Monopolistic Competition – Product Differentiation & Pricing
Many real-world markets (restaurants, clothing, cosmetics) show monopolistic competition.
1. Meaning and Features
Monopolistic competition is a market structure with many sellers offering differentiated products which are close substitutes, with free entry and exit in the long run.
Features:
- Large number of firms.
- Product differentiation – brand name, quality, packaging, location.
- Freedom of entry and exit.
- Selling costs (advertising, sales promotion).
- Firm has some control over price.
Key Idea
Each firm enjoys a mini monopoly over its own differentiated product but faces competition from close substitutes.
2. Product Differentiation
Forms:
- Physical differences – quality, design, features.
- Branding and packaging.
- Location – corner shop vs mall.
- Services – after-sales service, free delivery.
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3. Pricing under Monopolistic Competition
- Firm faces downward sloping, relatively elastic demand curve.
- Uses MC = MR rule for profit maximisation.
- Short run: can earn super-normal profit or loss.
- Long run: free entry/exit → only normal profit.
4. Excess Capacity
In long-run equilibrium of monopolistic competition, firm operates below full capacity of plant → called excess capacity.
Reasons:
- Need to differentiate product.
- Each firm has a small share of market.
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5. Quick Revision Points
- Many sellers, differentiated products, free entry/exit.
- Non-price competition through advertising, branding, service.
- Firm has some control over price.
- Long run: normal profit with excess capacity.
6. Quiz Time 🎯
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