Harwell 1

Leah Harwell
Dr. Pook Carson
ECON 2010
December 6, 2015

Monopolistic Competition and its Effect on the Economy

McConnells Microeconomics, 20e defines monopolistic competition as a market structure that is
identified by the following characteristics:
1. Fairly Large Number of Sellers in Market (25-70 firms)
a. Smaller total market share (limited control over price)
b. No collusion, or price fixing amongst competitors
c. Independent action, or the ability to determine its own actions without concern for what
the competition is doing
2. Product Differentiation in Market
a. Product Attributes
b. Customer Service
c. Location
d. Brand Names and Packaging - Advertising
3. Easy Entry and Exit from Market
The large number of companies competing for market share, as well as they ease of entry to and from
the market define this system as competitive, while the similar product shared amongst the
businesses defines the monopolistic characteristic in a monopolistically competitive market. Overall,
the companies are far more competitive than monopolistic.
An example of monopolistic competition would be manufacturing companies. Nationwide there are
numerous manufacturers of clay brick. While they are selling the same product, clay brick, the product
will vary in size, color, texture, shape, and price.
If a brick is selected by an architect/designer from a manufacturer in one state for a project in another
state, local masons or general contractors may try to replace that material with a more cost effective
solution from a manufacturer nearby. The cost of freight will be of concern, and price may be adjusted
by the producer when shipping out of state to account for freight. A manufacturer may have an edge
over its rivals if it has a certain color only they can produce due to exclusive rights to a certain color clay,
or they are the only company who can produce a particular size. Exceptional service before, during, and
after the sale of material is also a way a company can distinguish itself from the pack.
Companies will often invest heavily in advertising as another way to set their product apart from the
competitors. Though they may both be selling similar brick, consumers will want to buy one over the
other because their brand name is synonymous with durability, or has been a household name for years.
Monopolistic competition is healthy for the economy as many industries will invest in advertising,
technology, and their labor force to lower costs of production, and gain an edge over their rivals. Over
the long run however, businesses will only realize normal profits.
Consumers will benefit from monopolistic competition as there will be a wide variety of products to
choose from, offered at various prices to meet their budget. Innovations will be made to improve on
these products, again to the benefit of the consumer.

Harwell 2

Reflective Statement
It is important for economists to study monopolistic competition and share their findings for
entrepreneurs or companies looking to enter, or are currently in, the market to calculate risk and
determine where to allocate funds to maximize profit. They may also use this data to determine
whether to exit the market. I took this class specifically to help me understand and better function in my
position as a customer service representative for a manufacturing firm. I also wanted to understand
how we have remained in business while our most direct competitor closed theirs, and what we need to
do to keep them open.
Learning the importance of differentiating our products from one of our competitors by creating a
unique product, and/or by forming a relationship of trust with our customers in the quality of our
product and team has been valuable. I now know that my interaction with our customers, and the level
of service I provide directly affects our position in the marketplace. To have this understanding is
invaluable to me as it provides me with the motivation to continue to represent my company to the best
of my ability, and to recognize that my actions do matter. This also helps me to feel more secure in
position, as I can perceive that I am an asset to my company and appreciate that I am able to make a
difference in the success of employer.