Monopolistic competition is also called imperfect competition. Monopolistic competition is neither perfect competition nor monopoly competition. However, it has the features of both types of competitions.
In monopolistic competition, there are a large number of sellers who sell products that serve the same purpose but are not similar. The products sold by different sellers are not a perfect substitute for one another. These products are differentiated based on factors such as brand, price.
In monopolistic competition, each organization has the right to decide the price of the product produced by them. Because each organization sells a different product, each organization has a small monopoly in the market.
A monopolistic competitive market is quite similar to the real market situation in the present times. Monopolistic competition is observed more in industries that produce products used daily — for example, the cosmetic industry, clothing industry, footwear industry, etc. In the market, you will find toothpaste of different brands. The primary purpose of toothpaste is to clean teeth. But different firms sell toothpaste with various brands’ names and are advertised to serve different purposes such as gums protection, teeth whitening, cavity protection, stronger teeth, etc.
If you want to make a career in marketing, then you must understand monopolistic competition. In this article, we will focus on the main characteristics of monopolistic competition.
1. A large number of sellers and buyers
Like the perfect competition, monopolistic competition also consists of a large number of sellers and buyers. That means several sellers are selling the same product in the market. However, the product sold by each firm serves the same purpose, but the products don’t need to be identical. The products sold by each firm are differentiated based on different factors like brand, shape, size, etc.
Similarly, there are a large number of buyers in the market. All buyers have their unique choices. These buyers divide among seller firms based on their preferences. For example, different companies sell Hair wash shampoos. Each company advertises its shampoo based on its unique properties like dandruff controlling shampoo, shampoo, which strengthens the roots, etc. Buyers buy these shampoos based on their requirements.
2. Different price of products
The price of products sold by sellers in monopolistic competition is different. The price of a product can be low or high based on the brand name or based on its properties.
For example, a leather jacket manufactured by PUMA brand can cost up to $400 whereas, a locally produced good leather jacket can cost under $50. Therefore, in monopolistic competition, the same products can have different prices.
3. Control of a seller on the price of the product, but not on the market
A seller has control over the price of products produced by his firm. Unlike perfect competition, he is not bound to keep the same as that of other seller firms. For example, the PUMA brand sells his jacket at high prices because of its brand name.
However, a seller can control the price of products produced by his firm and has no control over the whole market.
4. Product variation
In monopolistic competition, products sold can vary in price, shape, size, and qualities. A product that serves the same primary purpose can be sold at different prices because of its advertised features and the name of the brand associated with it. For example, different bathing soaps are sold in the market at different prices, in different shapes, different packing, and with different fragrances.
Product variation is an essential characteristic of monopolistic competition. For example, the tea of different brands such as Tata Tea, Tetley tea, Society tea, and Brooke Bond Taj Mahal tea sells tea at different prices by promoting different features of the teas.
5. Freedom of entry and exit
In monopolistic competition, each firm has the freedom to enter and exit the market. There is little control of the government on the monopolistic competition, and it puts little restrictions on the sellers. Despite that, each firm has the freedom to stay in the market as long as it wants and exit the market whenever it desires. In addition to this, because of multiple sellers available in the market, the market also does not get much affected by the exit of a seller.
Let us take the example of a coffee café in a shopping mall. People enjoy coffee their as long as it is providing services to people. But, if someday due to some reasons the owner of the coffee shop wants to shut down the business. it will not cause a major disturbance in the coffee business in the mall. Initially, people will wonder, and soon they will move to another coffee café present in the vicinity. Therefore, the entry and exit of a firm from the business market do not create disturbance as it creates in the monopoly market.
Similarly, as long as a firm is fulfilling the criteria set up by the government, there will be no problem when the firm wants to enter or exit the monopolistic competition market.
6. Imperfect mobility of products
In monopolistic competition, it is not easy to mobile a product from one place to another. In perfect competition, a seller can easily take his product to a different place where he can earn more profit by selling the product. But in monopolistic competition, it is not easy for a seller to move a product.
Because of government restriction and also because of the variety of products available in the market. In modern times, the introduction of e-commerce has also put restrictions on the mobility of products as any product can be bought in any part of the world.
That means all products are available everywhere despite of its origin. For example, in monopolistic competition, it is difficult for firms to change the price of the product by moving the product to a different place to sell. However, firms move products often in a perfect competition market.
7. Imperfect knowledge
In monopolistic competition, all sellers and buyers have incomplete knowledge about the market. Buyers are lure with the things advertised by the buyers. They are unaware of the actual characteristics of products promoted to them. Similarly, the trade secrets about the products are kept hidden by the seller firms and are not shared in the market openly. Sellers generate huge profits because of the imperfect knowledge of the buyers.
Let us understand this with the help of an example of toothpaste. There are different brands available in monopolistic competition market that sell different toothpaste at different prices. Customers believe what is advertised by the brands and they don’t have perfect knowledge for why toothpaste of one brand is costlier than the toothpaste of another brand.
The lack of knowledge of customers is used as a marketing tool by the organizations. They make the use of advertising to convey any information about their product. There is the only motive is to maximize sales by attracting more customers.
8. More elastic demand
The demand for products in monopolistic competition is quite flexible. There might be more demand for products sold by one seller and low demand for similar products sold by another seller. In addition to this, the demand for products also varies depending on the season and need. As a result of which the revenue generation of the seller firm is not constant and varies frequently.
For example, the demand for moisturizing creams increases in the winter season, whereas the demand for sunscreen cream increases in the summer season.
Heavy advertising of products is done in Monopolistic competition. In monopolistic competition, products produced by different sellers are not identical. They come in different sizes, shapes, and different prices. Therefore, sellers are required to use advertising to attract customers and to boost the sales of their products. Because of advertising, each seller firm has a different share in the market.
Take the example of the advertisement of bathing soaps. All soaps have one job that is to make the foam and clean your body. But companies make their buyers believe that their soaps can do different tasks like moisturizing their skin, increasing the fairness of their skin, making them look younger.
All these tactics are used by companies to lure customers into buying their soaps. In present times, advertising is bringing more business to companies because of the lack of knowledge of buyers.
10. Independent decision making
In monopolistic competition, sellers have the right to make important decisions about the product, such as the size of the product, shape of the product, the color of the product, and the price of the product independently. Because of this reason, similar products are sold by different firms at different prices in the organization.
For example, the price of Apple smartphones is way much higher than the price of One plus smartphone. The basic purpose served by both smartphones are the same but sold at different prices because of their unique features.
Because of this characteristic of monopolistic competition, some companies have established itself as luxury brands and charge double or triple to their counterparts. For example, a branded perfume way more expensive than locally produced perfume. You can easily find a good fragrance perfume at much lower prices. The same is true in the case of footwear.
The price of a pair of footwear enhances just by pasting the tag of a luxury brand on it. Most of the time, the footwear produced by a local brand and a luxury brand are manufactured at the same place and by the same shoe artist. Their prices differ just by adding a branded tag and luxury packing of footwear.
11. Non-Price Competition
There is also non-price competition among the different firms in monopolistic competition. Firms compete with each other based on a brand name, features, shape, and size of products. All these competitive features are non-price features, and sellers’ firms advertise these features to boost sales. These are also known as imaginary differences. There is no difference between the two products, but buyers are made to believe that the gap exists with the help of advertising.
For example, An XYZ deodorant manufacturing company sells its products by claiming that people can attract girls by wearing their deodorant. Surprisingly, this helped the company to boost its sales. Companies compete with one another by advertising various features of their products.
12. Transportation cost
Transportation cost plays an important role in monopolistic competition. Similar products sell at different prices because of the transportation cost incurred in the mobility of the products. Transportation cost becomes part of the final price of the product.
Because of this reason companies make sure that they locally produce so that they can minimize the transportation cost. Take the example of maple syrup. Canada produces Maple syrup. Therefore, the price of maple syrup will be lower in Canada as compared to any other part of the world.