10 CHARACTERISTICS OF MONOPOLISTIC COMPETITION

Monopolistic competition is a market structure characterized by many sellers and buyers of homogenous goods.

Here are ten interesting characteristics of monopolistic competition:

1. Many Buyers and Sellers 

In monopolistic competition, many buyers and sellers have imperfect knowledge of the prevailing market conditions.

2. Product differentiation exists in monopolistic competition.

Goods sold in monopolistic competition are slightly differentiated, which may be real or imagined.

Real product differentiation exists in the form of variation in shapes, size and colour.

Imaginary product differentiation is created through branding and advertising.

3. The individual demand curve of a monopolistic competitor is downward sloping.

The demand curve of a monopolistic competitor is downward-sloping indicating the demand faced by the firm is inversely related to price.

The reason why the demand curve of a monopolistic competitive firm is downward-sloping is because goods are differentiated, which means the firm has some form of monopoly power over their product.

4. A Monopolistic Competitor is a Price maker

A price maker is a firm that possesses market power to raise the price above the competitive level.

Monopolistic competitive firms are price makers because they have some form of control over the price they charge (due to product differentiation).

It is important to note that a monopolistic competitive firms have less control over their price received when compared to monopolies

5. Marginal Revenue Curve Lies Below the Demand Curve

The demand curve of a monopolistic competitor lies above the marginal revenue curve for all output greater than one.

At the first output, the marginal revenue curve of a monopolistic competitive market will be equal to its demand curve because the firm is just starting production and does not need to reduce price before he can make additional sales.

6. Monopolistic Competition Lacks Allocative efficiency

A monopolistic competitive firm is allocatively inefficient since, in the long-run equilibrium, it does not produce where price equals marginal cost.

To be clear, allocative efficiency means producing at the goods most preferred by the society so that price equals marginal costs.

7. Monopolistic Competition Lacks Productive efficiency

A monopolistic competitive firm is productively inefficient since it does not produce at the output where long-run marginal cost equals long-run average cost.

Productive efficiency means producing without waste. The productive efficient output may be determined through the production possibility curve

8. Excess capacity is common

One common feature of monopolistic competition is excess capacity.

Excess capacity is the difference between the optimum output and the output attained by a monopolist competitor in the long run.

Excess capacity usually arises in monopolistic competition because the marginal cost is lesser than the average cost.

9. Abnormal profit is unlikely in the long-run 

It is very unlikely that a monopolistic competitive firm earn abnormal profit in the long run because of the low barrier to entry and exit.

10. Goods are close substitutes

Goods sold in monopolistic competition are close substitutes.

This is the reason why the demand curve of monopolistic competitors is more elastic than that of monopolistic.

So, while goods sold in monopolistic competitive market are close substitutes, goods sold in perfect competitive market are perfect substitutes.

To repeat, a monopolistic competitive market is one where there are many buyers and sellers of slightly differentiated.

The following are the ten characteristics of monopolistic competition;

1. Many sellers and buyers exist in monopolistic competition.

2. Real or imaginary product differentiation exist in monopolistic competition.

3. The demand curve faced by a monopolistic competitor is downward-sloping.

4. A monopolistic competitor is a price maker, which means it has some control over price.

5. The marginal revenue of a monopolistic competitor always lies below its demand curve for outputs greater than one.

6. Monopolistic competitor are allocatively inefficient.

7. Monopolistic competitor are also productively inefficient.

8. Excess capacity is common to monopolistic competitive market.

9. For a monopolistic competitor, Abnormal profit is very unlikely in the long-run

10. Goods sold in monopolistic are close substitutes, not perfect substitute

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