Market?
• Monopolistic Market vs. Perfect Competition CURRENT ARTICLE
• What are Some Examples of Monopolistic Markets?
• A History of U.S. Monopolies
• What Are the Most Famous Monopolies?
• Monopoly vs. Oligopoly
• What are Current Examples of Oligopolies?

Monopolistic Market vs. Perfect Competition: An Overview

A monopolistic market and a perfectly competitive market represent two market structures that have several key distinctions in terms of market share , price control, and barriers to entry . In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services, and that firm has total market control. A perfectly competitive market is composed of many firms, where no one firm has market control.

Monopolistic and perfectly competitive markets affect supply, demand, and prices in different ways. In the real world, no market is purely monopolistic or perfectly competitive. Every real-world market combines elements of both of these market types.

Key Takeaways:

• In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services.
• A perfectly competitive market is composed of many firms, where no one firm has market control.
• In the real world, no market is purely monopolistic or perfectly competitive.
• In between a monopolistic market and perfect competition lies monopolistic competition or imperfect competition.
• In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control.

In a monopolistic market , firms are price makers because they control the prices of goods and services. In this type of market, prices are generally high for goods and services because firms have total control of the market. Firms have total market share, which creates difficult entry and exit points. Since barriers to entry in a monopolistic market are high, firms that manage to enter the market are still often dominated by one bigger firm.

A monopolistic market generally involves a single seller, and buyers do not have a choice concerning where to purchase their goods or services.

Purely monopolistic markets are extremely rare and perhaps even impossible in the absence of absolute barriers to entry, such as a ban on competition or sole possession of all natural resources. Sometimes, however, a government will establish a monopolistic market to ensure national interests or maintain critical infrastructure. For instance, many utilities such as power companies or water authorities may be granted a monopoly status for a certain area.

In the absence of such permission, governments often have laws and enforcement mechanisms to promote competition by preventing or breaking up monopolies. This is because a monopolistic market can often become inefficient, charge customers higher prices than would otherwise be available, and can prevent newcomers from entering the market. Thus, there are various antitrust regulations that keep monopolies at bay.

A monopoly is when there is only one seller in the market. A monopsony , on the other hand, is when there is only one buyer in a market.

In a market that experiences perfect competition , prices are dictated by supply and demand. Firms in a perfectly competitive market are all price takers because no one firm has enough market control. Unlike a monopolistic market, firms in a perfectly competitive market have a small market share. Barriers to entry are relatively low, and firms can enter and exit the market easily. Contrary to a monopolistic market, a perfectly competitive market has many buyers and sellers, and consumers can choose where they buy their goods and services.

Companies earn just enough profit to stay in business and no more. If they were to earn excess profits, other companies would enter the market and drive profits down. As mentioned earlier, perfect competition is a theoretical construct. As such, it is difficult to find real-life examples of perfect competition.

Pricing in perfect competition is based on supply and demand while pricing in monopolistic competition is set by the seller.

According to economic theory, when there is perfect competition, the prices of goods will approach their marginal cost of production , or the cost of producing one additional unit. This is because any firm that tries to sell at a higher price in an attempt to earn excess profits will be undercut by a competitor seeking to grab market share. This also promotes a sort of technological arms race in order to reduce the costs of production so that competitors can undercut one another and still earn a profit. Over time, however, as technology diffuses through to all producers, the effect is to lower consumer prices even further, as well as to erode profits for producers.

In between a monopolistic market and perfectly competitive market lies monopolistic competition . In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control. In contrast, whereas a monopolist in a monopolistic market has total control of the market, monopolistic competition offers very few barriers to entry. All firms are able to enter into a market if they feel the profits are attractive enough. This makes monopolistic competition similar to perfect competition.

However, in a monopolist competitive market, there is product differentiation . Products in monopolistic competition are close substitutes; the products have distinct features, such as branding or quality. This is unlike both a monopolistic market, where there are no substitutes for products, and perfect competition, where the products are identical.

In reality, all markets will display some form of imperfect competition. That is because there will always be some barriers to entry, some information asymmetries , larger and smaller competitors, and small differences in product differentiation .

What Are the Differences Between Monopolistic Markets and Perfect Competition?

In a monopolistic market, there is only one seller or producer of a good. Because there is no competition, this seller can charge any price they want subject to buyers' demand and establish barriers to entry to keep new companies out. On the other hand, perfectly competitive markets have several firms each competing with one another to sell their goods to buyers. In this case, prices are kept low through competition, and barriers to entry are low.

What Is the Difference Between a Monopoly and a Monopolistic Market?

A monopoly refers to a single producer or seller of a good or service. A monopolistic market is the scope of that monopoly. For instance, XYZ Co. may be a monopoly producer of widgets. It can control a monopolistic market over all the widgets sold in the United States whereby nobody else sells widgets.

What Are the Main Characteristics of Perfect Competition?

In a perfectly competitive market: All firms sell an identical product; all firms are  price-takers ; all firms have a relatively small market share; buyers know the nature of the product being sold and the prices charged by each firm; and the industry is characterized by freedom of entry and exit. In reality, some or all of these features are not present or are influenced in some way, leading to imperfect competition .

Monopolistic markets and perfectly competitive markets are two different types of market structures. Monopolistic markets are characterized by the domination of one firm, which can dictate price, supply, barriers to entry, and other terms. In contrast, perfectly competitive markets are composed of many firms, where no single firm has total control.

In the real world, most markets are neither monopolistic nor perfectly competitive. Rather, they exist on the spectrum between these two types.

Federal Trade Commission. " The Antitrust Laws ."

• Terms of Service
• Editorial Policy
• Privacy Policy

• Business Economics
• Competition

A Study on The Concept of Monopolistic Competition

• Dhaka International University
• This person is not on ResearchGate, or hasn't claimed this research yet.

Discover the world's research

• 25+ million members
• 160+ million publication pages
• 2.3+ billion citations
• Recruit researchers
• Join for free
• Login Email Tip: Most researchers use their institutional email address as their ResearchGate login Password Forgot password? Keep me logged in Log in or Continue with Google Welcome back! Please log in. Email · Hint Tip: Most researchers use their institutional email address as their ResearchGate login Password Forgot password? Keep me logged in Log in or Continue with Google No account? Sign up

Monopoly: Compilation of Essays on Monopoly | Markets | Economics

Here is a compilation of essays on ‘Monopoly’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Monopoly’ especially written for school and college students.

Essay on Monopoly

Essay Contents:

• Essay on the Disadvantages of Monopolies

Essay # 1. Introduction to Monopoly :

ADVERTISEMENTS:

The market, form of monopoly is the opposite extreme from that perfect competition. It exists whenever an industry is in the hands of single of producer. In the case of perfect competition there are so many individual producers that no one of them has any power over the market and an; one firm can increase or diminish its production without affecting the market price. A monopoly, on the other hand, has power to influence the market price. By reducing its output, it can force the price up, and by increasing its output it can force the price down.

The word monopoly is made of two words; MONO +POLY. Here ‘Mono’ means one and ‘Poly’ implies the seller, thereby the literal meaning of the word Monopoly is one seller or one producer. Thus, pure monopoly refers to that form of market organisation wherein there is single firm (or producer) producing a commodity for which there are no good or close substitutes.

According to Watson, “A monopolist is the only producer of a product that has no close substitutes.” Changes in prices and outputs of other goods sold in the economy must leave the monopolist unaffected. Conversely, changes in the monopolist’s price and output must leave the other producers of the economy unaffected.

Essay # 2. Features of Monopoly :

(i) Single Producer:

There is a single firm producing the commodity in the market.

(ii) No Close Substitutes:

For the monopoly to exist single producer is the necessary condition but not a sufficient one. It is also essential that there should be no close substitute of the commodity in the market. This second condition would be even more difficult to fulfil than the first, since there are few things for which there is no substitute.

For instance, Usha are produced by a single firm alone but there are close substitutes of Usha fans that are available in the market in the form of Relifans, Khaitan Ashoka, Crompton, etc. Hence, though the firm producing Usha fans is single yet it cannot be termed a monopoly firm.

It is, therefore, essential for a monopoly to exist that there should be no close substitutes available in the market. This condition can be stated in other words as that the cross elasticity of demand for the output of the firm with respect to the price of every firm’s product is zero.

(iii) Barriers to the Entry:

The entry into the industry is completely barred or made impossible. If new firms are admitted into the industry, monopoly itself breaks down. This ban on entry may be legal, natural or institutional but it must essentially be there.

(iv) Firm and Industry:

Since in monopoly there is single firm producing the commodity, hence the difference between firm and industry vanishes automatically.

(v) Downward Sloping AR and MR Curves:

The monopoly firm is like an industry, and faces a downward sloping demand curve for its product; thus, it has to lower its price in order to sell more. For, it is this nature of demand curve that determines the nature of average and marginal revenue curves. Under perfect competition, we know, average revenue and marginal revenue curves coincide in a horizontal line. But that is not so under monopoly.

With a monopoly, however, the average revenue curve, which is the same as the market demand curve, is downward sloping. Furthermore, the marginal revenue curve does not coincide with the average revenue curve rather, it remains below it. Thus, for a monopolist firm both AR and MR curve are downward sloping and MR remains below AR as shown in the diagram.

IvyPanda . (2018) 'Pure Competition vs. Monopolistic Competition'. 9 July.

IvyPanda . 2018. "Pure Competition vs. Monopolistic Competition." July 9, 2018. https://ivypanda.com/essays/pure-competition-vs-monopolistic-competition/.

1. IvyPanda . "Pure Competition vs. Monopolistic Competition." July 9, 2018. https://ivypanda.com/essays/pure-competition-vs-monopolistic-competition/.

Bibliography

IvyPanda . "Pure Competition vs. Monopolistic Competition." July 9, 2018. https://ivypanda.com/essays/pure-competition-vs-monopolistic-competition/.

Reference Library

Collections

• See what's new
• All Resources
• Student Resources
• Assessment Resources
• Teaching Resources
• CPD Courses
• Livestreams

Study notes, videos, interactive activities and more!

Economics news, insights and enrichment

Currated collections of free resources

Browse resources by topic

• All Economics Resources

Resource Selections

Currated lists of resources

Study Notes

Monopolistic Competition

Last updated 2 Jul 2018

• Share on Facebook
• Share on Twitter
• Share by Email

Monopolistic competition is a form of imperfect competition and can be found in many real world markets ranging from clusters of sandwich bars, other fast food shops and coffee stores in a busy town centre to pizza delivery businesses in a city or hairdressers in a local area.

• Monopolistic competition
• Non-Price Competition
• Product Differentiation
• Contestable Markets
• Market structure

You might also like

Perfect competition - adjusting to long run equilibrium, perfect competition.

Topic Videos

Spotify in talks to acquire SoundCloud

30th September 2016

Paperbacks Fight Back!

19th March 2017

Price Wars in Oligopoly - Examples and Evaluation

Cma argues that google and facebook have too much market power.

3rd July 2020

Tesco Raises Prices for Meal Deals

22nd October 2022

CMA launches probe into prices of baby formula

29th November 2023

Our subjects

• › Criminology
• › Economics
• › Geography
• › Health & Social Care
• › Psychology
• › Sociology
• › Teaching & learning resources
• › Student revision workshops
• › Online student courses
• › CPD for teachers
• › Livestreams
• › Teaching jobs

Boston House, 214 High Street, Boston Spa, West Yorkshire, LS23 6AD Tel: 01937 848885

• › Contact us
• › Terms of use
• › Privacy & cookies

© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.