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Characteristics of Monopolistic Competition
A relatively large number of sellers
Easy entry and exit from the industry
Relatively Large Number of Sellers:
- Small Market Shares: Each firm has a small percentage of the total monopolistic market and thus has only limited control over market price.
- No Collusion: A relatively large number of firms will not combine to restrict outputs and set prices. With so many firms, collusion is almost impossible because it is too easy for one firm to cheat and charge the lower price.
- Independent Action: Each firm is independent and can determine its pricing policy without considering its rivals. eg. A firm could moderately increase its sales by cutting its prices, but that would have no significant effect on its competitors sales.
- Differentiated Products:
- Product Attributes: product differentiation may entail physical or qualitative differences in the products themselves. Real differences in functional features, materials, design, and workmanship are the vital aspects of product differentiation.
- Service: Service and the conditions surrounding the sale of a product are forms of non-price product differentiation too.
- Location: Accessibility of stores that sell certain products or placement of products in stores eg. products at eye level would have an advantage over those that are not.
- Brand Names and Packaging: Brand loyalty and packaging can affect demand.
- ie. Apple's iPhone. It's pretty much the same as any other phone. It has touch screen capability, can surf the web, can listen to music, but the apple brand as well as advertising makes it a big hit on the market of cell phones.
- Some Control over Price: Producers can charge extra for extra features, etc.
- Generally, firms are "price makers" since each firm owns such a small percentage of the total market; if a firm changed the pirce of their product, there would not be much of an effect on the market.
- The firms in monopolistic competition will DIFFERENTIATE their products and make them more appealing to the customers in order to maximize their profits.
Easy Entry and Exit:
- In the SHORT RUN, a firm may obtain economic profits or losses.
- However, since there are little barriers from preventing companies to enter or leave the industry, in the long run, the firms will only obtain normal profits
- Remember: entry eliminates profits; exit eliminates losses!
- A unique feature of a monopolistic competitive market is that there are product differentiations.
- Therefore, companies rely on advertising to flaunt their products and try to get consumers to buy their product over another.
- Goal of product differentiation and advertising (non price competition) is to make price less of a factor in consumer purchases and make product differences a greater factor.
- A successful advertisement would shift the firm's demand curve to the right and make demand more inelastic.
- Some examples of non-price competition
- store loyalty cards
- Banking and other financial services
- Home delivery systems
- Child services
- Extension of opening hours
- Internet shopping for customers
Monopolistic Competitive Industries:
- Shoes -Nike, Addidas, Reebok
- Asphalt paving
- Bottled water
- ice cream-Breyers, Tom & Jerry
- Mobile Phone- Nokia, Samsung, Sony Ericcson
Latest page update: made by JasmineMearday
, Apr 21 2009, 7:49 AM EDT
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